Telefonica SA (TEF) 2002 Q4 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to this afternoon's Telefonica conference. All participants are in a listen only-mode. At the completion of this presentation, you will have the opportunity to register your questions. I will hand you to Mr. Ezequiel Nieto, the Head of Investor Relations for Telefonica. Please go ahead, ladies and gentlemen, and I shall be standing by.

Good afternoon, ladies and gentlemen, and welcome to Telefonica's conference call, to discuss 2002 full-year results. I am Ezequiel Nieto, Head of Investor relations. Before proceeding let me mention that forward-looking statements are being made under the Safe Harbor of the Securities Litigation Reform Act of 1996. Actual performance could differ materially from those anticipated in any forward-looking comments, as a result of macro economic conditions, market risks, and other factors.

As in past quarters, all [indiscernible] comments included in this presentation refer to the financial performance of Telefonica S.A., with all international subsidiaries in which the Group has management control after September, incurred by full consolidation. We continue to be present all financial results and management comments by global business lines on a pro forma basis. The same in all Latin American businesses to their corresponding global business lines, from January 1, independently of the effective transfer of the assets.

Now let me turn the call over to Mr. Cesar Alierta, Executive Chairman and CEO of the company, who will lead this conference call.

Good afternoon, ladies and gentlemen. And thank you for attending Telefonica 2002 full-year results conference call. Today with me, is Fernando Abril, Chief Operating Officer, and Santiago Fernandez Valbuena our Chief Financial Officer.

I will like to start this call just to introduce the acquisitions we have taken, and how they fit within the company [indiscernible]. Then I will hand over to Fernando Abril for the review of 2002 performance.

2002 has been a year for execution. Focusing, albeit that [indiscernible] that will add value for our shareholders. First, reinforcing Telefonica's competitive position, in core business in natural markets. With Spain, Brazil and Mexico our top priorities, and broadband and wireless our maindrivers for growth. Second, delivery of the restructuring to stop cash outflowby focusing on all the European [indiscernible] operations outside of Spain. [indiscernible] operations and media portfolio, through a combination of asset sales and [indiscernible]. Complementary to this business in [indiscernible] we have managed the company's financial position, in order to achieve the two basic objectives that were fixed at the beginning of the year. Debt reduction for a total of €6.4b, and retention of cashflow for Latin America for a final amount growth to €1.5b.

As shown on slide number two, one-offs affecting TEF's bottom line for €5.6b net loss for last year. First, as to the write downs, for an amount net of taxes of €6.3b. The breakdown basically comprises UMPS totaling, €4.9b, Media Wave with €550m, and adjustment to the value of Terra Lycos and Telefonica Media assets, following [unclear] accounting criteria for an aggregated amount of $680m.

Second, a [indiscernible] losses of just about €350m related to the dollar denominated debt of our Argentinean subsidiaries. This made a big impact on net income, having reduced by more than €90m from the last results, thanks to the peso position later in the year.

Third, a provision for peso [indiscernible] related to the 2% [indiscernible].

Fourth, losses on the sale of non-core assets which shows we are delivering on the restructuring non-performing business. And finally, all the [indiscernible] in particular provision related to work force reduction, mainly in Latin America.

Excluding these effects, the net income was €1.9b.

I would like to highlight this accounting for all these non-recurring items is improving the quality of Telefonica's balance sheet], and has set the basis for future growth in [indiscernible] both return on invested capital and net income.

The write downs have nothing to do with Telefonica cash flow generation, as shown in slide number three. Group [indiscernible] reached €7.9b, representing an annual growth rate of 62.6%. Telefonica cash flow generation is well balanced and stable and top business line contributing equally to the total. And two thirds being generated by the Spanish operations. It is worth mentioning that all business lines are improving the 2001 performance, with all the fixed lines operators in Latin American ending the last year with a positive cash flow [indiscernible].

[indiscernible] cash flow genearation combined with the combined financial flexibility, we [indiscernible] to reveal this, we have the ability to adapt [indiscernible] remuneration to the sector operating [indiscernible]. After the [indiscernible] in 2003, and a 2% share buyback [indiscernible].

As seen in slide number four, 2002 improved operatiors provide the basis for profitable growth in the coming year, improving the profit and loss, and building a stronger balance sheet. From the profit and loss perspective, Telefonica will grow its revenue and its EBITDA [indiscernible] in real terms, and [indiscernible] of reaching a solid [indiscernible] that we have continued to build up by making a [indiscernible] our wireless footprint in Brazil and Mexico. Second, a comprehensive set of services [indiscernible] on broadband, and working to complete out [indiscernible] portfolio services, with less [indiscernible] long distance, offering a [indiscernible]. And third, efficiency, by putting on [indiscernible] initiatives and forming the business model [indiscernible] which is our number one priority.

In addition to top line growth, 2002 write-downs will improve both the [indiscernible] positive impact on the balance sheet going forward.

With respect to the balance sheet, [indiscernible] including the [indiscernible] on working capital. At the end of last year intangibles represented this 22.5 of total assets, down more than 9% from the level of 2001.

Finally, [indiscernible] to fully take advantage of all the opportunities, will be the drivers behind robust cash generation on coming year.

To review the basics on [indiscernible] for 2003, please turn to slide number five. In real terms, that is excluding FX and [indiscernible] group [indiscernible], we are expecting the following growth pattern for the next year. Earnings growth will be 5% to 8% rate. EBITDA growth between 6% and 9%, and 18% to 21% growth for 2002 write-downs and restructuring [indiscernible] in 2003. In addition, Telefonica will continue to see [indiscernible] efficiency, and we will [indiscernible] investment [indiscernible] to regulations and events. As a result, weexpect the Group CAPEX to be similar to the level of 2002 [indiscernible] we have the maximum of 3% in real terms. Next one, top line growth. [indiscernible] operating cash flow by [indiscernible] in real terms.

To conclude, we believe [indiscernible] to drive profitable growth [indiscernible]. We have [indiscernible] our operations in the [indiscernible] of our business with [indiscernible] to generate that growth. We have clearly improved the quality of the company [indiscernible] write downs are now behind us, and we are delivering an execution [indiscernible] to restructure non-performing businesses. And we are keeping a very solid financial result [indiscernible] to maximize [indiscernible].

