Telefonica SA (TEF) 2003 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Telefonica Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct Q-and-A session, and the instructions will follow at that time. If anyone should require assistance during the conference, please press star and 0 on your telephone keypad. I would now like to introduce you to the Chairperson, Ezequiel Nieto. Please begin your meeting, and I will be standing by.

Thank you. Good afternoon, ladies and gentlemen. Welcome to Telefonica's Conference Call to discuss the first half 2003 results. I am Ezequiel Nieto, Head of Investor Relations. Before proceeding, let me mention that this presentation may contain references that constitute forward-looking statements, which are not guarantees 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 the 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 June 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 from January 1, independently of effective transfer of the assets. If you do not have a copy of the relevant press release and slides, please contact Telefonica's investor relations team in Madrid by dialing the following telephone number +34 91 584 4713. Now let me turn the call over to our Executive Chairman, [Mr. Cesar Alirta] who will lead this conference call.

Good afternoon, ladies and gentlemen. Thank you for attending Telefonica's first half for 2003 results conference call. Today, I have with me Mr. Fernando Abril-Martorell, Chief Operating Officer and Mr. Santiago Fernandez Valbuena, Chief Financial Officer. I would like to start the call by presenting to you the dividend policy that the Board of Directors agreed to on July 27 and the basic reasons behind these decisions. I will hand over to Mr. Fernando Abril-Martorell for the review of the January to June operating performance. The corporate solution to establish a strong commitment to shareholders [indiscernible] is based on our confidence in Telefonica's capacity to generate [indiscernible] in the coming years, and have full access to it. It is under pin by our guarantee. This capacity is backed by the increasing confidence in the profitability and growth of our business. We have improved our outlook, which is really confirmed by the strong set of results. Turning to slide number two for a list of the views operated at the basic initiative. We have a recognized track record of [indiscernible] business initiatives and refocusing programs aimed at the improvement of our growth and profitability. We have kept our focus on delivering during this start of the year. Such progress has been made in turn of new business initiatives, two of which are related to the consolidate or wireless expansion in Latin America, mainly the acquisition of this deal in the production of unified brand name beeper in Brazil and the launch of [DSN] services in Mexico. In addition, we have finally reached an agreement with Telefonica de Espana [indiscernible] resulting in a new redundancy program to be executed in the next five years. We are on track to reach the Group's real estate projects in this year. You will have additional details of both initiatives across this presentation.

Finally we are keeping pace with business refocusing through the compression of the ViaDigital [indiscernible]. The [indiscernible] to the full [indiscernible]. January to June results are positive at all levels, as seen in slide number three. Telefonica first track results are improving quarter-by-quarter, pushing the EBIT by 4% and bringing net income above the €1.4m mark. This is thanks to a combination of a strong operating performance and the general progress of non-operative results at the chart source. With regards to the operating results underlying performance is identified with all the major subsidiaries exceeding first quarter [real growth rates]. The Group's profits are in line with the year-end targets. In addition, the [indiscernible] are reducing their impact on the Group accounts. A trend that we expect to be maintained if quarters and shares rate consolidate as the year progresses. Turning to non-operating results or delivery on business refocusing, with some management of debt and quarters [indiscernible] is leading to the general improvement of the bottom line. Positive forecast results and growing operating initiatives and solid steps towards completing business refocusing are the basis for consistent cash flow generation as the company keeps [indiscernible]. I will display on slide number four, free cash flow before financial investment for the period January to June exceeding €3b, 22% of consolidated sales and [indiscernible] to 66% of last year's total figure. More importantly, cash flow in the third quarter with [indiscernible] exceeding €2b for each of the first two quarters of the year, above the last year quarterly average. This will balance among business plans in the US.

[Indiscernible] cash flows has led the vote of the Telefonica to set the company within their dividend policy as defined in slide number five. [Indiscernible] has agreed to propose to [indiscernible] corresponding to the Fiscal year 2003, the payment of the dividend of [€24] per sale. The intention of the board is to maintain this same dividend for Fiscal year 2004 and 2005. In addition, the company keeps open the possibility of [indiscernible] selective sale buy-back if appropriate. The nuclear policy, which is a clear commitment to shareholders [indiscernible] and removes the perceived uncertainty of the Group use of the cash flow, is based on the following eight principles. First, to be sustainable. Certainly clear in [indiscernible] reference to shareholders [indiscernible]. Second, to allow the full development of our growth potential. Third, to represent a strong [indiscernible] to our shareholders. [Indiscernible] of Telefonica financial discipline placing the company at the top of [indiscernible] by dividend yield. Fourth, to be compatible with our quarter [indiscernible] target of [indiscernible]. Now, I will turn the call to Fernando who will be presenting the first half results.

