Telefonica SA (TEF) 2003 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to this afternoon's Telefonica call. All participants are in listen-only mode. At the completion of this presentation, you will have an opportunity to register your questions. I now hand you over to Mr. Ezequiel Nieto, your chairman for this afternoon's call. Please go ahead, sir. I shall be standing by.

Good morning, good afternoon, ladies and gentlemen. Welcome to Telefonica's conference call to discuss the first quarter 2002 results. I am Ezequiel Nieto, Head of Investor Relations.

Before proceeding, it should be mentioned that this presentation may contain statements that constitute forward-looking statements which are not are guaranteed of future performance and involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements, as the result of various factors. We invite you to read this complete disclaimer, including the first page of the presentation, which you will find on our website. We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators.

As in past quarters, all management's comments included in this presentation refer to the financial performance of Telefonica S.A. without international subsidiaries in which the Group has management control [up to March being carried by full consolidation]. We are presenting our financial results and the management comments by global business lines on a pro forma basis, assigning all Latin American businesses to their corresponding global business line for January 1, independently of effective transfer of the assets.

Let me mention that due to the new reporting of Telefonica de Espana's revenues we have included in this presentation, [indiscernible] of the year 2002 as an addendum. If you do not have copies of this presentation, please contact Telefonica's investor relations team in Madrid by dialing the following telephone +34 91 584 4713. Now let me introduce Fernando Abril-Martorell Hernandez, our COO, who will be leading this conference call.

Good afternoon, ladies and gentlemen. Thank you for attending Telefonica's first quarter 2003 results conference call. With me is Mr. Santiago Fernandez Valbuena, our CFO.

[Starting on first of May], [January-March] revenues and EBITDA decreased by close to 13% and 7% respectively, heavily impacted by FX, which [drained] 17 and 18 percentage points to the annual growth of both* financial metrics. Excluding Forex, the Group achieved a solid underlying operating performance, with consolidated EBITDA growing at double-digit rates. The company has kept its focus on cost [containment] across all business lines, [whose pace of decrease was sped up] by 7 percentage points to reach an annual 16% rate. EBITDA margin improved by 2.6 percentage points to 43.6%.

Efficiency gains and lower depreciation led to a 4%# EBIT nominal increase, a growth rate that comes after 4 consecutive declining quarters*. In addition, all non-operating results showed significant improvements, leading to a net income of EUR 543m, close to 4.5 times above the first quarter 2002 figure.

[indiscernible] defined as EBITDA minus* CAPEX remained strong at EUR 2.2m, growing at a 6% annual rate. Telefonica de Espana Group's and Telefonica Movile's cash flow growth exceeded the 15% mark.

In addition to the steady improvement of Latin America [indiscernible] and business financials, with all operators exceeding their 2002 performance, it is worth mentioning the positive result achieved by the companies domestic* businesses. First, Telefonica de Espana ended the first quarter with full year guidance and improved ADSL metrics consistently. Second, Telefonica Moviles Espana's commercial strategy is leading to a top-quality client base*, positively impacting minutes of use, up 10% on an annual basis, ARPU up 3% March 2003 over March 2002, and margins pushed just above 55%. Third, Telefonica [indiscernible] Espana, which EBITDA grew by 1.5 times in the last 12 months, went at the #28% margin.

Coming to the next slide for a review of bottom line performance, January-March earnings before taxes amounted to close to EUR 827m, reversing the negative EUR 143m accounted for in the first quarter 2002. In addition to solid underlying operating performance, [five] are the main elements behind earnings before taxes [positive] performance. First, depreciation, which declined by 15% year-on-year in nominal terms, excluding Forex, depreciation would have grown at the 5% rate, which compares positively with the 7% real growth rate in 2002. Second, a 60% drop in [associates], driven by the sale of [Asol TV] and [FD] in Austria, lower losses [indiscernible], [Madrid Telecom] and Terra Lycos and growing results [Pearson] and [Cantele]. Third, a 40% decline in goodwill amortization related to write-downs taken last* year for some of our internet, data and [indiscernible] assets. Fourth, an 80% reduction in extraordinaries, basically explained by the reversal of the provision fiduciary stock for EUR 53m, capital gains related to the real estate project of EUR 26m and a provision taken in 2002 prior to the sale of [Asol TV] for an additional EUR 39m. Finally, financial expenses that have been cut by more than one-third of the [late] appreciation of the Argentinean peso has led to reverse the provision for exchange rate losses by EUR 167m. [Once deducted] taxes and minorities net income amounted to EUR 543m, more than four times higher than the period accounted for in the first quarter 2002.

On the next slide, we anticipated in our last conference call that the Latin America exchange rate* has continued to play a major role in downsizing the Group's decline in real terms, as shown in the slide number 3. Although spot rates against the dollar have steadily appreciated in real since the beginning of the year, with the Brazilian real and Argentinean peso leading the whole with a 20% increase in value, average exchange rates are showing the worst annual comparison in the last eight quarters with these two same currencies losing more than 30% of their value. The US dollar witness versus the euro is adding to the reduction of Latin American assets' contribution to the Group's results. As a consequence, Forex [drained]* close to 17 and 18 percentage points to revenues and aggregated growth respectively, more than doubling its first quarter negative contribution

Excluding Forex, revenues, EBITDA and EBIT would have grown at the 4%, 11% and 20% rate, a significant improvement compared to 2002 rates for the last two metrics. In terms of EBITDA, all subsidiaries, except Telefonica de Espana, were contributing positively in constant currency terms.