Before turning this over to Fernando, I would like to inform you that the annual investor day, which we see as a unique opportunity to get closer to analysts and investors, will take place in the second half of the present year. And now I will hand over to Fernando for a review of 2002 results.

Thank you, Cesar, and good afternoon to all of you. As in past quarters, full-year results have been heavily affected by a combination of depreciating Latin American currencies and economic position, with its impact on local currency performances, especially in Argentina. And as such, total revenues and EBITDA decreased by close to 8.5% with foreign exchange bringing 14.6 percentage points to 2002 revenues and EBITDA growth.

In constant currency terms, Telefonica Argentina revenues and EBITDA declined by 12% and 17% respectively, year-on-year, but a 75% drop in euro terms. Excluding Argentina and foreign exchange, the revenues, EBITDA and EBIT would have grown between 8.5% and 11%. [indiscernible] in context, cash remunerations has become management's top priority, pushing cost cutting initiatives across the Group, with EBITDA margin stable at 41%, and gearing, capital expenditures, closer to revenue streams. The €4b yearly cut on total investment has been key for consistent operating cash flow generation, which topped the €7.9b mark during 2002.

It is worth highlighting that despite Latin American macro conditions, all local operators have positive contributed to the gross cash flow, a proof of the company's and the management of the current scenario in the region. And in particular, the net operating cash flow reached €1.4b, 12 times higher than 2001 figure.

Domestic businesses, which accounted for two-thirds of Telefonica's operating cash flow, have remained very solid throughout 2002.

Telefonica Espana ended 2002 within its real target of flat EBITDA, posting a 12% annual EBITDA growth for the fourth quarter, 2002. The increasingly higher contribution of [indiscernible] revenues, which [indiscernible] revenues, coupled with lower [indiscernible] regions related international traffic resellers, are the factors that have contributed the most positive trend of domestic fixed line financials. [indiscernible] Telefonica de Espana, revenues and EBITDA grew by a 18% and 24% respectively. With commercial efforts focused on customer loyalty, [indiscernible] in profit, and [indiscernible] services, EBITDA margins reached 51.6% growing by 2.5 percentage points year-on-year. And finally, Telefonica Data Espana increased in EBITDA 33% year-on-year to end at a 24% margin.

One of the main drivers of Telefonica's results through 2002 has been currency fluctuations, whose impact on consolidated accounts is shown in slide number eight. Average exchange rates have progressively deteriorated during the year, heavily penalizing the contribution of the company's Latin American assets to the Groups accounts. As a result, FX, as I said before, has ranged close to 14.5 percentage points to revenues and EBITDA growth for the full year, almost doubling its first quarter negative contribution. Excluding foreign exchange, all financial metrics exceeded the 6% growth mark in 2002, improving our first quarter running growth by more than one percentage point. This is thanks to the effective reversal of Telefonica Espana yearly downward trend, and the recovery of the Group's Latin American local currency results, which we believe have already bottomed. It is worth mentioning, [indiscernible] is contributing positively for revenue growth in constant currency terms.

In spite of the recovery of major spot rates in the region, since year 2002, particularly the Argentinean peso and the Brazilian real, which appreciated by 18% and 9% in the last eight months, respectively, average exchange rates will likely continue to play against the Latin American assets results in euro terms, especially during the first half of 2003. And then we expect the impact to smooth into the second half.

Argentina has been the [indiscernible] differentiator factor of 2002 results as presented in slide number nine. [indiscernible] to the local currency depreciation, [indiscernible] by more than 11% in 2002. And inflation jumping to 41%, with no tariff adjustment, Argentina contributions to the Group's revenues, EBITDA and EBIT dropped by 70% to 80% in the last 12 months. Therefore, Argentina's [weight] over 2002 consolidated revenues and EBITDA decreased from about 12.5 percentage points in 2001, to less than 4% this year. The Group's total exposure, including equity, goodwill and internal financing, sharply dropped to levels below €970m.

In 2002, cash flow was set as company's estimated for evaluating margin performance. With top initiatives being [indiscernible] will strengthen Telefonica's present and future cash flow generation (indiscernible)the Group's resources.

Just to review one of the two key levers management has been focusing on in 2002, [indiscernible] top line performance and drive cash flow up, namely operating efficiency. Please, let's go to slide number 10.

Group operating expenses increased by 9% year-on-year, with [indiscernible] consistently pushing cost stream and initiatives at the close of 2002 [indiscernible] cost basis [indiscernible]. In that respect it's worth mentioning that [indiscernible] operating companies except Telefonica in America, have posted higher EBITDA margins in the last quarter of the year, compared to the same period of 2001. On operating costs, it's worth highlighting the positive trends in bad debt expenses, with an annual drop of 13% in constant currency terms.

In terms of margins, the pressure on cost efficiency, which will continue in 2003, to further stimulate profitability, has led to keep 2002 EBITDA margins at 2001 level of 41.3%.

Regarding CAPEX on slide 11, which acted as a second level to the cash flow, complementing cost cutting initiatives. 2002 capital investments almost reached €3.8b, which is equivalent to an annual decrease of 52%. In relative terms, capital expenditures over revenues was reduced by 4 percentage points, to end 2002 just above the 13% level. But Latin America, with exchange rates amplifying the already sharp CAPEX drops in local currency, and Telefonica Moviles benefiting from both economies of scale and a slowest data pickup, explained about 80% of the overall reduction.

Telefonica Latin America, with a total expenditure below €700m, is the company that has cut CAPEX the most in terms of revenues, moving from the 30% level invested in 2001, to just below 10% this year.

Telefonica Espana has continued to shift its CAPEX value [indiscernible] allocating an increasingly higher proportion to business transformation. And as a result, [indiscernible] related CAPEX dropped by an annual 16% rate, while [indiscernible] CAPEX grew by 7% year-on-year, in accordance with the company's commitment to DSL deployment.

[indiscernible] wireline and wireless in Spain represented [indiscernible] 60% of consolidated CAPEX, with Latin America fixed line subsidiaries having [indiscernible] the Group's investments falling, from 40% to 18% in the last 12 months. [indiscernible] Telefonica Espana business performance.