Thank you, Cesar. Good afternoon, ladies and gentlemen. On slide number six, underlying operating performance has accelerated in the second quarter with April-June revenues and [indiscernible] growth rates, excluding Forex, exceeding the 8% and 12% mark respective. Four-percentage points and one-percentage point are low first quarter figures. In addition, to stronger local currency operating results, Forex's negative impact on the Group's accounts over steel material has started to pay. [Indiscernible] 4-5 percentage points less to top line growth than three months ago. As a consequence, April-June revenues dropped by just 1.6% in nominal terms. A decrease that confers very favorably with the 13% decline posted for the first three months of the year. Whereas second quarter of the year showed a 30.5% annual increase breaking a five consecutive quarters downward turn. Second quarter performance is pushing. January-June revenues have indicated increases to shrink by around 5.5% points to 7% and 2% respectively. The reduced affect of Forex is impacting heavily Telefonica's Latin America's result, which posted a 16% decline in EBITDA for the second quarter compared to a 35% drop in both [indiscernible] for the January-March period. Complementary to top line improved performance, the company's efficiency efforts continue to flow into [debited] margin, which read 2002 figures by 2.6% points to reach 43.9%. Capital expenditure and control is translating progressively into lower depreciation expenses pushing EBIT to grow at the 19% rate for the second quarter alone. In addition, all non-operating results are showing significant improvements leading to a net income of more than €1.4b for the period. In addition to better wire-line financials in Latin America, it is worth to highlight domestic business positive results. First, Telefonica de Espana, which is increasing the weight of recurrent revenues to 52% and improving ADSL metrics consistently. Second, Telefonica Moviles Espana, whose revenues grew above the 13% level in the second quarter led by an 8% rise in service revenues positively impacted by a 2% ampule increase April 2003 versus April 2002. Also, thanks to the increase in concept sales. Finally, Telefonica Data Espana with revenues growing at an 8% rate and EBIT market stable at 28%. Constant currency growth, that is excluding Forex, is accelerating across the Group in the second quarter, as revealed on slide seven, with revenues, EBITDA, and EBIT growing at an 8%, 12% and 27% rates compared to the second quarter of 2002. Except Telefonica de Espana with increasing recurrent access revenues being upset by persistent pressures on voice and narrow-line internet, all the subsidiaries have been sequentially improving their performance in constant currency terms. It is [indiscernible] in the similar business performance whose revenues have increased by 21% in the second quarter 2003 versus the second quarter 2002. Expansion operations, growing at an annual 15.5% rate in the second quarter, it has significantly exceeded first quarter performance. This was led by constant sales and higher service revenues after the first time increase in quarterly ampules, whereas local revenues in Brazil came close to a 31% growth rate for the second quarter. A figure which would drop to 12% excluding [PCO].

If we were to exclude changes in consolidation in addition to eliminating Forex variations, organic growth for the Group, in terms of revenues, EBITDA and EBIT, would reach 5%, 11% and 25% respectively in line with our year-end targets. Turning to slide eight for the analysis of foreign currency impact on the Group's total line growth. For the first time in the last year and a half, the average exchange rates for both the Brazilian Real and the Argentinian Peso, the two currencies we are the most exposed to, have appreciated versus the Euro by 5% and 2% respectively compared to previous quarter figures. Less than average exchange rates for the year, at close to 20% increase in value for both Latin currencies versus the dollar since January are offsetting current dollar weakness. It is adding to the progressive deterioration suffered by Latin American currencies in 2002. That is reversing the increasingly negative contribution of Forex to the Group's account. As such, Forex's negative contribution to revenues and EBIT growth is almost half in just three months. Going from close to 18 percentage points in the first quarter to 9-10 percentage points for the second quarter. We expect this positive trend to continue as we move towards the end of the year permitting a better translation of our solid underlying performance into the Group's consolidated accounts in nominal terms. Cost control is starting to improve total line growth benefiting the Group's margins, as slide nine shows. Operating costs dropped by 11% year-on-year reducing the place of decrease when conferred to first quarter numbers, as a result of the lower impact of Forex and higher commercial activity for the mobile business at the list. Renewed commercial efforts in Brazil with the launch of the brand [Vigo], an intensified campaign in Mexico at [indiscernible] and higher handsets cost in Spain preparing for the summer campaign explain the 5% annual increase in mobile costs for the second quarter. Higher costs relative to the long-distance offering are behind Telefonica Latin America's marked reduction. Excluding Forex and changes in consolidation, operating costs were up by just 1.3% below the 2.3% increase posted in the first quarter. During the first six months of the year, consolidated EBITDA margin added 2.6% points at 2002 figure reaching 43.9%, with all business lines, except wireless operations, being able to grow the EBITDA margins in the last 12 months.

Lets review CAPEX on slide number ten. With all business lines starting to progress on CAPEX spending to address the revenue growth opportunities, general decline in CAPEX has been reduced from the –37% posted in the first quarter to the –16% cumulative drop for the first six months, with total investments just exceeding €1.5m. While the cellular business is increasing CAPEX by 15% year-on-year, as a result of [indiscernible] in Chile and Mexico, the rest of major business lines are reducing the pace of the [indiscernible] as [indiscernible] related investment programs link to a higher ADSL pickup are initiated. It is worth mentioning that Mexico accounted for 36% of the cellular business coverage for the period, as coverage has been accelerated to reach 15 cities as of July. As suspected, the cellular business is increasing its weight over the group CAPEX, as close to 10% points with respect to its 2002 contribution, to end June at 35%. This, at the expense of the Telefonica de Espana, which is obtaining higher efficiency in ADSL, as Telefonica Latin America where investments are linked to the demand for services. Entering to slide 11 for a review of traditional wireless business in Spain, first of all, I would like to stress the increasing importance of client network access revenues to [indiscernible]. At the account for 31% of operating revenues and have contributed with 1% point due part to company revenue growth, led by the latest monthly increases. Higher client network access revenues is a key element in the company's who are starting to increase the growth of recurrent revenues at the top line level. A study that has proven to be successful, as recurrent revenues accounted for 52% of total sales for the January-June period, close to 6% points more than at the end of June 2002. The number of access lines, the operating driver for network access revenues, has again showed an improved performance compared to year 2002 with the net line losses for the second quarter of 2003 being below the 2002 quarterly average by a growth of 16-17%. Despite competitive pressure of the Easter Holidays, on second quarter traffic, voice usage revenues annual decline remained unchanged quarter-over-quarter at the between –8% to -9% rate.

Moving to ADSL metrics on slide 12, total ADSL connections almost reached €1.3m at the end of June, we have net at, for the second quarter, increasing by 18% year-on-year keeping first quarter growth factor. ADSL pickup is affective additionally with the second and third quarters sustaining historically as the weakest quarters in terms of commercial activity. Regarding the business economics metric, the second quarter retail [indiscernible] exceeded [€45] producing an increase of 6% in comparison to 2002 year-end-figure, apparently related to an improved customer mix with a number of basic accesses accounting for 89% of total connections at the end of June. In terms of cost, retail [indiscernible] cost per new connection at €40 in the first half has been reduced by 24% in the last six months with plan and pay representing 62% of current year dividends. Gross incremental margin calculated at revenues minus direct costs ended the January-June period above the €164m equivalent to 7% of Telefonica de Espana current EBITDA.