Taking into account the 2002 evolution of exchange rates in the region, the recent appreciation and respective higher stability in 2003, the negative impact of Latin exchange rates is likely to ease as the year progresses, depending on the dollar-euro evolution.

On slide number 4, we present the year-to-date contribution by business line to the revenues and EBITDA structure of the Group. Exchange rates are affecting [indiscernible] to minor subsidiaries with exposure to Latin America, pushing them to negatively contribute to revenue [indiscernible]. This negative contribution is mostly reversed in terms of EBITDA, thanks to a successful down sizing* of cost structures implemented throughout the Group. Telefonica Latin America remains the main driver of revenue and EBITDA growth, [indiscernible] 10 and 12 percentage points to each financial metrics respectively.

In actual terms, the Spanish fixed line operations stood [as top single] contributor a percentage more than one-third of consolidated EBITDA. On the contrary, Telefonica Latin America has seen its [weight] reduced by 10 percentage points in the last 12 months.

Turning to the Group's cost structure in slide 5, cost contention continues at the forefront of the Group's management* initiatives. The company renewed efforts to [indiscernible] cost basis to revenue streams. We have also seen a contributing to cost initiatives resulted in a 16% annual decrease in operating expenses, clearly improving the 9% drop we registered for the full year 2002. This positive trend remains in constant currency terms, with operating expenses increasing by just 1% year-on-year, rose to 4 percentage points below last year's performance.

Higher costs, excluding Forex, for Telefonica Latin Americana by 6%, driven by [Telef’s] development of its long-distance operating and Telefonica [de Peru] marketing recently launched new pricing plans. And for Telefonica Moviles 2.5% up* due to [indiscernible] consolidation was partially offset by cuts by the rest of the business units' expenses.

The focus on cost efficiency has stimulated profitability across the Group, as seen in slide 6. The first quarter EBITDA margin was 43.6%, equivalent to an increase of 2.3 percentage points from 2002 levels. Excluding [wire LAN] operations and the more pressure by competition in the region, all business lines were able to grow their EIBTDA margins in the last 12 months. It is worth mentioning the 6 percentage points increase in Telefonica Moviles' margin, driven by the higher efficiency of Spanish operations and the closing of European subsidiaries.

Turning to CAPEX on slide 7, first quarter 2003 total investments just exceeded EUR 600m, equivalent to an annual decrease of 37%. I would like to mention that CAPEX is affected by seasonality, with investment spending traditionally concentrated in the second half of the year. As such, I remind you that our year-end Group CAPEX growth target falls in 0% to +3% range, and that we will stick to the individual targets for business lines we made public at the year-end results conference call. CAPEX control has offset the decline in EBITDA in the first quarter of 2003, driving cash flow up 6% to EUR 2.2b.

It is worth highlighting that solid growth rates, posted by both Telefonica de Espana and Telefonica Moviles, exceeding the 15% mark each of them. Starting our business review with Telefonica de Espana [indiscernible], on slide 8. Before entering the analysis of the traditional business performance, it is necessary to point out that Easter holidays have positively impacted quarterly comparisons, since they took place during the second quarter 2003, as opposed to the first quarter last year. This positive impact would be then reversed in the second quarter to become neutral for the January-June period*.

Traditional services continued under pressure, as shown its 2.6% decline in revenues. Lower [indiscernible] usage revenues, related to the November 2002 tariff cut and the 8% decrease of [indiscernible] traffic is the factor behind traditional services' performance. The 3% increase in client access revenues, related to the 8% monthly fee increase taken early in January, has partially offset lower growth revenues.

Regarding traffic, local traffic accounted for 90% of total [outgoing] gross traffic decline, and decreased by almost 11%, driven by market share growth in excess of close* to 8 percentage and a 66% increase in global [pre-selected] lines to reach 1.6m. Global [pre-selected] lines added up to 84% of total [pre-selected] lines.

With regard to [Narrow 1] internet, related traffic continues to materialize by [ADSL pick-up], posting a 10.5% year-on-year drop and pushing [Narrow 1] internet revenues to decrease by 15%. It is worth mentioning that both direct and indirect access market share losses are growing at a slower pace in the first three months of the year. The company has lost close to* 100,000 lines in the first quarter, which is 21% below the average quarterly loss during 2002, where new [pre-selected] dropped by 17% in comparison to 2002 quarterly [indiscernible].

Turning to slide 9 for Telefonica de Espana's operating expenses, although operating expenses have increased marginally, the company's focus on efficiency has been strengthened. As 6.5% and 3% reductions in external services and supplies clearly shows. It is expected that these reductions will [indiscernible] as the year progresses, with the company allocating additional resources to fight competition and attach growth opportunity, mainly on broadband. Fixed-to-mobile interconnection expenses, which closed the quarter decreasing by 12%, as lower fixed-to-mobile interconnection rates compensated the 6% increase in related traffic, is the main driver of the 3% decrease in supplies.

With regard to external services, lower commercial expenses and lower maintenance costs are the two factors behind internal growth. Personal* expenses increasing by almost 7% is affected by two main factors. First, the [one-out] revision of 2002 salaries according to 2002 real inflation of 4%, versus a 2% increase [originally implemented] last year, an effect that will diluted* in coming quarters. Second, the position to reflect the expected salary increase in 2003, once the new agreement for the next two years is agreed with the [unions].