Traditional revenues, accounting for almost 80% of planned company revenues, ended the year down 1.3%, a figure that is significantly above the company's target presented to investors a year ago of a 2% to 4% annual decline. Access, traffic, and tariffs have remained under a lot of pressure through 2002, due to a combination of increasing competition and compliance with the current regulatory framework. As such, the average nominal price was reduced by 8% in 2002, in addition to the 7% decrease registered in 2001, complying with mandatory price cuts. Moreover, access market share loss equaled 3 percentage points in the last 12 months, having lost 7 percentage points since market liberalization.

Telephone traffic. Traffic market share went down by 4 percentage points in 2002, ending the year with an estimated market share of 81%. After the weak third quarter due to seasonality, pre-selected lines fourth quarter levels have returned to better growth patterns, increasing sequentially by 120,000. Pre-selected lines reached 1.8m of which 81% had already pre-selected. Total traffic volume increased by almost 4%, driven by incoming traffic growth above 20%. Outgoing traffic shrank by 3%, which [indiscernible] declining by 1% due to [indiscernible] increasing penetration and local traffic dropping by 8% as a result of the 70% growth in lower pre-select lines, being the factors behind this performance.

Finally, and at the Group level, domestic wireline posted flat revenues and EBITDA in 2002, in line with our beginning of the year's presentation.

On slide number 15, moving to the ADSL business results, ADSL traffic overall has been a key management priority for the last two years, combining efforts to increase service penetration with a clear focus on building solid business economics. In terms of plans, 2002 ADSL connections exceeded 950,000, 2.5 times higher than 2001 figures, and ahead of our year-end target of 900,000. It's worth mentioning that fourth quarter net adds surpassed 200,000, the highest level since [indiscernible].

This positive operating performance has been coupled with the progressive strengthening of all relevant economics. Retail ARPU reached €43 per month, growing at a 2% rate year-on-year, positively impacted by an improved customer mix, with 256kb [indiscernible] in connectivity [indiscernible], reducing it's weight over total connections from 91% as of March 2002, to 85% as of December. Prepaid connections accounted for 63% of total ADSL subscriber base.

Regarding costs, retail subscriber acquisition cost was down by 34%, with respect to January 2002, helped by plug and play, which represented 62% of 2002 retail adds As a result, [indiscernible] EBITDA calculated as revenues minus [indiscernible] costs, reached €85m in 2002.

I would like to highlight that incremental EBITDA is also positive when considering [indiscernible] business line since its launch back in 1999.

Finally, capital expenditure for new connections decreased by almost 40% per line in 2002, as most of the investments related to the deployment of both and [indiscernible] network, progressively completed in 2001.

Starting our business review with the Latin American Wireline unit in slide 14. Regarding operating performance, Telefonica Latin American managed lines decreased by less than 1% year-on-year, ending 2002 at 21.4m. [indiscernible] losing lower income lines as the company tightened controls to improve the quality of the client base, and Telefonica Argentina influenced by lower economic activity, were the reasons for the drop in lines. ADSL totaled 456,000 connection, 85% annual increase, with Brazil representing more than 60% of aggregate minutes.

Regarding financials, Telefonica Latin America P&L has been severely hit by the worsening of average exchange rates, with drained more than 30 percentage points to its revenues and EBITDA growth. As a result, fixed wireline operations in the region subtracted 14 percentage points to Telefonica's EBITDA growth, with its weight over consolidated EBITDA decreasing by 12 percentage points to 28.5 in the last 12 months.

In terms of cash flow, all operators posted positive figures, offsetting top line pressure for both a firm management of costs, which were flat for the year, excluding foreign exchange and [indiscernible], and CAPEX, which was cut by 77.5% overall.

With a view to the performance, on slide 15, 2002 operating [variance] on EBITDA increased by 11% and 8% in local currency, driven by a 10.5% growth and a 37% rise in local and long distance revenues respectively. Average lines in service went up by 6%, [indiscernible] of traffic per line per day growing at a 4% rate sequentially, and tariff increases granted in June 2001 and 2002, are determining local traffic positive results.

Regarding long-distance services, end of the year market share reached 36% for domestic long distance, and 32% for international long distance, well ahead of initial expectations. It's also worth mentioned the positive growth of ADSL revenues, exceeding 120%, with total connections increasing by 68% on an annual basis.

Going to Telefonica Argentina performance in slide 16, you see the devaluation took place, management initiatives have been oriented to stabilize the company's key operating metrics, which have reversed the downward trend since [indiscernible] in the first half of 2002. In that respect, the company has been very active in launching a specific products both prepaid, and dedicated to reduce on collectibles. All lines in service remain stable since September, and negative net adds decreasing from 100,000 lines in the second quarter to just 5,000 lines in the last quarter of the year.

[indiscernible] were 12% year-on-year, have been key in the effective management of bad debt. We've reached 6.9% of revenues in 2002, down from its 9.4% peak in the first quarter of 2002. In addition to the positive performance of operating metrics, Telefonica Argentina has downsized its cost structure, cutting local currency expenses by 4%, despite high inflation. As a result, fourth quarter EBITDA recovered to first quarter level, after two declining consecutive quarters.

Turning to the next slide, I will present a basic wireline estimate for 2003.

Regarding Telefonica Espana Group, 2003 expected performance would imply a minus 3% to flat revenue growth for the year. EBITDA decreasing between minus 4% and minus 1%, and CAPEX dropping by 15% to 20%.

Talking about Telefonica Latin America, its [indiscernible] financial should the end 2003, showing a plus 6 to plus 9 revenue growth and EBITDA growth in the range of 4% to 7%, and CAPEX moving between minus 2% and plus 1%.

[indiscernible] for our Latin American subsidiaries excludes FX and [indiscernible] consolidation.

Let me mention that 2003 first quarter performance is expected to be good for the Group with respect to year-end targets, with its progressive improvement throughout the year.

Slide 18 presents a brief overview of Telefonica Mobiles performance, a detailed analysis of which was fulfilled at the company's conference call. For that reason, and to shorten this presentation, we will not review the company's 2002 results. Although we will be ready to answer questions you may have on this subject during the Q&A session.

As seen in slide number 19, Telefonica [indiscernible] financial performance has been affected by a difficult environment, foreign exchange and changes in the consolidation have drained also 14 percentage points to the company's revenue growth, with Telefonica reporting a 6% annual decline in revenues. Within the context, Telefonica has primarily focused on efficiency through costs and capital expenditures rationalization, to improve the cash flow profile. As a result all incumbent operations have significantly improved their EBITDA margins, with Spain posting at 24% margins, and Latin American subsidiaries ending the year in the mid to high teens.