Finally, 12 months rolling CAPEX per new connection decreased by 47% in the second quarter of 2003 compared to 2001 and by 15% compared to 2002 with opportunities for further efficiencies still existing. With regard to Telefonica de Espana course page on the slide 13. The company has finally reached an agreement with trade unions to prevent the new redundancy program designed to adapt fixed costs to the company's operating environment and initiative, which is key in a context or top line [indiscernible]. The key program conditions are the following. First, the program was involved up to 15,000 employees in the next five years, 2003 to 2007. It is voluntary, universal and non-discriminatory. Second, the [indiscernible] cost per employee is estimated at €250,000 in net percent value terms. Third, the new collective agreement resulting from the negotiations add flexibility to the management of the program as it incorporates for the first time functional and inter-provisional mobility. These added flexibility combined with a longer timeframe for education would permit Telefonica de Espana to adapt to the new structure progressively, thus assuring that the program's operating savings will flow into the company's accounts and subcontracts would be reduced to a minimum. From a financial mental point, it is necessary to distinguish between P&L and cash impacted. In cash terms, yearly payments to proprietary are offset by the benefits related to lower personnel and general and a decrease on administrative expenses. The program is suspected to bring €10m to €20m to 2003 cash flow. Cash flow [indiscernible] would be reached in 2004 and the increase in net cash position would peak in 2008 at €430-417m. Overall, we estimate the program will generate between €3.5b and €3.8b of excess financial resources for the Group. At the P&L level, each year, the program is open; mainly from 2003 to 2007 the company has to account for the provision representing the difference in value of payments to the proprietaries joined in the program each year until they reach 65 years old. These provisions are adapted on a yearly basis based on [indiscernible] tables and interest rates, under the financial expenses caption. These provisions are not cash, but would gradually pay along the life of the program. As benefits, the company would save personnel, general and administrative expenses. The negative impact of the [indiscernible] will peak in 2003 when the highest number of redundancies is expected to take place. That gives €670m to €690m to profits, although we expect to generate positive [indiscernible] compensating the shortfall. Break-even and net income would be reached in 2007. In 2008, we will see the program's main benefit to peak at €500m to €540m.

Before entering into the wide line in Latin America, I would like to bring ahead the status of the realistic project we launched 2002 in [indiscernible]. The project is part of an ambitious efficiency program to manage the Group's expense. [Indiscernible] up to 1.3m square meters in the period 2002-2006, from operation line, commercial and administrative facilities. First launched in Spain, the program might be extended to the rest of the countries where we operate. In terms of value, the project is suspected to generate close to a €1b of net financial resources by 2006 once deducted to the €1.9b of inflows basically related to direct sales and [indiscernible]. The cost of the efficiency program is estimated at €900m. All of these objectives in 2003 are projected to bring close to €480m to the cash position of the Group with sales of properties just exceeding €700m. We are on track on execution having reached roughly 60% of this years asset sales and net cash position as of June. On top of this value, execution of the project resulted in an accounting €151m of gross capital gains at the [January] level in June for a total expected for a full year in the €300m to €330m. Turning to Latin America wireless unit business review, on slide 16, revenues and EBITDA growth, excluding Forex, are improving on a quarterly basis with the second quarter boasting a 9.2% and a 7.2% annual increase in both financial metrics perspective. The list, which has accelerated the pace of revenue increase in the second quarter by 2% points to 16%, and is keeping EBITDA growth above the 7% mark. This stands at the major contributor to Telefonica Latin America [indiscernible]. It is worth to highlight the positive management of Telefonica Argentina, which has reversed its 0.6% January-March decline in local currency revenue towards the first six months with a 12.5% revenue increase adapting successfully to its operating environment. This reverse trend resulted from a combination of improved economic conditions, positively impacting traffic, and the cooperation of inflation adjustment to hold [indiscernible]. Excluding the later, revenues will have growth at a 5.5% rate. Telefonica Argentina continues to implement a tariff-cost management of operations pushing operating costs down by 8.5% for the year. The recovery of coverage in 2003 with Forex treading close to 25% points to both revenues and EITDA growth for the end of June period in comparison to the 14% points negative contribution Forex had in the first quarter of the year is reducing significantly the nominal declines. To review the Telefs performance, please turn to slide 16. Year-on-year operating revenue went up by 16% in lower guarantee terms driven by the 10% increase in local revenues following Tariff increases granted in 2002 for traffic and fees and 2003 for fixed-to-mobile interconnection. After a 69% rise in long-distance revenues, the company continues to make market share. The positive performance of the areas of business with average connections increasing by an annual 55% is adding to top line growth. In terms of the cost base, operating costs, excluding interconnection, grew by 17% due to a combination of higher activity in the long-distance and brother fields. Inflation linked price decreases affecting external services and supplies. An additional [indiscernible] expenses as restrictive provision criteria are being [intervened]. As a result, local currency [indiscernible] was up by 7% year-on-year. In accordance with local and long-distance concession contracts, Tela proved an average 28.75% Tariff inclusive to June 26 to be effective on June 30.

Nevertheless, as a result of a legal decision, readjustments are temporarily limited to the consumer price index producing general increase to an average 60.42% for the local basket and a 14.20% for the long-distance services basket. This decision is still pending an appeal at the finite judgment or what the reference index will be finally set. Focusing on Telefonica Data global copy results, on slide 17. Effects and changes in consolidation remain as exact to the company's revenues, attracting almost 20% each point to save [indiscernible] excluding both effects, organic growth reached 30%. Remember Telefonica data was contributed with 10% points to the Group's organic laws. Consolidated EBITDA topped the €125m in comparison to the €9m we used up in the first half with EBITDA margins surpassing 14.5%.