Moving to the ADSL business results in slide 10, ADSL metrics we presented at the end of 2002 have continued to improve. Total number of ADSL connections was 1.1m at the end of March, showing global demand of first quarter [indiscernible] have increased by 18% year-on-year. Today, ADSL access has already surpassed the 1.2m mark. As economies of scale have been achieved, all relevant economic metrics are improving. [indiscernible] increased by an additional 4% in comparison to 2002 year-end figure to reach growth of EUR 45. Improved customer mix determining [indiscernible]. Likewise, retained subscriber [indiscernible] costs per new connection have halved from the first quarter 2002 level down to EUR 45. As a result, the gross incremental margin calculated* as, revenues minus direct costs, reached EUR 72m in the first quarter, almost equal to 2002 full-year period. Gross incremental margin over revenues grew annually by 26 percentage points to top 49%. Finally, 12 months rolling CAPEX per new connection decreased by 46% in the first quarter 2003, compared to 2001, and by 13% compared to 2002, representing room for further improvement.

Turning to Latin America, [Wharton Unit] business review in slide 11, Telefonica Latin Americana's operating performance, it is worth mentioning the commercial effort displayed by all operators to develop local [indiscernible] markets, with ADSL connections almost doubling in 12 months to reach almost 0.5m clients.

Regarding financials, the seemingly negative annual comparison of [indiscernible] exchange rates continues to heavily penalize the companies' P&L in euros, with FX draining more than 40 percentage points to its revenues and EBITDA growth, around 10 percentage points more than the impact on the 2002 full-year results. Excluding FX, underlying operating performance is clearly improving, with consolidated revenues and EBITDA increasing by 7% on all business lines, posting better financial results than in 2002. Operating costs, net of interconnection, have been flat in constant currency terms, as cuts in personal expenses and budget control offset increases in external services and supplies related to stronger activity within linked to the long-distance offering have improved.

Before turning to [Telas], which accounts for 50% of the region's revenues, it is worth mentioning that successful management of Telefonica Argentina's operations, leading to an EBITDA growth of 16% in local currency, in comparison with the declines we were reached last year. Main operating metrics are benefiting* from economic recovery, and this coupled with cost contention will [indiscernible] revenues being reduced to less than 3%, are key factors behind Telefonica Argentina's positive performance.

To review the performance of [Telas], let's go to slide number 12. Operating revenues and EBITDA for the period January-March increased by 14%, and 8% in local currency, with local and long-distance revenues as growth drivers. Tariff increases [granted] in 2002 for access and usage and [indiscernible] for fixed-to-mobile interconnection, and a 2% growth in local traffic per-line per day have compensated the 2% decline in average lines in service to lead to an 8% increase in local revenues.

With regard to long distance* services, which accounted for 60% of consolidated revenue growth, market shares are offsetting the [indiscernible], with inter-state domestic* long-distance at 42%, and international long-distance at 33% as of March 2003. Telef’s new launch long-distance offering, including inter-state and international long distance, ended the quarter with a 25% EBITDA margin.

Slide 14 represents* a brief overview of Telefonica Moviles' performance, a detailed analysis of which was [covered] at the company's conference call. For that reason, and to shorten the speech, we will not review the company's first quarter operating results, although we will be ready to answer any questions you may still have on this during the Q&A session.

Before concluding the overview of data results on slide 14, I would like to point out that we continue to progress on Telefonica's data business organizations. Continuing with the business transformation that we are committed to for the better position of our company in the corporate and the international operator’s market segment. A complete description of this business structure is included in the interim results published yesterday, on which I will be ready to comment during the Q&A session.

Focusing on Telefonica Data Group's quarterly financial results, the company's performance is affected by both Forex and changes in consolidation, particularly the deconsolidation of AguaNet that was effective September 2002. Excluding FX, underlying business remains strong, combining top line growth and increasing profitability. Revenues organic growth reached 13% growth year-on-year, with EBITDA increasing 2.9 times to exceed a margin of 16%. The improving operations are leading top line and profitability improvement at the Group level, with sustained Latin America local currency revenues up by 8% and #25% year-on-year respectively.

Adding higher efficiency to revenue growth, all incumbent operations are improving significantly to EBITDA margins, with Spain posting 28%* and Latin America subsidiaries ending the quarter at 19% on aggregate. The positive operating performance, coupled with CAPEX rationalization, lead to a 47% annual decline in investments, is turning the cash profile of the Group into a positive EUR $41m, compared to a negative EUR 18m for the period January-March 2002.

Now, Santiago Fernandez Valbuena, our CFO, will continue with the different financial explanations.

Thanks, Fernando. Good afternoon, ladies and gentlemen. Let me start with a very brief overview of our financial performance, highlighting on slide 15 the fact that Argentina's foreign exchange effect has continued to exhibit a large influence on our financial expenses. Headline results show, as you have seen, a 71% decrease in [this caption] relative to Q1 2002. But right below that line, we have provided the same figures purged from the Argentinean FX effect for better comparison. On this view, our expenses are down 5.7% relative to the first quarter of 2002, reaching EUR 413m. Now, this figure is the result of a number of opposing forces. The negative or reducing forces are basically net debt, which operates on the positive side, but the lengthening of our maturity profile, the higher weight of bonds over loans in our liability structure, and the large increase in interest rates in Latin American currencies, notably the Brazilian real, relative to the first quarter of 2002, have all increased and contributed positively to unit interest costs.

Moving on to slide 16, I would like to say a few words about our credit profile. [Providing] structure for components, and on the upper-left, you can see that for the second quarter running, Telefonica has been able to reduce net debt, reaching roughly EUR 21.5b level at the end of the last quarter. On the upper-right, you can see a break-down of how to go from the EUR 22.5b debt level existing at the end of 2002, and the EUR 21.5b level that we recorded at the end of Q1 this year.