On a consolidated basis, EBITDA margin grew by 8.5 percentage points to 10%. In relation to cost [indiscernible] bringing cost structures closer to current operating environment, the company has continued to push CAPEX down to an annual decline of 54% to end the year at 30% of revenues. 70% of the investments were devoted to strengthen incumbent markets operations and international network. As a consequence of cost and CAPEX cuts relative cash flow was reduced by more than eight times to end 2002 at minus €56m.

Now I will hand over to Santiago Fernandez Valbuena, our Chief Financial Officer.

Thank you Fernando, and good afternoon ladies and gentlemen. Please turn to slide labeled 21, where I will start a [indiscernible] on finance in 2002, with the details of our financial expenses.

Slide 21 shows that all captions in the finance section of the accounts are down relative to 2001, as a result of shrinking debt levels, a positive impact of foreign exchange on non-euro denominated debt, and finally lower re-financial rates. Net interest has been €1.48b, or 7.8% lower than it was in 2001, and FX has negatively impacted our financial expenses by €733m, mainly as a result of the Argentinean devaluation on our debt. Next, Argentina, our overall financial costs have been €1.61b.

If you now please turn to slide 22, there you see that we show the profile of our net debt levels over the last two years. From the all time peak of €31.3b in the second quarter of 2001, we have been able to downsize our financial liabilities by €8.7b or 28%. In 2002, and despite a very challenging financial markets environment, with widening spreads, low risk appetite and a sever drought in funding sources, Telefonica has been able to bring overall debt levels down by €6.4b. The upper right hand chart shows how to go from 2001 to 2002 debt.

Operating free cash flow has cut €4.5b off initial debt levels. Foreign exchange conversion and a prudent liability management and hedging policy have been instrumental in wiping an addition of €3b off Telefonica's debt. And finally preferred shares, which as you know are not within Telefonica's balance sheet, explain an additional €2b reduction.

Cash consumption to financial investments has been €1.56b. This includes mainly our treasury stock acquisitions, about €200m in [indiscernible] in TCB shares in Brazil, related to the JV. And about €300m related to the [Pigasso] acquisition in Mexico.

Finally, [Pigasso] in Mexico with €923m, and [indiscernible] in Brazil with €314m, are also the bulk of the €1.6b added to debt as a consequence of changes in consolidation perimeter in 2002. Our debt structure, which is shown at the bottom of the slide, may tell you that our short-term refinancing risks are low, as only 13% of our debt is short term. We have a balanced exposure to the yield curve, increasingly leaning towards long maturation liabilities, and our currency exposure is also balanced between the two main regions where we do business.

Telefonica's solid financial position is an asset that we will continue to work on selectively, to selectively access the capital markets in a timely and attractive fashion. Our recent February 2003 €2b long bond issue is witness to this, as demonstrated by the tight spreads that we achieved, and the two times over subscription recorded.

Finally, on slide number 23, we meet our previous commitment to publish a detailed cash flow table. Reading from the top down, cash flow from operations has been €11.7b. Calls on cash by other operating activities, has been €1.1b, of which the main contributors are €689m which come from payments to retirees, €234m in one-off payments related to UMTS in Germany, and about €100m in severance payments for personnel reduction in Latin America.

Cash paid in interest has been €1.6b, and the next line shows that income taxes have drained €226m. Most of these tax payments are coming from companies not included in the tax consolidation perimeter, which are especially our Latin American affiliates. Net cash from operating activities, line (a) in the chart, has reached €8.8b.

CAPEX payments, next line, have been €4.2b in 2002. Please remember that CAPEX is accrued when contracted, but paid out with a significant time lag. Thus, 2002 CAPEX paid is a mix of CAPEX contracted in 2001 and 2002. €1.56b has been spent in financial investments, which I have explained in the previous slide, and the remaining lines in the statement reconcile this cascade with changes in debt, which is what we did in a graphical form in slide number 22.

Let me simply finally add that the regional sources of our EBITDA, CAPEX and cash flow, are broadly aligned. Latin American sources represent 31% of CAPEX, 35% of EBITDA and about 40% of interest paid.

With this I turn over to our Chairman.

And so this problem with the Argentinean position has been what's behind the company's negative quarter reports. [indiscernible] continue to perform strongly and we have set the basis for sustainable profitable growth in wireline and wireless. We are actively reacting to a very demanding environment, by matching corporate structure to capital expenditures. I said before, margins and cash flow remains [indiscernible]. The [indiscernible] of domestic business continues to be strong, and [indiscernible]

Thank you very much, and now we are ready to answer your questions.

Thank you gentlemen. If you wish to register your questions, please press the number one on your telephone keypad. Once again it is one if you wish to register your questions. There will be a brief pause while parties are registering their questions. Our first question comes from Octavio Andolisio, from CSFB London.

Hi, good afternoon gentlemen. First questions if I can, starting from the wireline outlook you've given today, am I right that you practically are downgrading the guidance you gave in Seville last year? Last year, from memory, you were going for 2% to 5% growth in EBITDA. Now this year we had a flat growth, and you're now talking a decrease of 1% to 4%. So if you can just elaborate on that? The second question is on Via Digital. Now could you just give some color of what's going on in terms of the merger with [indiscernible] and how much cash is still committed to flowing to Via Digital in terms of capital increase before we are going to see the merger with [indiscernible]? And the third, if it's possible to [indiscernible] payment for income tax? Basically you guys mentioned that this €226m of cash outflow for the Group, and mostly due to Latin affiliates Now in Moviles we saw €900m of cash outflows, so could you just reconcile this just to check what the companies within the group affectively are receiving cash back from the sales, to that we get a net of 226? Considering that the subsidiaries already paid €900m in cash. Thank you.

Okay. With regard to the Via Digital the merger was [indiscernible] we expect it to be completed by the month of June. All the shareholders are fully committed to the merger, and I am convinced the merger is going to be a great success. And now Fernando will answer [indiscernible]

So the guidance for the wireline business. We are giving guidance for 2003, while last year we were giving our related guidance for a period longer than one year. Next year our guidance of minus 1% to minus 4%. We are incorporating a 1% decrease in Latin American EBITDA comes from this investment in the real estate portfolio. It means that some of the assets that now are owned by Telefonica Espana if they are selling them they will have to pay rates, and that over the year is expected to become 1% growth in net EBITDA.