Entering to Telefonica data, which accounts for 90% of consolidated revenues, all operations are sticking to a system of growth [indiscernible] as a result [indiscernible] operations have improved, EBITDA margins, in the last four months which was penalized in America reaching 28% and 18% respectively. At two other half [indiscernible] cutting topics combined with positive operating performance has lead to a positive €77m cash flow for the period compared to a negative €2124m in January and June 2000. Now I will hand over to Santiago for the review of financial expenses of debt.

Thank you, Fernando. Good afternoon, ladies and gentlemen. From Telefonica's quarter financial results, which are on slide 18, show a continuation of the decline in trend in the overall financial expense, sharply punctuated this time by poor non-recurrent but at the same non reversible events. If we start from the bottom up, net financial results excluding one offs are down 13.7% to €800m relative to 2002, first half. Excluding impact from the Argentinian Peso or foreign exchange movements, net financial expense would be down 42.5% to €534.9m. This lasts for a total of foreign cash swapped into Euros. The US dollar denominated debt, which was financing our Brazilian companies, was taking advantage of the Euro strength relative to the dollar. This move will moderate the P&L effect of currency fluctuations. Euro and US dollar movements will now have a much lower impact on our finances going forward. Overall, total financial charges to the P&L have been less than €300m for the first half of this year, which is 81.6% below the levels that we reached in 2001 and 2002 first half. Turning to slide 19, our net debt levels continue to go down, at this time, €1.5b for total shrinkage of €2.5b during the first half of 2003. On the upper right chart, you can see the breakdown. Operating pre-cash flow of roughly €3b plus an over €500m FX effect are the positive contributors to debt contention with dividends of €134m and financial investments and changes in consolidation parameters having roughly €1b. Debt maturity continues to lengthen as we retire or to not reduce short-term denominated debt. We estimate that debt to [indiscernible] wages continue being commensurate with our current trading. As a consequence of swapping part of our US dollar denominated debt into Euros, we have reduced significantly the proportion of US dollar denominated debt to 16%. On slide 20, you can see our cash flow scheduling, which for the first half of this year shows that call-to cash by operating activities of €443.7m continued to be basically coming from payments to [indiscernible]. Income tax outflows of €114m are coming redundantly from our Latin America subsidiaries and [indiscernible] net free cash flow has been roughly €3b. Financial investments of €663m are coming mainly from ViaDigital and the completion of the [indiscernible]. Foreign affect on net debt accounts for €531m or roughly 20% of the total debt reduction in the semester. With this, I would like to turn over to our chairman, Cesar Alirta to wrap up the main points of this semester.

To sum up, first, underlying performance is improving across the Group and falls in line with year-end targets. The Spanish operation remains solid. Latin America is steadily progressing leading to recovery in revenues in the second quarter. Forex is provisionally reducing its negative impact on the Group's accounts, a strength that will consolidate depending on future currency fluctuations. An efficiency continues to flow into markets in [indiscernible] generated. Thank you very much and now we are ready to take your questions.

The first question comes from Bosco Ojeda (ph). Please go ahead with your question and announce your company location.

Hi. Good afternoon. UBS, London. My question is about your project [indiscernible] and the impact that could have in terms of revenue perspective and CAPEX. I wonder if you could share with us what your projects over there were? What are you launching? Your retail offering? What kind of CAPEX that could assume in the future. Thank you.

Okay. It is negligible so far. You know the [indiscernible] test in Alicante now we are launching pre-commercial [indiscernible] in Barcelona. We still are waiting for the official approval. We have some targets for this year that are extremely moderate, and, therefore, you should not expect to have any impact basically short-term. Okay?

We review [indiscernible] in conference in October where we basically unleash our plans for sort of medium term. Obviously, [Majenia] will be part of that [indiscernible]. Okay?

Okay.

Thank you, sir. The next question comes from James Golob (ph). Please go ahead with your question and announce your location.

Hello. It is James Golob from Goldman Sachs in London. If I can ask a couple of questions. One, you mentioned that the staff reduction program would be front end loaded. I wonder if you could give a bit more detail about how many you expect to go this year? If you could give us any guidance on what sort of cash flow you think you can repatriate in Latin America this year? And whether or not you see Telefonica participating in any acquisition opportunities in Europe. What are your consensus on with what you have in Europe?

I will answer the last part of the question. [Indiscernible] any acquisition in Europe. I would say that basically [indiscernible] after we have to [indiscernible]. If we see any [indiscernible] [inaudible].

In respect, I think your question was on the [indiscernible] program. How we expected [indiscernible] of people in the five years? We expect roughly close to 1/3 of the program to happen in year one, so from now until year-end. The rest will be evenly distributed over the next four years. This we cannot anticipate accurately because it is, as you know, voluntary and nondiscriminatory, but that is what we expect basically to happen. On CAPEX we expect to [indiscernible] for Latin America similar to last years amount. So far, we are relatively close between €400m and €500m.

Thanks very much.

That is not net. That is the gross interpretation.

Okay.

The next question comes from Alfredo Tennenbaum (ph). Please go ahead with your question and announce your location.

Yes. Good afternoon. Alfredo from Commerzebank London. I had a question on the selection in the [indiscernible]. It seems it has increasingly [indiscernible] in the second quarter, if you could explain what is behind that.