Cash flow generation has contributed EUR 1.45b, and the stronger euro has cut net debt by an additional EUR 423m. Financial investments, however, have consumed EUR 463m of this cash flow. The reasons behind these investments are, first, the completion of our share buy-back offering, which consumed EUR 118m, and the rest being largely explained by the purchase of 12% of Antenna 3 in January, and the buy-out of the ViaDigital minorities. Those two factors explain, as I said, the overriding bulk of the rest.

Moving on the upper-right slide, you can see the changes in consolidation have also added EUR 387m to net debt on this quarter. The main contributors to this increase, again, Antenna 3, which is now fully consolidated, and there is a long list of smaller reclassifications of inter-company loans, previously recorded as short-term* investments, which have now been extended into long-term investments and, therefore, add to net debt. Also, the effect of the accounting of the zero coupon bonds still outstanding has an explanatory effect on this figure.

If you now turn to the lower-left end of this slide, you can see that the average debt maturity of Telefonica is now extended over six years. This is longer* than the projected period necessary to pay debt fully with cash flow generation. Our February this year bond issue has significantly contributed to this target. And as you may have seen, overall, our bonds have been able to tighten credit spreads, which we think is witnessed with better risk perception of our overall paper.

Finally, on credit profile, on the lower-right, you can see that our debt structure shows that #22% of the total or roughly EUR 4.6b# is located directly in our Latin companies or subsidiaries. Holding company debt continues to be managed actively, and as you see, the credit ratios posted in this slide are witness to continued strength of our debt to EBITDA ratios and, therefore, continue to support our target of an A rating.

Finally, on slide 17, I would like to turn your attention to our quarterly cash flow statement which, this time, shows very small variations between the cash and the accounting perspective of our operations. Starting from the top, cash flow from operations stood at EUR 2.83b, which is a number almost identical to EBITDA of EUR 2.82b. [Calls] on cash not recorded in EBITDA have been EUR 189m, and they are almost exclusively explained by payments to [indiscernible], EUR 176m, with the rest being explained by personal restructuring costs in Latin America.

I covered the interest expense slide slightly earlier. If we continue to go down, you can see that income tax outflows of EUR 34.6m are largely explained by Latin American taxes paid locally. Continuing down, CAPEX payments of EUR 736m. We have invested EUR 463m, which as I mentioned are explained by the completion of our share buy-back program and the Antenna 3 and ViaDigital minority buy-outs.

On line C, dividends paid of EUR 21.9m are almost exclusively explained by the quarterly payments, which are dividends on our preferred share issue, which we completed at the end of last quarter of 2002.

Free cash flow, after dividends, has increased by almost EUR 1b this quarter, and it will [indiscernible] the EUR #463m of financial investments that we just mentioned, you could get the approximate EUR 1.45b of equity free cash flow for this quarter.

I would now like to turn back to Fernando Abril for a wrap-up of the main points.

Thank you, Santiago. In short, the company is substantially improving its bottom line across the P&L statement, posting an net income* of EUR 540m for the quarter. The Group remains focused on efficiencies, keeping strong margins and solid cash flow generation. CAPEX, which has continued to heavily effect the Group results is expected to steadily ease as the year progresses. And Latin American operations are showing a steady recovery in their underlying operating performance.

Thank you very much. Now we are ready to take your questions.

Ladies and gentlemen, if you wish to register a question, please press the number 1 on your telephone keypad. To cancel your question, simply press the # sign. Once again, may I remind you, if you wish to register your question, please press the number 1 on your telephone keypad. To cancel, press the # sign. Their will be a brief silence while participants register their questions.

We have a first question from Robert Mokapa (ph) from Smith Barney.

Good afternoon, gentlemen. I have a couple of questions. The first question is on financial investments. Can you tell us what the outlook is for further financial investments in the course the rest of this year, particularly about share buy-backs? Do you plan to increase the amount you've spent so far? My second question is on the Telefonica de Espana personnel cuts. Can you make any comments on any cuts in personnel you may be looking for over the course of the next 12 months or so? Thank you.

Okay, regarding Telefonica de Espana's possible personnel cuts, we will remind you we've just had trade union selections last month, so now the table which will discuss the new agreement, in terms of salary, in terms of conditions, for the next two years, have already started to meet. This is a process that will take some time. So, there's no news on that. No anticipation of cuts at all. Okay.

Regarding financial investments, and in particular the outlook for share buy-backs, as you know we have not announced any share buy-backs. We are clearly generating enough cash, and we will obviously study all uses of funds as the year progresses, and we will keep all of you posted. But no decision so far is made on that.

Can I follow up and ask what time you expect to make any decision on share buy-backs?

Not really. I mean, this year, we are discussing this quarter, and of course four quarters in the year, so we are very early in the year. We just had our shareholders' meeting, the annual shareholders' meeting one month and a half ago. So, we are starting the year, basically. Okay.

Thank you.

Our next question comes from Bosco Ojeda (ph) from UBS Warburg (London). Please go ahead, sir, with your question.

Yes. Good afternoon. My question is about [Telas]. I wonder if you could elaborate about how this business is performing, especially about the pricing outlook in the short term. I think you are probably going to revise targets shortly. And also on the long-distance business, given there's no track record, I think we saw a decline quarter-on-quarter on revenues, this is probably I guess due to seasonal reasons, but I'm not sure. And also on the margin performance of the traditional businesses, excluding long-distance, I think there has been some pressure, but I wasn't sure either. So, I wonder if you could give us some detail? Thank you.

