Telefonica SA (TEF) 2004 Q2 法說會逐字稿

Good morning and good afternoon ladies and gentlemen, and welcome to today's Telefonica conference call. At this time all lines are in listen-only mode. Later we will conduct a question and answer session, and instructions will follow at that time. [Operator Instructions] I would now like to hand over to today's chair person, Mr. Ezequiel Nieto. Please go ahead sir, and I will be standing by.

Thank you. Good afternoon ladies and gentlemen. Welcome to Telefonica's conference call to discuss 2004 fiscal results. I am Ezequiel Nieto, Head of Investor Relations.

Before proceeding, let me mention that this presentation may contain announcements that constitute forward-looking statements, which are not guarantees of future performance, and involve risk and uncertainties. And, actual results may differ materially from those in the forward-looking statements as a result of various factors.

We invite you to read the complete statement included in the first page of this presentation which you will find on our website. We encourage you to review our publicly available disclosure documents filed with the relevant securities markets regulators.

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 Chief Financial Officer, Mr. Santiago Fernandez Valbuena, who will be leading this conference call.

Good afternoon ladies and gentlemen, and thank you for attending Telefonica's 2004 first half results conference call. Today with me is Julio Linares, Telefonica de Espana's Executive Chairman, and Jose Maria Alvarez-Pallete, Executive Chairman of Telefonica Latin will be joining us, as he is flying in. And we hope he will be able to join us for the Q&A session.

Combining top line growth, profitability and cash generation, which is the goal behind our approach to managing the Company's day-to-day operations, is fully reflected on the January-June results. From the top line perspective, Group sales increased by 5.6% year-on-year, to end just above €14.3b. All major subsidiaries have been improving their revenue performances on an annual basis.

Achieving top line expansion is being based on the intensified commercial initiatives, aimed at feeding the growth opportunities we have in front of us, such as Broadband and mobile, while supporting the performance of traditional fixed services to extract their full value. Telefonica's more intense commercial stance has driven operating costs up by 5.1%.

From a profitability standpoint, EBITDA grew by 6.9% to end the first six months of the year just below the €6.4b mark. EBITDA margin stood at 44.5%, up a percentage point above last year's figure.

Finally, and from a cash generation point of view, the January to June operating cash flow ended close to €5b, equivalent to a 13.4% increase year-on-year. The Company's cash flow generations track record is giving us full flexibility to address growth opportunities with strategic fit, such as [Bell Tel]; retain a healthy balance sheet, in which we have reduced net debt by 6.1% in the last 12 months; and provide an attractive shareholder remuneration package through dividends and a front-loaded execution of our buyback program.

The Company's solid top line growth profile is being reflected at the net income level, as the slide number 4 shows. If we exclude the impact of the 2003 to 2007 pre-retirement program on extraordinary charges, which have amounted to close to €400m net of taxes, net profit would have topped €1.6b, up 16% when compared to the equivalent figure of 2003.

January-June reported net income just exceeded €1.2b, which is down 12% from last year's figure. Although negatively influencing net income, I would like to highlight that the 2003-2007 pre-retirement program is accretive in cash flow terms, adding €18m gross of taxes, to the cash generation ability of the Telefonica Group in the first half of 2004.

For a review of our operating highlights, please turn to slide number 5. Growing the client base to develop expanding business opportunities, such as Broadband and mobile, is a top priority for Telefonica, and a key lever in our strategy to stimulate recurrent top line growth. To execute this priority, Telefonica continues to build on its revitalized commercial efforts, which are providing to be effective, as 1.7 million and 9.7 million new clients have been added to our ADSL and mobile subscriber bases respectively in the last 12 months.

In fixed telephony, commercial expenses for Telefonica de Espana and Telesp are heavily biased towards ADSL development, exceeded 2003 figures by close to 1.2 times each, which has pushed Broadband net adds to grow year-on-year by 1.1 times and 2.4 times in their respective markets. The significant expansion of net adds has been common to all Latin American wireline operations.

It is worth mentioning that the boost to ADSL net adds in Spain and Latin America, has led Broadband new connections to exceed traditional lines lost by more than 800,000 connections in the last 12 months on aggregate.