Okay. On selection has been basically the main focus of our competitors since July of last year when the regulation basically changed again, not allowing us to make any win-back performance after we loose a line. We believe, this is basically the peak of pre-selection. We have re-launched a [indiscernible] campaigns. In fact, numbers in July are looking much better. If you look at the numbers really under the second quarter you see a concentration of pre-selection in June. Basically, that has been pretty much towards the last part of the quarter. These clients are also having lower ampule, and, therefore, you know the impact on revenues has not been shown so big coming from this pre-selection. Despite that, we are 100% focused on those win-back campaigns that we have incorporated. July is much better. We also work under regulations also to smooth out debt prohibition and ask to win-back campaigns. The biggest step that we are having from pre-selection is somehow an accelerated loss of market share under local metropolitan. Okay, that is basically the biggest impact because in metropolitan we will have the higher market share, and, therefore, that market share tends to converse with the pre-selection global resolution market share.

Have there been any, any like specific campaigns from [indiscernible]?

Well, they are putting most of the commercial effort on pre-selection and after [indiscernible] they will have a special focus on pre-selection. That is why the numbers are fixed a little bit. We have basically answered with our all suspicion focus and July numbers are much better. So, that is why I am telling you that we believe this has been the peak of preselection.

Okay. Thank you.

Thank you, sir. The next question comes from Javier Barjare (ph). Please go ahead with your question and announce your company name and location.

Good afternoon. Javier Barjare, [indiscernible]. I have a question regarding the regulatory situation in different countries. In Latin America, if you could maybe give us a bit of an update on how the ongoing [indiscernible] with regulators or government in the four countries we have are fixed-line corporation. If there is any sort of timetable or some timing for reaching agreements with the different bodies?. Thank you.

[indiscernible] we perceive a very positive attitude. We think in the second part of the year some of the problems that we are facing will be [indiscernible]. We go by country to Brazil the general ample feeling is very very positive. We think that [indiscernible] management being [indiscernible] respected the [indiscernible] in the coming months, basically starting from now. We are going to start working on the various fronts and the other fronts. We perceive that in the coming months, there will be some marked level of demand. The same happens in Chile and in Peru, actually in a good position now. So in general local sales, we [indiscernible] will be much cleared in a positive way. The same in the comments which [indiscernible] I think we have a [indiscernible] for the next two years in Spain. Which I think in my personal opinion, I think the position is going to be positive from the bottom line of the sector in the next two years in effect.

The next questions come from Arturo Morero (ph). Please go ahead with your question and announce your company name and location.

Arturo Morero from Merrill Lynch in London. I had a couple of questions. The first one, regarding the numbers you give on slide 13, when you calculated the estimated cash flow impact, you talk about 2008 number of €430m to €470m. I just wanted to know if there was any extra cost, when you lay off 15,000 employees, to replace for your tax [inaudible]. Can manage to do your calculation for those numbers? The second question was regarding your [indiscernible] policy for shareholders. What do you think is a reasonable percentage of [indiscernible] that you will use based on [indiscernible] through dividends in the next few years, [indiscernible] accounts for €2b and your bank rate, according to the numbers for the purpose, you are only up to €6b this year.

With regards to the debt policy, clearly, the dollar adopted on July 23 to [indiscernible] for Euros. So, next year and for coming years, [indiscernible] after considering the [indiscernible] of free cash flow and some reserves for the coming years. As I said in my position, we feel the confidence and the future evolution of [indiscernible] and resources. So, that is the reason we propose the court to pay a dividend of [24]. That does not mean that [24] is [indiscernible]. According to the evolution of the free cash flows and the [indiscernible] nature of the coming year, we will take the adequate decisions at the right moment.

Regarding the cash flow profile of the work force production program. Two [indiscernible] that is the net impact that takes into account on one side the cash out on payments to the early retires. He also takes into account what would have been. So the savings in cash compare to what would have been in cable [indiscernible] place, all the savings on general and administrative costs, etc. So, that is the net effect, and it is positive. Second, the payments are on a monthly basis. So obviously you start payment only you do not upfront there are not any upfront payments to the yearly [indiscernible]. [Indiscernible] on a monthly basis, and, therefore, the [indiscernible] is growing, and I have seen danger thinking in talking about the savings and to immediately have worked over moment one. So that is the second thing.

There is no extra course. In fact, we believe, that this work force erection program that will have worked for two years trying to understand better the processes and ways of doing this within the Telefonica de Espana operations. We believe, we want to basically be very close to optimize efficiency at maximum. Then 100up % efficiency after the program. So expect very little support, but really, do we need it? What we implement is worth [indiscernible]. Another reason for that is first of all it is over five years. It is time enough to really allocate the article. The second element, which is very important with the work force reduction program, will have introduced for the first time in the agreement with trade unions. Some visibilities like functional mobility and some geographic mobility, which is going to help us basically save as much and much more out of the program. Getting the maximum efficiency. Okay?

Just to remind you, sir, if you do have a question at this time please press the number 1 on your telephone keypad. To cancel your question please press the # key. Once again, that is the 1 to register a question and the # key to cancel it. The next question comes from Mark Cardwell (ph). Please go ahead with your question and announce your company name and location.

Bernstein in London. A couple of questions if I can. First, can we go back to the subject of the domestic core business. You talked about pre-selecting in earlier questions today. Is pre-select accounting for the total drop in volumes, which have been quite substantial with a 10% invoice calling or so. Over the last couple of quarters it seems really big and I am wondering if there are some other competitor factors beyond pre-selection that we should be thinking about in the market there? Secondly, can you talk a little bit about the changes and improvements that you made in the profitability in the margins? The profitability in the media businesses and give us a sense of how sustainable that is going to be and how much more we might going forward, as you continue to cleanup there and as the antenna 3 and other things move out going forward? Finally, you talked about offsetting extraordinaries for some of the redundancy cost. I was wondering if you could give us a sense to what those offsetting extraordinaries are likely to be?