[Telas], the operating performance is good, it's better than last year. We see revenues going up and everything going up. Regarding long distance [indiscernible] but revenues are going up. Clearly, we are the far above our market share estimates when we launched, and we continue to grow in terms of market share. Okay.

Regarding the margin, it is true that the margin is under pressure, but be aware that we have experienced a high inflation period in Brazil, and that hit our costs earlier than we had basically [indiscernible] the tariffs, so we are monitoring it*, but we are not concerned so far because we are having some pressure there, in general, in the [indiscernible] period and probably as the year progresses, but that will slow down substantially. Obviously, the amount of revenues that are growing, coming fundamentally, as we explained in the presentation, from long-distance, as we said, has a margin of 25%-26%, which compares low with the overall company margin. I repeat that mix is [shedding] towards lower margin, which is also affecting some margin pressures. But the underlying performance of [Telas] is really okay. And we're confident on that. Okay.

Thank you. Should we expect pricing increases in June, as we saw the last couple of years?

Yes. We will see some price increases, which is still very early, because you know there are several baskets, and [indiscernible] and we will come back with a proposal to [regulators] and then they will accept it or not. But we think the [rules] that worked four years ago, [as we have been doing every year] and this year we will do again. Okay.

The next question comes from Javier Barjare from ING Financial Markets, Madrid. Please go ahead, sir, announcing your company name again.

My question relates to the domestic fixed line business. I have impressions from the information you've provided that the lost market share has intensified a bit, compared to previous quarters, and also the traffic figures are slightly weaker maybe than in previous quarters. Can you maybe comment on how the competitive situation in Spain is right now, and whether you have any intent to take any kind of measures to fend off competition? Thank you.

All we do every day is take measures to improve our performance, and that relates to how we [address] competition within the legal and regulatory framework. Okay?

In terms of market share losses, for example on [Axis], as we told you on slide number 8, what we have seen over the first quarter of this year is that the pace at which we are losing market share is slowing. In fact, on [Axis] lines, we lost basically 125,000 on average every quarter last year, and we lost just south of 100,000 in the first quarter 2003. So, we continue to be extremely focused on that. But the pace at which we lose market share has slowed, clearly in [Axis] line and also so far on the global [pre-selected] lines, which we lost also 90,000 in the first quarter 2003, compared with an average of 110,000 during the rest of the year. When we look at market share, on traffic, that is behaving according to plan. Basically, we have lost market share on local traffic at a similar pace at which we've been losing market share over a quarter of year. Maybe that has accelerated a little bit, but the rest of market share, on provincial, domestic long-distance or fixed-to-mobile, in fact, market share losses are basically happening, but at a slower pace than [normal]. Okay.

We have a next question from James Golob, an analyst from Goldman Sachs (London). Please go ahead, sir.

A couple of questions, if I could. Just on the wage inflation we saw in Spain, can you remind me when the standstill agreement with the unions comes to an end and what, if anything, you've said publicly about the next wage negotiations with the unions in the domestic Spanish business? Is there any news Brazilian tariff increases for this year? And perhaps you could comment on what you see as your optimal medium-term capital structure?

Okay. Well, maybe it's a misunderstanding here. The last agreement with unions, we agreed to revise salaries on a true [CPI] basis. Okay? So, we start accruing what is the government's [CPI], and then on the first quarter of the next year, we basically increase the base remuneration. Okay? So, during the first quarter of 2003, we are obviously having an extra impact on salary expenses, which is the difference of 2002 between what has been at the end of the 2002 true inflation and what we've been accruing in 2002, and that impacts 2003. Okay? On top of that, we are accruing what is, you know, a certain amount of salary increase already since the beginning of the year of 2003. The amount of the final salary increase in 2003 will have to be negotiated with the trade unions. And as I mentioned, we have [only begun negotiations now], so it's too early to determine what's going to happen. Okay? There's not only the salary linked to [CPI]; there are many other concepts that are affecting at the end of the day on labor expenses, which are also discussed every time we discuss every two years. So, it's a combination of things which will finally impact salary expenses, and it's a little bit too early to give you any outlook of that, plus we are discussing it now. It would not be probably proper to do it.

In terms of Brazilian tariffs, the outlook, it's okay. I mean, there was an initial, several moths ago, when we had discussions and comments on that, regarding whether we would be able to right tariff, there would be some problems because the inflation index was high. I guess, what hasn't happened in those discussions that we had with the investor community at the time of the publishing of the full 2002 results, is that I think the outlook is clearer now, and seems to me less pressure. There was discussion about that. So, we expect to be able to propose an increase in due course, and we expect no trouble with that. Okay? I think it's clear. And now--

Can you just say what increase you expect to be able to propose?

We expect to propose the increase that we have a right to. We think that the parameters-- You know, there is a maximum increase, and we expect to propose-- With no restriction, unless our own commercial interest, basically. Okay? I know that's clear, but I cannot elaborate more.

Is that 20%?

I'm not telling you how much it is. It's a little bit early. Okay? I pass you to Santiago now to discuss the capital structure.

Yes. Your question on the optimum capital structure is easily answered. We are committed to trying our best to maintain an A rating. You know that an A rating is approved by the agencies on varying parameters. We think their is value* and this is the kind of rating that maximizes shareholder value, when you compare indebtedness levels and ratings. So, we are still committed to that, and we will continue to do that.

Now that you mention it, I would like to make the following statement. We have repeatedly said that we could wipe out all our debt in about four or fives years' time. Let me emphasize that this is a metric, not a target, and that this is accountability, not determination. We don't think the interests of our shareholders are best served by retiring all the debt. That doesn't mean that we are not going to strive to continue to reduce. What it means is that we continue to be focused on creating shareholder value, and that an increase in our rating is a desirable, but not necessarily a priority target for us.