In the cellular arena, Vivo and Telefonica Moviles Mexico were adding 4 times and 5 times more new clients in the first 6 months of 2004, than in the same period of last year. These figures are to be compared with increases of close to 1.5 times and 2 times in commercial expenses, respectively.

If you please turn to slide number 6, you will see all our major business lines are keeping their solid contribution to consolidated financials. Telefonica Moviles stands as our major contributor to consolidated revenue growth, adding 5 percentage points to January-June nominal sales, close to 90% of the total.

Wireline operations are being complementary to mobile, contributing to top line growth by almost 1 percentage point each, the proof of their successful management of their demanding operating environments.

Business contribution is more balanced at the EBITDA level, with both Telefonica de Espana and the cellular businesses adding just above 2 percentage points to the Group EBITDA. While Telefonica de Espana is fully benefiting from its cost-trimming initiatives, start-up losses in Mexico are pressing down cellular business EBITDA contribution.

A quarterly analysis of the Group key financials is showing some deceleration of growth rates, deriving from the slowing down of the cellular business in Telefonica Latinoamerica. The former was already anticipated and is totally in line with our 2004 targets; whilst the latter is fully explained by foreign exchange movements. On the contrary, Telefonica de Espana is sequentially speeding up its revenues and EBITDA growth rates, consolidating year-end guidance.

For an outline of the impact of both foreign exchange and changes in consolidation in our accounts, please turn to slide number 7. Although slightly accelerating, now that the Brazilian and Chilean average exchange rates are showing a slim depreciation versus last year levels, as opposed to first quarter, ForEx dilution to organic growth remains mild.

As such, ForEx has drained 2.1 percentage points to January-June revenues, which is a negative impact that shrinks to just 1.2 percentage points at the EBITDA level, as the weaker Mexican peso is downsizing EBITDA losses of Mexican operations.

With regard to changes in consolidated accounts, their impact on Group financials stood at minus 1.6 and minus 0.1 percentage points, following the deconsolidation of Antenna 3 in July of 2003, which is not being compensated by the incorporation of TCO in May of last year.

If you will please turn to slide number 8, you will see that the combination of strong organic revenue growth across the Group, and higher efficiencies has defined Telefonica's fulfillment of its year-end targets. Excluding foreign exchange and changes in consolidation, revenues, EBITDA and EBIT, organic growth have topped 9%, 8% and 21% respectively.

Moving to slide number 9 for an overview of Group CapEx and cash flow; let me say that capital expenditures ended June just above €1.3b, posting a 12% annual decline. Telefonica remains focused on investing in Broadband and last (ph) generation mobile networks, which represented 43% of CapEx spending to date, up 7 percentage points from the 2003 figure.

Please notice that CapEx numbers cannot be extrapolated towards the end of the year, as the total committed investment already amounted to €2.4b at the end of June, or €1b above the first half accounted or accrued spending.

CapEx management is being complementary to solid EBITDA performance, leading to a 13% annual increase in operating cash flow that reached €5b in the first six months of the year. It is worth mentioning that Telefonica de Espana's operating cash flow was growing at the 16% rate above the first quarter figure.

And now to start the analysis by business segment, let me hand over to Julio Linares for the review of the major trends so far -- domestic fixed (ph).

Thank you Santiago and good afternoon. The Company's (indiscernible) to become a truly commercially oriented organization is clearly paying at the top line level, as the slide number 10 shows.

Total Group sales ended the first half of the year close to €5.4b, up 2.2% with regard to January-June 2003 figures, and close to the higher end of the target range anticipated. It is worth mentioning that the aggregate of Internet, Broadband and other services is adding 3.2 percentage points to total sales growth. Fully compensating for the decline in traditional voice revenues, that [drained] 2.7 percentage points to revenue growth.

As such, Telefonica de Espana foreign Company posted a 1.4% annual growth rate in revenues - more than 60% of the total Group's growth rate. Our subsidiaries, particularly Telyco, accounted for the remaining 0.8 percentage points of Group's total line growth.

I would like to highlight the acceleration of revenues expansion when comparing quarterly figures with Telefonica de Espana parent Company growing at a 2% rate in the second quarter, well above their 0.7% revenue increase posted in the January-March period. The rise in the monthly fee in April is an important factor behind this improvement.