Okay. There are other factors affecting the laws in traffic not only preselected. Total traffic, total market volume, not Telefonica but total market volume, is down roughly 4% on a yearly basis. So, that leaves basically, the overall pie shrinking in terms of millions. Okay, so that is affecting also volumes coming down. You also have to take into account the internet and the dial-up, in which free minutes are coming down due to the very strong performance of ADSL and that is affecting on the dial-up minutes. There are all the factors beyond presidential pre-selection. It is basically affecting, not only in Telefonica de Espana, position on local market shares, it is affecting more when a client moves from indirect access to grow or pre-select basically from next day all the local traffic that traditionally was basically done through Telefonica goes to the competition. Therefore, that puts pressure upon our volumes not only in local. For the overall witness and traffic user other factors, which are market factors.

Can you tell us how much of that is going to the cable company versus others?

Well, I am afraid I cannot tell you because we do not have the data, in fact. Cable operators are part of the competitors, but there are other operators that are also doing that. Cable operators are under head taxes business so most of the cover preselection is also immigration from indebted practice clients into global prospect clients. As such, those are distributed among recent competitors. Okay. I cannot tell you that. Then on the margin for [Milia]. Why should that improve? Because the performance of antenna 3 for the first six months has been much better than last year, although, we do not comment on that because it is going out of the parameters. We had to stop with that July 1. It is not of any relevance anymore. That should be the reason, most of the operation tax performed perform better but not [doubling] that one.

I would like to answer. I mean there are two [indiscernible] within our place we can only recognize antenna to this capital gain when it goes to the market in November. The second one is the real estate and there are some minor operations after [indiscernible] that would compensate the negative impact of the [indiscernible] program.

Thank you.

The next question comes from Luis Perrera (ph). Please go ahead with your question and announce your company and city location, sir.

That is Luis Perrera for [indiscernible]. Thank you but my questions were already answered.

Thank you, sir. The next question comes from Guy Petty (ph). Please go ahead with your question and announce your company name and location.

Yes. Good afternoon. It is Guy Petty from Deutsche Bank in London. A couple of quick questions. I just want to clarify what means you are going to be doing from repatriating tests on [Latham] back to Spain given in 2002 you had the benefit of the income from the loan with [indiscernible] being repaid. You do not have that this year. Are we likely to see very very strong dividend pay outs in [indiscernible] or is the Argentinean business going to start paying down those company loans. Secondly, I am wondering what went through your flow process when you decided to announce a tax dividend at €0.40 and not necessarily a growing dividend? Thirdly, you have talked about a very strong underlying performance at Telefs. Yes, I give you credit that the huge dip improved on Q1, but it is still going at sub-inflation. Now with the increase in tariffs that you are going to propose, you should pickup with inflation, but are you going to be able to actually increase your tariffs by the full allowable amount? I know the old back-debt provisioning rate has gone up as well, so, I am just wondering what you actually think was a realistic tariff increase you could actually introduce into Telefs. Thank you.

I answer first the question on dividends. We decided to raise the dividend up to €0.40 because we think this dividend would pay clearly in 2003. The board decided to make a commitment for the next 30 years because, we think at this moment in time to send the message of recurrence is very important. We feel very comfortable with the view that we have for cash flow and every item on the P&L to be able to be there. As I have said before, this does not mean that we cannot take decisions to increase the dividend in 2004 or 2005 [indiscernible] moderate [indiscernible] and work on the evolutional free cash flow and the net income in those years.

Okay. On your question, Guy, on flow [indiscernible] I think Fernando mentioned before that we are very much on track. The numbers that we are going to show this year are not going to be dissimilar in gross terms from what they were in 2002. We should also remember that we continue to extract cash out of our Southern American operations and that we are putting cash into Mexico this year as consequence of the CAPEX employment program there. I think the second part of your question was on the instrument we use. It is true that total debt, total integral debt, has gone down. It is also true that the debt that remains because of the higher interest rates is contributing significantly in the form of interest to cash flow [indiscernible]. Two other countries out of that regime are also contributing significantly. Also, remember the dividends are in gross operations, which are profitable, which are almost all of them. They are very significant and they are not [indiscernible] as it is in the US or Europe. So, we expect to be on target half of this year in gross terms. From that number, of course, you will have to take out whatever we end up spending in Mexico.

Regarding Telefs, we would like to see Telefs growing more. That has to be clear. Now, having said that, I think we were experiencing 24 months in Brazil were really economic conditions are [indiscernible] are extremely high and, therefore, nominal significant growths are difficult to track. For this sort of brief period we are, you know, thinking about what is going on. So, we are personally happy with the performance of Telefs, which has not basically in the heels of the operation so far. We have grown a long-distance business out of scratch, which is already contributing. We are loosing plan due to the fact that [indiscernible] at regulatory levels of penetration will have basically to step up penetration levels very quickly, therefore, picking clients, which probably were not clients for the long-term. In the current economic scenario, we see those [currents] have been low. So far, we are happy with the performance of Telefs. We expect the margin of Telefs also to improve on the second half even if we just keep this 16% nominal tariff increase. We, obviously, do not know what is going to happen with the legal injection, and, therefore, we do not know what it is going to be finally the tariff increase that we will be able to implement. So far, with the tariff increase implemented, we believe, we are able to increase margins on Telefs for the second half and, therefore, accelerate a little bit the revenue growth level for the second half and, therefore, for the year.

Regarding back debt, back debt is marginally up. Last year for the first six months it was 3.8% points. This year it is 4% points. It is 0.2% points worse in terms of back debt only, which we consider reasonable, for the state of things.

Thank you.

Thank you, sir. The next question comes from Luis Prota (ph). Please go ahead with your question and announce your company name and location.

Yes. Good afternoon. Luis Prota from Morgan Stanley Madrid. I have a couple of questions. The first one is regarding six [telefoni] in Spain. I would like to get your view on the 7% increase in the connection rates by capacity. If this might have an impact on the competitors pricing scheme and, therefore, renew the competitive pressure in the coming quarters? The second question is on Brazil. I wonder if you could elaborate a bit on the margins from the long distance service that look like they have been small at the moment if any I wonder if that is structural or if it affected margin and expenses and we should expect margins to pickup? So any guidance that you could give us here would be very useful.