And the rest, is also the [indiscernible] that will have better [indiscernible] impact next year, because here we are accumulating a price cap that until November will [indiscernible] and then at the same times we're not benefiting on the same fashion of the increase in the market rental, because we increased 11% on 2002, and we have only increased 8% in 2003. So that gives you a sort of a little bit of a [indiscernible] in the guidance for 2003. That together with the market dynamics.

In terms of the Moviles effect, it is true that there is a lot within the cash effect of tax Moviles, and that is the same in the Moviles makes to Telefonica Group from 2000 and 2001 tax payment to the consolidating tax pool. Because that is a cash net out, it happens in 2002, but this related to 2001 and 2002 taxes. For 2002 obviously we have Dutch credits, and that's on an accounting basis and that's [indiscernible]. So it's true that there is a cash outflow, but that comes from 2002 payments related to 2000/2001 tax payments into Telefonica, which is a consolidating pool of the tax group. And Moviles belongs to the tax consolidating group of Telefonica.

The next question comes from Justin Tollis, an analyst from Sanford Bernstein in New York. Please go ahead, sir.

Thank you, I have two questions if I may. First a question on working capital changes. For the year your balance sheet shows working capital improvement of just under €1b using accounts receivable and accounts payable. My question has two parts. One, what was the cause of this shift and should we expect it to reverse itself? Because I noticed that over time this number does bounce around. And two, when will we see a reconciliation between the changes on the balance sheet in terms of working capital, and the working capital reported in the change of debt statement that you just presented, which showed an investment of working capital of €490m.

My second question is just related to the Other payments charged on the cash flow statement, of €1.1b. I'm just wondering what we should be expecting for that number going forward? Totaled €1.1b this year, what should we be expecting in 2003? Thank you.

Let me try and answer the first question, which is the reconsolidation of working capital. Now you take our balance sheet, you're going to see that the change in balances related to working capital was going to be in the neighborhood of 250. Now how do you reconcile that number with the number we have provided in our abridged cash flow statement? Well, the changes in working capital related to operations have been 200, the changes in the perimeter of consolidation are adding 106, and then - and this is the big moving piece in the puzzle, which happens every quarter and will probably continue to happen in the future - is what we call the difference in FX conversion rate. This is the effect of translating into euros net balances which are reported in balance sheet at local currencies. And as you very, very rightly said, they do bounce around quite a bit.

On the Other payments, that I mentioned very briefly in my presentation, you can safely assume that a large part is always coming from payments to pre-retirees. I can give you some color about the future evolution of these payments to pre-retirees which are by far the largest contributor to the €1.1b. I did mention, I think in my talk, that there is this year a one-off payment which is not going to be recurrent in 2003, and this one was related to the basic shutdown of the UMTS operations in Germany. Others will be recurrent but diminishing in time, and this is the pre-retirement payments. Those are going to be to the tune of €720m in 2003, and about €700m probably slightly less than that in 2004.

Our next question comes from Nick Delsard, and analyst from Lehman Brother, London. Please go ahead, sir.

Thanks very much. Two questions. I just want to go back to the Seville guidance question. Clearly if you do see a 4% drop in fixed EBITDA this year, then in order to reach even the lower end of Seville guidance you would need to see fixed EBITDA grow more than 6% in '04 and '05, which seems unlikely. Presumably something has changed between Seville and now in your outlook for the fixed business, could you tell us what aspects of the fixed business have led you to reduce your outlook?

And the second question is, could you give us some breakdown of the CAPEX between the different business lines for 2003?

Okay, on the guidance of Telefonica's finance, things are broadly online, within a very tough market environment. So this means we lost access lines last year. We think this year we lose a little bit less. We lost market share last year. On aggregate, according to expectation we think 2003 we will lose a little bit less. But obviously all those effects are accumulated and we have given you a broad, basically 3% range on EBITDA. So let's wait to see where we end. But we thought it was not fair not to give you a reflection of what we think the toughness of the market is ahead of us. If you exclude the real estate effect, it will be minus 3 to flat EBITDA.

We also have to look at cash generation. It is true that maybe this is slightly lower guidance on the edge, but at the same time we expect to end up with a 15% to 20% drop in CAPEX, which means that cash flow should be this year severely up. And that is also a reflection that we see sort of weak demand environment, due to combination of factors. One of them is also macro factors. And also that's the reason why we see less CAPEX really needed to attend that weak demand. So on average, let's see how we end up in the year, and let's see how we move within that sort of pro forma minus 3 to flat EBITDA guidance.

[indiscernible] I mean this is very preliminary, but generally it's doing okay, according to estimates, and it's well situated on the good side of this guidance that we are giving you right now. So we will have to wait and see how things are going.

In terms of CAPEX, basically we expect that Telefonica Espana, as we said, going down between 15% and 20%, Moviles will be up -- basically will be below 10% over revenues, because 7% to 9% of revenues basically what we have is an investment in Mexico. And then the rest of the group will be [indiscernible] very modestly in terms of CAPEX. Our fixed wireline business in Latin America will remain broadly flat on CAPEX, and then the rest of the group's subsidiaries and so forth will be from slightly negative to flat CAPEX. So overall we expect flat CAPEX, maybe slightly up or slightly down, minus 1% to 2%, to plus 1% to 2% 2003 CAPEX versus 2002 CAPEX.

We have Robert Mocasha from Schroeder Salomon Smith Barney, London. Please go ahead, sir.

Good afternoon. I have two questions. Can I also ask a CAPEX question following up that last one? If we assume that the Moviles CAPEX is going sideways, either as 999 which is the figure you gave on page 11, or 919, which is the figure you gave in your text release, and you put Mexico on there for €500m, which is again from the text release, that suggests that the rest of the Moviles CAPEX is going to halve. Is that the right assessment of that?

Second question. On slide one you mentioned you repatriated €1.5b from Latin America. Can you explain in some detail exactly how you've done that, and whether we can assume that is something you can continue to do going forward?

Two CAPEX figures, one is with the Moviles business, of CTC Chile And the other one is without CTC Chile which is not within the legal [indiscernible].