For the analysis of Telefonica de Espana Group cost restructure, please turn to slide number 11. Group operating calls are being cut by 0.4% year-on-year, driven by the 9.8% decline in personnel expenses, a result of the execution of the retirement program. The workforce reduction program is leading to a 0.3% OpEx fall at Telefonica de Espana parent Company level, a figure that will reach 0.7% once excluding interconnection.

I would like to remind you that the Board of Telefonica de Espana has finally accepted all of the 2,310 applications presented last March, with 1,356 employees having already left the Company. The reduction in personnel expenses is offsetting the 12.2%, and 2.6% increases in both external services and supplies respectively. The higher external services expenses are explained by the intense commercial campaigns to foster top line.

The greater costs associated to handset sales at Telyco are compensating lower interconnection expenses to drive growth supplies up. Top line growth, coupled with cost contention and improved efficiencies are leading to a 6.2% EBITDA growth for the year - a figure that reached the 4.2% growth rate posted at the first quarter. Equally, EBITDA margin continues to outperform sequentially, standing at 46.1% in the first half of 2004 - 1.7 percentage points above last year level.

With regard to Telefonica de Espana traditional services operating performance, please turn to slide number 12. Telefonica de Espana has lost close to 98,000 access lines in the first 6 months of the year, 50% below last year's figures.

The acceleration registered in the second quarter is related to both the termination of the free connection fee promotion that was active during the second week of March and a slight pick up in full [unbundling] with 17,000 [loops] opened in the April/June period.

In respect of commercial initiatives in recovering clients, has been particularly visible for carrier [de-selection], as opposed to 2003, when the Company almost lost 200,000 lines to de-selection in the second quarter. Total de-selected lines have diminished by more than 14,000 in April/June 2004 period, a first ever event since carrier de-selection was introduced back in 1998.

Turning to traffic - the negative quarter registered last year continues - having estimated that the total Spanish voice market has shrank by almost 5% in the last 12 months. However, (indiscernible) response to bundling voice packages with more than half a million net adds in the last 6 months. And the recovery of de-selected customers are limiting Telefonica de Espana voice market share loss in 2004 to close to 0.3 percentage points per month, a figure that compares very positively with the 0.5 recorded in 2003.

For annual review of the key ADSL metrics, please turn to slide number 13. In terms of operating performance, Telefonica de Espana surpassed the 2m clients mark at the end of June, adding close to 196,000 new connections in the second quarter - up 25% from the April-June 2003 figure. As such, we captured more than 145,000 retail clients in the second quarter this year, equivalent to [75%] of the total market net adds.

In addition to ADSL connections, we have more than 700,000 operative Broadband value added services for intense commercial campaigns based on both raising promotions. And an enhanced portfolio of services and solutions are improving our competitive positioning.

In terms of financial performance, Broadband revenues increased by 66% on an annual basis to reach 503m users. Complementary to client expansion, blended ARPU grew by 7.6% to end just below €50 per month, with value added services accounting for 8.5% of ARPU.

Turning to profitability, EBITDA exceeded €171m, leading to a 34% EBITDA margin.

Let me now briefly address our strategy to foster ADSL penetration outlined in slide number 14. (indiscernible) the basic pillars shaping this strategy. First, doubling the current speeds of our ADSL portfolio without modifying present price structure - an initiative that has already been approved by the CMT. Under the new portfolio, the 256 Kbps connection will be eliminated and a new one for 4 mega bits per second service, charged at the current 2 mega bits per second price, will be introduced.

We expect to launch the new offering at the end of September, in compliance with regulatory conditions, and to finalize the [other] migration to our existing client base before year end. This move will permit us to improve the quality of service with minor CapEx requirements, around €10m, and minimizing the risk of ARPU dilution. Business structure will be also [effective] for the wholesale offering.

Second, we are enforcing the penetration of value added services for the different market segments, increasing the percentage of customers willing to pay for these services that today stands at 36%.

IMAGENIO -- that will benefit from increased commercial push, will play a relevant role on our product offering. To achieve this goal, we are preparing the launch of the new Broadband products in the second half of the year that will implement-- complement our portfolio.