Is there a certain level, in terms of the ratio of debt to EBITDA, where you would want to, or must commit, to returning all surplus cash to shareholders through dividend payments?

What I said, we are trying our best to keep the A rating. Sometimes an A rating is worth 60% debt over equity; sometimes it's 40%. It depends on your risk profile. We have been penalized in the past by our exposure to Latin American risk. So, this is the kind of thing that we try and keep in mind. There is no hard number in our mind. If it's a moving target, as seen by the agencies and credit analysts. So, we don't have one.

Thank you.

Our next question is from [indiscernible], an analyst from Commerzbank. Please go ahead, sir, announcing your company name once again.

Two questions. The first one is on net debt to EBITDA in Latin America, 1.1 times. Does that mean we should* expect to get dividends coming from the region, or will we see other sources of cash? Second, on the fixed line, you were talking about DSL gross incremental margin of 49%. Could you elaborate on the long-term incremental margin? Also, if that's netted against cannibalized traffic as well?

Okay, on the debt to EBITDA ratios, we think our Latin American situation is pretty much coherent with what I answered to the gentleman who asked the question before you. I don't quite understand the connection between debt to EBITDA ratios of 1 times and dividend payment. We have repeatedly said that we continue to siphon off cash flows from our Latin American operations as a matter of course, on a regular basis. Those come from either inter-company debt, they come from management fees and they come from dividends. We have had no difficulties so far, either in 2002 nor so far in 2003. We do not anticipate any difficulties going forward. The question we ask ourselves is not whether or not we can do it, but whether or not it makes sense to do it. I alluded briefly in my presentation to the high cost of debt in Brazil. So, something [indiscernible] is actually giving up the 26%-27%, which is the current [CBI] rate in Brazil. This is another factor that has to be taken into the equation to make the final decision.

Okay, regarding what we used to call last quarter incremental EBITDA and what we now call incremental margin, that's going up. The target obviously is to get a full EBITDA, full cost allocated basically. Full allocated EBITDA costs positive, including into the core side of that, basically administration, support costs, and many other costs which we are not putting in to the gross incremental. Now, we have not considered in here basically as a cost, minus revenue, the annualization. We are monitoring that looking at what is the* percentage of new ADSL lines with no previous IP traffic. We are monitoring the number of lines that in the month prior, and in the month after, ADSL connections are showing this impact of traffic, and so on. But this is not taken into account the annualization effects. Okay?

Our next question comes from David Wright*, an analyst from ABN Amro. Please go ahead, sir, with your question.

A couple of quick questions, if I may. The first is, could you give us your latest broadband targets? I know you did have a 2004-2005 approximate target given in Seville a year ago. Could you possibly give us an update on that, please? Second of all, one or two of your European peers have been talking about cyclicality of the economic effect within the business lines. Now, I didn't hear the last conference call, I apologize if that was addressed there, but I would be interested to hear your perspective on cyclicality within the fixed and mobile business lines. Thank you.

Okay, on the target we announced, we announced 5m global connections in Spain and Latin by 2006. And we are now at 1.7m. Okay?

We, for this year-- Your second question regarding fixed-to-mobile growth? Sorry? Could you speak up a little bit?

I apologize. On the issue of economic cyclicality, I was just wondering if you had noticed any of that within Fixed or Mobile telecoms? One or two of your peers in Europe have actually talked about economic weakness affecting revenues. I was wondering if you have noticed any effects within your businesses.

Okay, on Mobile, if we look at the corporate segment, we saw no reflection of any economic weakness, basically, on that. In fact, we were growing, you know, strongly. And within our business in Spain, we haven't really observed direct effects from economic weakness. It is also worth nothing that Spain is not having a big weakness. GDP is growing okay, and private consumption is as well growing. So, we haven't really observed nothing of that. For last year, Latin America really observed that in Peru and in Brazil, and especially in Argentina, both in Fixed and in Mobile. Okay?

Okay. That's fine. Thank you.

Our next question comes from James McKenzie, and analyst from Cazenove, London. Please go ahead, sir.

Hi. Good afternoon. I've got a couple of questions for Santiago. First on the underlying net interest, despite the reduction of debt, it seems very similar to last year. Now, you've given a couple of reasons for that. I was wondering, looking forward, do you see any reason for the underlying net interest to fall, in comparison to last year, on a quarterly basis? The second is regarding tax rates, the tax rate you're going to be showing in your profit and loss account. Traditionally, or the guidance from Telefonica has always been for a very low tax rate in your profit and loss account. I notice that in this quarter, you're actually looking at a reasonably full tax rate of around 30%. I wonder if you can give us any guidance for the full year?

Okay, on the net interest, I think I gave-- [you are right that they are] higher and because debt is down by about EUR 5b, (EUR 5b something), and interest costs are not. Now, there is the quarterly effect that you should remember two things. First, that as I mentioned in the presentation, we are in the process of increasing the maturity. And that, as you know, the yield curve is very steep. Therefore, once you have sold out of very short-term debt into longer-term debt then, of course, you will pay a price. The price will, of course, more than pay for itself over the course of the next couple of years, but certainly that is not what's happening on this particular quarter. Now, if you have made the comparison between full interest costs this quarter the last quarter of 2002, you may have noticed that the number is about double. The reason for that is not that this quarter is abnormal, the reason for that is that* the fourth quarter of 2002 was abnormal. Why was it abnormal? Because it is in the last quarter of the year when, typically, we had to review on an accounting basis the swaps that are in the money, or we will roll out part of our swaps. We have to recognize then, and only then, any profits that there might be, although losses are recognized on a routine basis when they are known. So, what this, if you want 'abnormal', is the wrong number of Q4 2002 rather the number this year. We do not provide guidance, as you know, for total interest cost for the year, so I cannot share with you my own expectations for this year. But I don't think any analyst should expect any significant surprise.