On your cash flow question, we did say that we have repatriated about €1.5b from Latin America last year. Let me give you some color on that. You that we use basically three instruments to bring that money back home. Dividends, which have accounted for 640m, management fees, which have accounted for 60m, and then inter-company loans and interest on those loans, which have together contributed 730m last year. And those numbers I just gave you are all millions of dollars, and therefore you should reconcile them with the euro number which we provided in the presentation.

So let me repeat that, 641 in dividends, 60 in management fees, 730 in inter-company loans. The remainder being made up of a small number of numerous different things.

We have a question from Mr. David Wright, an analyst from ABN Amro, London. Please go ahead, sir.

Hello. Just following up on the question on the pre-retiree provisions, and you gave guidance of €720m '03 and €700m '04. I think assuming your payment this year, the brought forward balance is about €2.8b, so you broadly cover off half of that over the next two years. It would be useful to get a little bit more of an idea of how you intend to reverse the rest of that, whether it will be by 2006 or whether the rest of it will diminish a little further on?

And then secondly, I noticed access lines in Telefonica Espana falling for the first quarter, for quite a long time. And I'm just wondering whether you expect that to decline, and whether that is key driver of the minus 1% to 4% of target?

Then finally, if I may, there obviously have been quite a few rumors of a bid for Terra minorities. I don't expect you to comment too much on that but obviously, but how long do you think you will be able to continue consolidating the Terra cash, given that you have less than 50% holding? I do note as well in the US GAAP statement in your 20-F that they don't actually believe you have long-term management control of that business with your current holding. So how long do you think you will be able to consolidate that cash? Thanks.

Okay, on the pre-retirement, people who pre-retire eventually do retire. Therefore, this program of payment is tapering off and falling off quite significantly. So you should not assume that the numbers I gave you, which is 720 something for 2003, and about 700, slightly less, for 2004, are in any way shape or form going to be stable going forward. Actually, our provisions, our forecasts, our plans for the future show a significant drop off tapering out - almost out - until 2010. So maybe that can help you put in those future payments on your numbers.

If I may for a minute take your third question, which is more on my division. Terra cash, as you know is not exactly consolidated. What Terra does is it uses one of our financial subsidiaries to actually get the financial income that they derive from their cash. And only later do we attribute that to us the proportionate share. In other words, it is not that we are using that cash as if it were our own - which it isn't - but they are rather using one of our instruments, which happens to be more efficient and faster than some of the other alternatives.

Let me comment that [indiscernible] Telefonica, [indiscernible] with Terra had the market [indiscernible] The Terra Lycos business model, and pricing [indiscernible] and as usual [indiscernible] and I think that's very clear. [indiscernible]

Regarding the Telefonica Espana [indiscernible], what will be behind the numbers on the guidance is the part that we [indiscernible]. But we do not expect for 2002 that that trend in losing lines accelerates. On the contrary, we expect that trend to smooth out a bit. So we expect to lose less access lines really in 2003, compared to the ones we lost in 2002.

We have once again Mr. Robert Mocasha from Schroeder Salomon Smith Barney, London. Please go ahead, sir.

I'm sorry, can I ask the same question I asked again. CAPEX, you are forecasting Moviles CAPEX going sideways this year. You are also forecasting that Mexico has €500m of CAPEX spent on it. Does this mean the rest of the Moviles CAPEX goes down from between €900m and €1b, to €500m?

Sorry, can you repeat the question?

Your text suggests that Mexico will spend €500m this year on CAPEX. You have suggested that the overall Moviles CAPEX is going sideways. Does that mean that excluding Mexico, the numbers have gone from around €1b to around €500m?

I mean we refer to what we've said. The CAPEX over revenues for Telefonica Moviles in Spain will be between 7% and 8% of revenues for the next 3-year period. So when you look at your CAPEX of Telefonica Moviles it will go up, including the overall -- the overall Telefonica Moviles CAPEX will go up, taking into account that there is an important part of CAPEX into the Mexican deployment. So if you exclude Mexico, CAPEX will remain pretty flat to slightly down, 2003 compared to 2002 for Moviles. I don't know whether that is clear?

So that excludes Mexico?

Yes, excluding Mexico CAPEX will be pretty flat for the --

But including it goes up by a third?

Including, yes, it goes up by a third, something like that, yes.

The next question comes from Jose Martin from JP Morgan, London. Please go ahead, sir.

Hi. Good afternoon. Could you possibly -- you've returned something like €2.1b worth of cash to shareholders that's a 2% share buyback, worth 25 euro cent. How much are you planning to return to shareholders this year, given your cash generation?

And the second question is, on your slide 12 you have nominal price reductions. You had 8.1% in 2002. Can you just give us an idea how much do you expect for 2003, given the fact that the monthly fee increase is now outside the price cap? So if you could give some light on that. Thanks.

You know with the regards to the dividends, we will continue to pay a hefty dividend, and to offer an [indiscernible] including the possibility of buyback. And the other limiting factor would be that we are committed to [indiscernible].

For 2003, we will basically be applying the price cut, which is CPI minus 4%. [indiscernible] that has come up 8% in January, so that is the price cap. The issue is that the price cap will be effective in November, so we are having the effects throughout the year, and until November, the target reduction that we incorporated last November, due to the price cap of last year, right. But that is the price cap. CPI minus 4. okay?

So is it fair to say that the nominal, the maximum nominal price reduction that you would have to make on this price cap, would be minus 2%?

That's the meaning. Then you know the [indiscernible] that will have with effective prices in the different plans, so we will be giving you a flavor as we did last year, every quarter. A little bit of what's the difference between effective prices and the nominal prices, okay, which [indiscernible]

And I'm sorry to go back on this, but you're not giving any guidance in terms of cash being returned for next year?

No, not on that one, but I mean we [indiscernible] breadth of this, in that your cash flow on Telefonica Espana should go up substantially.

We have another question from James Gallop, an analyst from Goldman Sachs, London. Please go ahead, sir.

If I could ask a couple of questions. Just going back to the cash flow statement, I couldn't really reconcile the dividends paid with what seemed to be the dividends paid out of the Latin American subsidiaries? And then would the tax paid by Telefonica Moviles this year, the €934m that appear in that cash flow statement, would that appear as your cash outflow in terms of tax next year?