Okay. Regarding the increase in the prices of interconnection per capacity, we believe it is positive in the sense that it is the first time any price affecting Telefonica holds up, which is very positive. We think is slow the increase. We were expecting higher increase; because we think we can justify that we should have bought a much higher increase close to 20%. From that point-of-view, to have a positive increase is positive but the affect [indiscernible] because more and more traffic is interconnection through capacity. At the end of the day, the net affective interconnection price, even with this increase, is slower on a capacity basis than on the standard thing. So it is positive overall but it will not be much. The second question was regarding the margin on long-distance on Telef right? And the question was? It is 25% right now, the margin according to 2003. You know the margin is basically improving slowly without a budget, which we have already surpassed in terms of margin for the total year. If this sort of margin is maintained for the second half of the year, we will be able to improve it. So if we are also on track on that and within 25% on long-distance margin on fully allocated costs is okay.

Okay. Thank you.

Thank you, sir. The next questions come from Nick Belfast (ph). Please go ahead with your question and announce your company name and location.

Hi. It is Nick Belfast from Lehman Brothers. To [indiscernible] tax could you tell us what the cash tax payments you expect the Group will be in 2003, 2004, and 2005 and whether that is being affected by the redundancy scheme.

Okay. On taxes, I wish I knew what those numbers are going to be going forward. You remember, we have a large tax credit coming from us towards write-downs. We have been exclusive to how we are fairing in the first semester, which is as you probably see in a low number. We are not in a position, first because we do not know and second because it would depend very much on how the parameter of the organization changes.

Could you give us any kind of range for the next couple of years. Previously, you indicated that it would be in the range of €300m to €400m for the next couple of years, but is there any impact at all from the redundancy scheme?

Okay. I think we can still abide by the €300m to €400m rough estimate of the three years. We started talking about those ranges in 2002. So, we will try and update them as soon as those numbers become more visible. On the impact of the redundancy program, if I am not wrong, you can have a net accounting on the P&L and it would soon be cash flow equivalent starting next year. So, that should also help save a couple of cash taxes in the consolidated cash flow going forward.

Great. Thanks very much indeed.

The next questions come from Maria Tinero (ph). Please go ahead with your question and announce your company name and location.

Hi. This is Maria Tinero from Citi Group Asset Management. I have two questions. The first one is, could you clarify whether you have regulatory restrictions in Span in terms of handling both broadband and media to be able to compete against that cable offer. The second one, is if you could clarify as well whether you have restrictions anymore to the list Telefs in Brazil? I understand that privatization law gives [indiscernible] which cannot enlist the company. I think that has expired. So, if you do not have restrictions anymore, what sort of obligations do you have and how much you will have to pay if you decide to [indiscernible]?

To the second question, we are not going the list [indiscernible]. That is the answer.

We do have some restrictions in marking media and [indiscernible]. We have some restrictions in linking Telefonica products which [indiscernible] and that was a condition of the [indiscernible] of [Italia] ViaDigital. Those conditions, some of them are general competition conditions, which because of the dominance of the position we have on wireline and they have an [indiscernible] and they have [indiscernible] businesses. There are some specific conditions related to the context of [indiscernible] that has to be offered equally to other possible interactive parties as well. So there are some restrictions. It is not a prohibition. They are restrictions, okay.

Do they expire at any time or does it depend on market shares in the future?

No, they are not specifically expired at anytime, but these things will be changed in time. You can request from the regulator to review conditions anytime you consider that the word has changed, basically.

Right. Regarding Telefs, if you were to enlist the company, and as I understand you are not planning to do it, what would you have to pay, average of three months previous to the listing?

We really do not know.

The free-flow [indiscernible] is very low.

We are not going to enlist at all.

Okay, thanks a lot.

The next question comes from Brian Russling (ph). Please go ahead with your questions and announce your company name and location.

Good afternoon. It is Brian Russling from Casanova in London. Two questions. The first one is just related to the work force reduction program. I am not quite clear how that is going to show in the profit and loss account. Can you just clarify that position? Are we going to have, for example, for 2003 you say a third of the program so 5000 employees leaving? Are you going to take provision for them leaving which will be showed as an extraordinary and then we will see the net financials line each year going forward and adjustment without pushing net value adjustment? So if you could clarify that? The second question relates to your strategy [Inaudible] going forward given that you do not have 100% control. Can you talk about operationally what has changed now and what you cannot do with it that you wanted to do from an operational perspective? Then secondly, from a financial perspective, can you review the synergies that you will be able to extract now with your higher ownership and what the earning solution estimates are now in the current situation?

Okay. On slide 13. If you take slide 13 and you look at the lower end graph, you see 2003 an estimate of –€670m to –€690m the net P&L impact. Okay, well, that is the 2003 net P&L impact. That is the impact it is going to have on accounting basis okay. We said that we estimated that one third of the program to happen, one third or 70% to 75%, but we do not know. If that is the case, that is the net impact we will expect to have from this program. On 2004, 2005, 2006 and 2007, the other four years of the program, will have impacts coming from provisioning in full the present body of all the stream of flow that we will have to pay to the employees retired on that particular year. That will be a net [indiscernible] impact on the P&L, but then we will start to have positive P&L impacts coming from savings also. So it is more difficult to say the net. The other thing we said is that we expect to be able to compensate in full this €670m to €690m estimated negative P&L impact for 2003 with extraordinaries, for example, the real estate plan or the sale of antenna 3 and so on. We will be updating you on the progress as the year progresses.

Can I just clarify that? So effectively from a divisional presentation those people would disappear from the cost line of Telefonica de Espana and they will just appear on the provisions line and the financial line.