On the tax rate, well you did the number right. The effective accounting tax rate is the one you mentioned, 29.something%, but you should not take that as guidance, or as what the future might hold. You know, of course, that we have a large tax credit coming from our write-downs and write-offs from last year. That will be used up as legislation permits.

And that will actually appear as a lower tax rate on the P&L account, as opposed to just in the cash flow. Is that correct?

What you can safely assume is that accounting and cash taxes are not going to bear any similarity. Okay? So, this is not a piece of guidance, but because we have such a large tax credit shield, we will be using it up in accounting, but there will not be any significant tax cash leakage, other than that coming from companies which are outside our tax consolidation perimeter.

Okay. Thank you.

Our next question comes from Luis Prota (ph), an analyst from Morgan Stanley, Madrid. Please go ahead, sir.

Yes. Hello. I have two questions. The first one is on the data transmission business. Could you give us an update on your plans for the non-core data businesses, the ones for which you said last year that you were going to slow down investments, especially for the loss-making businesses in Germany and UK? What are your plans there? Are you planning to sell those businesses? Or what are you planning to do? And the second question is on ViaDigital. When do you think that you will start consolidating the stake in [indiscernible] instead of that in* ViaDigital? What might be the financial implications, in earnings especially? Thank you.

On ViaDigital, we will be consolidating the stake in [indiscernible] in the second part of the year-- Okay? We [permit them to be] listed company, which reflects on our accounts going forward. We have already [indiscernible] the impacts on our accounts within the first six months at the close of the second quarter. Okay.

And the other question was on the data businesses that we announced we would get out of them. We in fact got out of several of them last year, as you know. The Austria one [we slowed on substantial operations and revealed them in some non-incumbent areas]. We deconsolidated AguaNet on September last year and explained why. If I were to decompose for you the CAPEX figure of the first quarter of this year, you would note that the global data is a new parameter, which incorporates [indiscernible]. It's in EUR 21m versus EUR 40m, it's a 46%# decline. And if I were to decompose it to you, you would see that CAPEX in this area [indiscernible] basically. So, we have already started to do that, and we are taking opportunities to really [indiscernible]. And I think that having been successful already, as you have seen in the financials, and you will continue to see in the financials along the year.

Thank you. I have a follow-up question on the tax issue, if I may. Santiago was mentioning the tax credit, which was supposed to reduce the tax rate. As far as I understand, maybe I'm missing something, the tax rate was already recorded last year. So, should we expect that the accounting tax rate should be close to the nominal tax rate, although the company is not paying taxes from a tax point of view?

Okay, as I said before, what we have is a large accounting tax shield. Last year, if we lost a billion, we accrued about 35% of that. That was legally allowed. This is how the tax shield was formed. It is against that tax shield that now taxes are being accrued. What is not going to happen is that cash taxes paid are going to be anywhere close to that number. As to what the exact tax rate from an accounting point of view, I first of all, reiterate that we do not provide that guidance. Second, it should not be that hard to figure out, because most of our profit-making operations are in Spain, in very known percentages. What we have in Latin America pays taxes at quite varying rates. So, I think that's as far as I can go.

Okay. Thank you.

Our next question comes from Guy Petty, an analyst from Deutsche Bank, London. Please go ahead, sir.

Just a couple of quick questions. Following on one from earlier when you were talking about further cash investment, you mentioned share buy-back, but I'd be interested to see whether you think you're going to have to put any further cash in the [indiscernible]/ViaDigital, once that business transaction is fully completed. And the secondly, if you could give us how much of your net debt at the end of March was actually dollar-denominated. Thank you.

There's no new money [indiscernible]. Okay, you know we announce the transaction, but we commit to sound, [subordinated] convertible debt, and so on. That was already announced, and we expect to basically recover that debt on maturity. So, there's no part injections of cash expected into the [indiscernible] venture.

Okay, Guy, I didn't say what the percentage is, but I'm very happy to share it with you. It is about 35% at the end of the first quarter. 35%.

Thank you very much, gentlemen.

We have a question from Jose Martins Soares, an analyst from JP Morgan, London. Please go ahead, sir.

Hi. Just a couple of questions. On page 9, can you tell what the amount of the one-off adjustment to personnel expenses? And also on page 17 of the presentation, can you explain the difference between the CAPEX number EUR 601m and the net payment for investments of EUR 736m? Which one is the cash one, and what explains the difference between the two*? And finally, when do you expect your old shares to be cancelled? I suspect that it's something that you wish to do in the future? Could you just tell us when? Thanks.

We will start with the last two questions, and then go on to the personnel expenses.

Okay. Thank you for the questions, taking them in reverse order. We expect to cancel the shares very quickly, in the very near term. Some legal technicalities are being sorted out. I think this is doable, although this is not a commitment, before the end of the quarter, maybe slightly after the end of the quarter, but only legal technicalities remain.