And then could I just clarify what you're expecting in terms of tariff changes in Brazil this year, and if you could elaborate on the regulatory context for that?

Okay, in the dividend question, the figure we provided is net of both what we pay out and what we get in. We also give you a flavor of what's in it. We, as you know, hold a position in VVVA and that has provided dividends in excess of €11m. We have shares in [indiscernible] Telecom, which has brought in - I don't have here the exact number, but it is slightly higher than €5m. And we own a significant but minority shareholding stake in [Canne TV], and we have brought home about €18m in dividends. So you have to -- we would have to net out all those effects, and that's why the number you have on the cash flow, which is deliberately abridged to simplify, shows just the net of minus 10.8. But it is the addition of positive and negative dividends.

[indiscernible] my personal impression here in Spain is [indiscernible] will have a much better outlook. I think that if you [indiscernible] from the part of the [indiscernible], now I'm much more worried that they should be about the growth of the market share of the incumbent. And I think they understand we're [indiscernible] this market growth, the telecommunication market growth, profitability is a key element for the development of the market. And with regards to Latin America, to say that the attitude and the level of [indiscernible] in Brazil is very positive level of understanding, and I think we are certainly confident [indiscernible] will be positive. [indiscernible] the evolution of the [indiscernible] in Moviles that you have probably seen is a clear indication that the attitude is positive. We see a much better attitude in Chile and Argentina, and Peru. We think for the time being that there will be a good [indiscernible] to this [indiscernible] and it will be in the coming days. [indiscernible]

ARegarding the tax that you see as an outflow on Telefonica Moviles, that is an outflow paid to Telefonica S.A., tax consolidation group, due or related to 2000 and 2001 taxes. The taxes outflow that you see on the cash flow statement is very typical tax payments for [indiscernible], because it's in [indiscernible] or yellow pages subsidiary. Because it's not in the consolidated tax group for Brazil, mainly, okay. And those are taxes that the group, on a consolidated basis, have paid or subsidiaries making money, and have not been in the consolidated group either, because they are foreign companies, or either because we don't own the percentage enough to have the consolidated picture.

Telefonica Moviles will be receiving inflows from the consolidated tax group of Telefonica in the next year, because they have contributed this year with tax credits, on an accounting basis, okay? So it's not related, it's a different thing.

We have Mr. Frank Balendorf from WestLB Panmure. Please go ahead, sir.

Hello. I have just one question. Could you give us your assumption on exchange rates in Latin America with respect to your guideline you gave for Latin America? So particularly what is your exchange rate assumption on the real/euro exchange rate?

The guidance we gave for Latin America is on constant exchange rates, so it assumes no FX changes, 2003 versus 2002. So those guidance they were plus 6% to plus 9% growth in revenues and the plus 4% to plus 7% growth in EBITDA, are assuming no change on the average FX rates 2003 versus 2002. Okay? We don't give our own estimates or budget considerations for FX rates.

Thank you. May I add one question? What is the negative basis effect? Do you have a calculation for that, because in Brazil the decrease of the real was mainly in the second part of the year?

Yes, it is true that we will have the quarterly groups performance, which will be more impacted at the beginning of the year than at the end of the year. Because at the beginning of the year, as you very well said, the average FX rates are especially weaker than last year's first quarter, for example, average rate. And we expect that as we progress in the year, that impact will be a smoothing out. So all this having an upward performance trend due to FX and to other factors as well, along the year.

We have Mr. [indiscernible] from ING, Madrid, please go ahead sir with your question.

Good afternoon. A question related to [indiscernible] Brazil. Because of your cost base in [indiscernible] under normal conditions, I mean without considering any cost cutting measures, how much of your cost base will increase according to the consumer prices? And how much is more wholesale related? I'm trying to assess how much, or how your cost base could be affected by the new price cuts, thank you.

We haven't disclosed that figure, but we still have margin to manage our costs in a way that improves actual inflation reading. So we have margin in there, and we think that guidance we have given to you of Telefonica Latin America, we are quite comfortable due to that effect. On the cost side we have some margin, and we will continue to [indiscernible].

There is an analyst from Cazenove in the name of James McKenzie, please go ahead, sir.

Good afternoon. I wonder could I ask for the break out of two items on the cash flow statement. First, sorry, I didn't catch all the detail you gave on the other payments related to operating activities? And secondly the net payments on [indiscernible] financial investment?

Okay, let me see if I can find that particular page. It is on 21 if I'm not -- Okay, cash consumption through financial investment, €1.56b. Okay, there you have treasury stock -- I'm only going to explain the main items, okay, so it's not a fully detailed breakdown. Treasury stock, acquisitions, €200m, which is the right number that we spent in the rights issue of [TCP] in Brazil. And €303m I think I said, related to the [Pigasso] acquisition in Mexico. Those are the main financial investments.

So you've got 303m for [Pigasso], Treasury stock of 200m, that's just 500m. You've got about another €1b.

I'm sorry, I probably misrepresented a number. I did not say how much did we spend in treasury stock, I did say this is the largest component. €200m are Brazil TCP share rights issue. And €303 is the [Pigasso] equity that we acquired. Those are the two numbers I did give.

Okay, so we've got about a €1b to explain of which the majority is treasury stock?

Well you also have the large restructuring on the UMTS.

Which is what provisions for Germany?

Let me double-check this.

We have another question from Louis Prota from Morgan Stanley, Madrid. Please go ahead, sir.

Hello, my question is regarding taxes. Could you confirm that the tax losses generated in Germany, Switzerland and Italy are going to be fully deductible in Spain and that you're not going to have any problem with tax authority?

Well we fulfill the law. The law is -- I mean we basically have all the various 100% [indiscernible] within the tax law in Spain. So we don't even consider that.

We have an analyst, Mr. Francois Cavai, from BNP Paribas.

Good afternoon. I've got one question again. So you assume that Telefonica Latin America revenue will increase by 6% to 9%. What is your assumption for '03 for the increasing tariffs in Brazil? And do you think that there is a risk of a change of the index system in Brazil, do you think that could apply already in '03? Is this really more a risk for '04? Thank you.

Okay, the increase that we've calculated we still don't know some of the final parameters. So obviously it is still preliminary. But we are very comfortable within the budget. We don't disclose obviously what was our estimate was when we budgeted for a tariff increase, because that's [indiscernible] how the market is affected by that. So we will see what happens. You know that most of the approval from [indiscernible] have been basically sticking to the contract on the utility sector and also on the mobile. And we expect to get the [indiscernible] around 30%. We'll see what happens.