Yes. Exactly. Okay. So you will start to see an improvement in salary expense of Telefonica de Espana and you will start to see also improvement in the royal margins and the real estate cost and there are many other administrative expenses related to head count. Okay, and we will be going to review the color of that as the quarters progress.

Okay, regarding [Terra] really the things that we were planning to do, tender offer are the things that we are planning to do post tender offer. The fact that we did not get 75%. [Indiscernible] is 72% is not really affecting anything of the estimate or anything. We could do the same things basically, the things otherwise that we incorporated in the prospectus basically. So there is no real difference there. The only difference is that with 75% we can consolidate on a tax basis [Terra] within the Telefonica Group and with 72% we cannot consolidate. The affect of that is only €10m in cash terms, and an estimated P&L impact €300,000 a year so as you can see it is not really relevant anyway.

Thank you.

Then next question comes from Majir Govnier (ph). Please go ahead with your question and announce your company name and location.

Yes. [Indiscernible] of London. Good afternoon. I will ask three different questions. The first question is related to the redundancy program. I have understood the number of [indiscernible] from provisions. Can you just verify the number of people involved for the second part of the year? The second question is related to Telef. It seems that the launch of long-distance services in Brazil is to continue to grow but is also putting margins under pressure. Can you contemplate the [indiscernible] it counts to improve the profitability? The last question is regarding the CAPEX announced. Do you expect the same level of CAPEX in the second part of the year compared to what you have done in the first half:

Okay. Starting with the CAPEX so far, our estimated guidance, the guidance we gave you in CAPEX for the year was to have roughly flat CAPEX compared to 2002. So we expect to have flat CAPEX in 2003 compared to 2002. So now, the CAPEX is down 15% so far with last year. We believe this progressively is going to convert to get close to the guidance, although, it is difficult to say today. So we expect CAPEX to convert close to the guidance. Then we will have to see quarterly the final [indiscernible] impact because it is being [indiscernible] from the assumptions we made on the guidelines. So obviously we [inaudible]. Basically, you should expect CAPEX to move outwards to convert with the guidelines of today, which is flat with last year.

Regarding the work force reduction, it is voluntary. We do not know how many people are going to leave from now to year-end. We expect normally based on the experience that on the first part of the part is when more people will sign up. Therefore, we estimate that 1/3 of estimated work force reduction along the five years will happen before the end of this year, but we do not know exactly. Then the rest of the plan, we believe it to happen evenly over the rest four years. So 1/3 now and then 15% of the time of each year roughly, or something like that. Okay, but we do not really know that.

On Telef, Telefs is already the most efficient operator program in the world. We formed at 1600 lines [indiscernible] and we continue to optimize [indiscernible] external lines. Last year most of the services are solid. It is a very busy [indiscernible]. It is everyday looking for more efficiency, but really we cannot try looking for more efficiency because the margin on long-distance business is slower. The long-distance business has a lower margin. In average, the mix, when you look at the margin of Telef it is going down because it is a different mix of margins but continues to be a very healthy and a very high margin operation. We do not consider this an issue in Telef because of the lower margin coming from long-distance.

The next question comes from Florad Pindares (ph). Please go ahead with your question and announce your company name and location.

Hi. Good afternoon. It is Pindares here from [indiscernible]. I have a few questions if I may. The first one, is regarding your dividend as a followup. As we have been seeing Telefonica has a very strong cash [indiscernible] when compared with the expected cash flow of €3b on your dividend payment announced two days ago. My question is, what are the main risk factors that is seen that could possibly affect your cash flow so that you are being [indiscernible] for a three year period, the 40 year [indiscernible] dividend? The second one, you mentioned that you are now willing to believe that Telefs [indiscernible]. My question is, would it be possible or even interesting if [indiscernible] was willing to do it. To lease the sale of the company in Brazil that would get not only [Diesel] the mobile operator but also the fixed line given that the high advantage is that you would have a gathering in the same company, both aspects and mobile? Thank you.

Okay. With regards to the third question about the business policy, I think we are better [indiscernible]. We have the higher dividend [indiscernible] . We have said before. This is a minimum flaw for the next three years, and we will see the evolution of the free cash flow and the net results. I think, we went from 0 last year to €0.40 [indiscernible], which I think is extremely good.

Sorry for interrupting. I know, yes, it is a great dividend but compared with your cash and ration ability, I think is to be seen as [indiscernible]. Is there one main risk factor that you would just like to highlight, so we are justified in not paying more dividends out of [indiscernible]. Thank you.

Well, I will repeat what I said before. I think it is a very consistent dividend. It is a high dividend. As I said before, in the presentation, it is sustainable. Our loss for the full growth of the company, at the same time and maintaining also the greater rating so three together, for us, it is very important. We think of the organic growth of the company. It has to be important. This dividend [indiscernible] to have [indiscernible] shareholders and to allow the company to grow to its full potential, also maintaining a stable [indiscernible] rating of plan which is on target.

Okay. We have time just for the last question please.

Thank you, sir. The next question comes from James Golob, sorry. Please go ahead with your question and announce your company name and location.

My name is James Golob from Goldman Sachs in London. If I could just ask, just earlier, you made a brief mention on the Spanish regulatory framework and said you thought we would have some news in the next couple of weeks and that would be positive. Is there anything further you can say on that?

I say next weeks or months. I think before the next two months, there will be a definite framework for the regulatory work for the next two years. The general experience has carried my impression, the impression we have is positive. It is going to be a framework that allows the industry to grow, which is the important thing. I think the industry has a very good potential to grow. We need the framework in which we can grow. I think, it looks well in that direction.

Thank you.

Ladies and gentlemen, thank you very much for your assistance. Goodbye.

Ladies and gentlemen, thank you for your participation today. This concludes today's conference. You many now disconnect your lines. Thank you.