On the difference between CAPEX accrued and CAPEX paid, the difference has two reasons. First of all, when we recorded the accounts, CAPEX accrued during the quarter. What you have in the cash flow statement is the CAPEX actually paid, which because of the lengthy period between accrual and payment dates, tend to be off that there is that something between four to six months, at the most. So, basically, what you have in the cash flow statement is payments relating to CAPEX done in the last two quarters, basically the last quarter of 2002. Okay? So, there is always going to be a difference, sometimes positive, sometimes negative between CAPEX accrued and CAPEX and actually paid. The difference* this quarter is what you would expect, because CAPEX is bulky. It tends to happen in a lump way, rather than a linear way throughout the year. We are now paying CAPEX contracted at some time in late 2002. This number tends to be higher than the CAPEX actually accrued because it has been contracted on the first quarter. But on the balance of the year, it will in fact end up evening out.

Okay, regarding the salary number, there are two effects on the first quarter for personnel expenses. One is the remainder of the adjustment between the true inflation of 2002 and the inflation that we were accruing within the salary expense. Okay? The agreement was to pay through inflation. And we have stuck every year, accruing which is normally the government's target. And then as we see, if we see that deviates we* will start accruing more and catching up for the past number of months in which the accrual has been slow. Okay?

So, in the first quarter of 2003, you have the remains of that catch-up of 2002, plus an accrual for 2003, which is our expected inflation number that will be effectively paid when we agree with the trade unions for 2003 and 2004. And normally there is a delay between the agreement and the beginning of the year in which the agreement [that you date] later in the year, is official. Okay? That's the reason why it is an abnormal increase that, along the year, it will be diminishing. Okay? So, that growth of 6.8% on the first quarter for personnel expenses in Telefonica de Espana side will be a slowing down along the year. Okay? Absorbing this extraordinary effect. And the lower the inflation the better* for salary numbers. Okay.

My question was only regarding the one-off payment, the one you already made. If you could just tell us, out of these EUR #545m or so, how much was the one regarding 2002?

Okay. I can find it for you. There is not the full difference because, during the 2003, and I remember in the first half conference results, we already told you that we were upgrading our accrual because already the inflation number was deviating, so this is not the difference for the full 2002, because we were already updating. So, this is the last part of it. But you can call investor relations and I'm sure they will be able to get out that number exactly, the one for you. Okay?

Just on the CAPEX, Santiago, you assume that the cash CAPEX was EUR 601m? Is that correct?

Hold on a second. No, the cash CAPEX on [indiscernible] was EUR 736m [indiscernible], accounting CAPEX. We paid for more CAPEX than we accounted for in the first quarter. Okay? The difference is small compared to over the year, we had a difference, at the end of the quarter. Okay?

And how many shares will be cancelled at the end of the quarter?

101m, maybe slightly higher than that.

Many thanks.

Our next question comes from Mark Cardwell from Bernstein, London. Please go ahead, sir.

A couple of things. Can I go back to the growth in the domestic Spanish business, on the fixed line side, for a second. First, can you give us a sense-- You were talking before about share loss. Can you give us a sense of how much of the overall growth issues are related to market growth, and what your latest view on how much of the market, both in lines and in minutes, is being held by mobile, please?

Secondly, on the trade union discussions that you're having today, am I right that this is a multi-year agreement you're trying to strike, or is it just for this year? Besides discussing wages, are you at least discussing the subject of the number of staff to be kept on? And then the third question, if you look forward to areas of interest for future investment, you've talked off and on about investing further in Latin America. It's been some time since you talked about investment priorities. Are there any investment priorities on the horizon at this time?

On the agreements with trade unions, we normally have two-year agreements. So, we discuss the agreement that lasts two years. We are not discussing elements of 2003-2004. Within that discussion, there are a number of issues that we incorporate every two years. That includes salary, but also many other labor conditions, and so on, and might include related to the number of staff, and so on. Okay, so that is a process that we have every two years. It's complex and we will have news whenever we strike a deal, maybe June-July. Okay?

In terms of the markets, we are losing share within a market which is growing, basically nothing, or some cases, in some other traffics, it's even coming down. For example, market size, in terms of access lines, have grown 0.9% during the year. Okay? So, that is basically very little. And we have lost market share of close to 3 percentage points over the last four quarters. Okay? That's one parameter. When you look at the traffic, you know, overall, for example, local traffic has come down 5% marketwise. And we've lost a little bit more of that. Okay? And provincial, domestic long-distance, and all that, all of them, the market is coming down. Fixed-to-mobile, market is going up and we are going up, and that [indiscernible]. Okay?

Do you have an estimate now for how much of the market is held by mobile and how many households there are with no fixed line at all?

Let me find out for you. Our estimate what is the number of minutes which on the mobile in this market. Okay? And that will give you a flavor [of the minutes]. For example, roughly mobile accounts for roughly 30% of total voice traffic minutes in Spain, for example. Okay? A little bit less than that. In Brazil, for example, it accounts for 15%. Okay? Thank you. Next question, please.

We have Anthony Schroenn (ph), an analyst from Bear Stearns. Please go ahead, sir.

Just two quick questions. Can I just confirm that I heard you correctly and that you will be fully consolidating [indiscernible], even though you're probably own just short of 23%?

No. That's not [correct], we will be putting it through equity method. What we said is that-- We were asked what was the impact of that for the year, and we said that [indiscernible] company, you should get the guidance from the guidance of the equity impact. Okay?

Okay. Then the second question is on net debt to EBITDA levels in Brazil, so the Brazilian joint venture. Do you have a target for the EBITDA ratio there?

No. We have for the first time provided a flavor of the net debt to EBITDA levels, would be in the full Latin America, but we are not at this point. And especially in the case of our joint venture there, ...

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