Then on the other hand, next year the conditions change. This year, [indiscernible] have to change the new contract for the next five years? So we'll see what happens. So we will have something to [indiscernible] you with in the first -- in the next -- before June, okay?

Could you just give more information about the timing of the negotiations with the authorities in Brazil?

No, we don't know, but we will believe it will be before -- you know, soon, but in any case it would have to be before June, so we will see what happens.

I mean for the new concessions?

[indiscernible] will have a year ahead [indiscernible]. We think whatever they want to do, they want to change, this year's inflation with [indiscernible]. The Minister said yesterday that we will obviously have -- [indiscernible] whatever structure they want to project for the next concession period. But in any case, we are pretty convinced and pretty sure that we will be getting the contract, so we are not basically concerned at all. We are very happy. We believe the guidance is extremely comfortable.

So what you mean is, for '03 you think it's not at risk?

No, we believe it's not at risk, no.

We have a question from Ricardo Tierra, from BGI.

Sorry, all my questions have already been answered, thank you.

[indiscernible] from Inter Monte Security, Milan. Please go ahead, madam. Our next question comes from Alfredo Pellenbaum from Commerce Bank, please go ahead.

I've just got a couple of questions on tax. One has to do with the alleged negotiations you are in with the German authorities regarding the VAT of licenses, if you could maybe update a bit on that? The second, with the latest write downs you've done on Terra and other divisions, could that generate any tax benefit for Telefonica going forward, as well?

Okay, this is Santiago. On VAT in Germany what we are exploring, and this is just an exploration issue, is whether or not the payment for the licenses has anything to do with VAT. This is far from being settled, this is far from being clear, but we're certainly trying to explore all the possibilities. And I hope that answers your question.

And how about the second one?

The Terra tax position is affecting us through the higher or lower value of our book values of Terra. So right now we're really due to the tax credits with that in the P&L. It's affected in our P&L a proportional basis through the value of the investment in Terra. And as such it's tax deductible for us, or is basically part of the benefit. We basically reflect what they reflect.

We have Jesus Romero from Merrill Lynch New York. Please go ahead, sir.

Two questions, the first one is in your Telefonica Espana forecast for 2003. Are you assuming any significant headcount reductions? And if that is the case what kind of severance payments are associated with those reductions? And the second question was, you've mentioned that you're committed to maintaining a single 'A' rating, how much could you gear up the company, or what is the right ratio for agencies to look at to not put that rating at risk? Thank you.

On the Telefonica Espana guidance that is not incorporating any severe headcount reduction, okay. So there's no headcount reduction within that guidance.

Okay. As you know there are no straight and no rules set in stone as to what kind of gearing would be necessary to be accorded an 'A' rating. As things stand right now, we estimate, and the rating agencies seem not to disagree with us, that a two times debt to EBITDA level is just about what the single 'A' rating should be like. So in the short term we could think that we are committed to that sort of number. Should that number change we will try and adapt to those changes, should they come.

We have a last question from [indiscernible] from UBS Warburg Madrid. Please go ahead, sir.

Good afternoon. Two quick questions. The first one is for real estate divestment. I wonder if you could give us some guidance of the expected proceeds from those divestments? In previous conference calls you mentioned the possibility of proceeding with [indiscernible] and I was wondering if you could update there in the development, if you've already done some this year, or that could come in the future? Thank you.

If I may start with the second question, which is related to [indiscernible] networks. It is true that we have put in place a system, especially at Telefonica Espana by which we've been able to shorten up the number of days typically associated with our billing. Now this is a one off thing, so it will not be repeated in 2003. Although we continue to strive towards bringing those numbers down. The number of days by which we've been able to abridge the payment period for our billing in Telefonica Espana is about 3 days. And the average billing period is closer to 50. So you can take -- actually 40 something. It is in the high 40s, but not exactly 50. So you can make your own impact there. This is a one-off, and although we continue to work towards bringing those numbers down, it will have had an effect in 2002, but it will not be recurring.

And the other on the real estate. Plan for the three years is to invest the right number of property on 50 real estate sites. Last year we basically sold and booked roughly in the region of €50m, so it's tiny what we've done until now. And the plan over four years, considers to get net financial resources of over €1b, and that incorporates already the cost of building our new conglomerate site outside Madrid, and also the costs involved in erecting some switching centers and all the relocations within the group. So all that basically should yield net financial resources of over €1b along the next three years. So we will be updating you the [indiscernible] we said already in Telefonica Espana will be at incremental cost because of rents, which will amount to 1% of EBITDA, so we will be updating to you on a quarterly basis how that is [indiscernible] and therefore what is the realistic disinvestment every quarter. So we will be [indiscernible] information this year about that.

And if I may go back to Mr. McKenzie's question, which I wasn't able to fully answer before. If we go back to the cash flow on line (ii) I'd like to redisclose or give you again a bit of flavor for what the Other payment relating to operating activities, the 1.13b, are. I did say on my talk that the calls on cash by the Other operating activities are explained by €69m being [indiscernible]. €234m coming from one off payments related to the shutdown of UMTS in Germany, and a one-off €102m which is coming from severance payments for personnel reductions in Latin America.

Now going down, which I think was the second part of your question, on our financial investments, which is the one I had started to look at before. The large amount which I unfortunately cannot disclose, treasury stock. I did speak about the joint venture in Brazil and [Pigasso] acquisition. Those two together are €500m. And then there is a very long list of sundry items, including [Nesoltel] our Guatemala and El Salvador mobile operations, about 50. We have a recap of our operations in [Medi Telecom] in Morocco for about 40m. We have the exercise of the exercise of the [indiscernible], which is another €40m. And it goes all like that. Not everything is of course in the €40m range, but I singled those numbers out just to show you. Those are one-off, mostly related to our previous businesses. And the bulk of those numbers in financial investments had been related to our treasury stock.

Thank you very much. We want to thank all of you for attending the conference call. And I thank you very much.

Thank you, ladies and gentlemen, this concludes this conference, and thank you for using Genesys conferencing. May I ask you ladies and gentlemen to disconnect your lines now. Thank you.