Third, deploying [attractive] commercial campaigns, such as the free connection fee on standard promotion, commercially intensified, will continue in the second half of the year; and, finally, expressing our quality differentiation and recognition. It is now my pleasure to turn over Santiago for the analysis of Telefonica Latinoamerica results.

Thank you Julio, and while we expect that Jose Maria Alvarez will be able to join us for the Q&A session, let me fill-in for him and walk you through Telefonica Lationamerica's first 6 months of the year.

In terms of revenues, EBITDA and operating cash flow, the growth rates have been 10%, 8% and 10% respectively, all in constant currency terms. Organic growth is keeping first quarter pace and is even improving at the EBITDA level as the tighter management of resources is being implemented, and clearly stands within the 2004 target range.

As we already anticipated, operating cash flow growth is converging towards year-end guidance of CapEx budget [year spend]. Consolidated growth in revenues and EBITDA is moving down to 5% and 3% in euro terms, following the general depreciation of Latin American currencies against the euro. I would like to highlight that consolidated accounts are showing growth in euro terms for the last four quarters.

Let us now turn to the next slide for the analysis of the main drivers of Telefonica Latinoamerica's revenues, which are mainly Telesp and TASA. In slide 16, you can see that from an operating standpoint Telesp kept focusing on the developments of its new growth opportunities, particularly the long distance and Broadband markets.

As such, the Company has added around 7 percentage points to its domestic long-distance and international long-distance market shares in the last 12 months., whereas the ADSL subscriber base has exceeded the 600,000 clients mark, supported by quarterly net adds that are more than doubling the 2003 figure.

Please note that second quarter ADSL net adds are sitting at record high in the Company's history. This solid set of operating metrics, coupled with 2003 target (ph) revision, have pushed traditional revenues to expand by 19% in local currency, with local and long-distance services growing by 13% and 39% respectively.

Local revenues' quarterly growth pattern is being affected by the deceleration of fixed-to-fixed sales, a consequence of mobile cannibalization fundamentally. We are actively addressing this issue with the launch of specific commercial initiatives aimed at incentivizing both lines in service and traffic.

In addition, Internet and Broadband revenues, benefiting from intensified commercial campaigns, was growing at the 45% rate year-on-year. At the consolidated level, Telesp local currency sales grew by 20% - a rate that remains close to the first quarter level. The effect of foreign exchange, which is draining 3 percentage points to revenue growth, is placing sales growth rate at 17% in euro terms.

Before turning to Telefonica Argentina's analysis, I would like to comment on the two latest official decisions on tariffs that have been made public, which are also proving the stability and low risk profile of the Brazilian regulatory regime, and will clearly support the Company's second-half financial performance -- first, the Anatel tariff adjustment, effective July 2, granting a 6.89% and a 3.2% increase for local and domestic long-distance respectively; and, second and foremost, the High Court of Justice Federal Ruling issued on July 1, that validates the use of the wholesale price index as the basis for the 2003 tariff adjustment.

The ruling that endorses Anatel's last year decision and the principal of the concession contract, has given the us right to recover 2003 tariff shortfall.

Turning to our wireline operations in Argentina in slide 17, you can see that as the evolution of operating metric shows, both in terms of lines and in traffic, TASA is successfully managing the recovery of the Argentinean traditional fixed telephony market, which is anchored to the economic recovery.

As a result, the Company is growing again its lines in service on an annual basis, breaking 2003 negative trends, with more than 100-- 100,000 net adds registered in the first six months of the year.

In terms of usage, traffic per line, per day was up 9% year-on-year. On top of traditional service, TASA is keeping a strong hold on the ADSL market, adding close to 39,000 new connections in the January-June period, which is 3.5 times more than the last year figure. And, this is improving its market share in the southern region by 5 percentage points to reach 69%.

This positive operating performance is setting the basis for solid financial results which top line growth-- I am sorry, with top line growing 8% in local currency, driven by 6% and 42% increases in traditional and Internet and Broadband revenues respectively. A 7% depreciation of the average peso/euro exchange range in the last 12 months is flattening top line growth in euro terms.

Our effort to grow top line is not being at the expense of profitability and cash generation, as slide number 18 presents. Setting aside TASA where growth rates are heavily affected by the inflation indexing of wholesale offerings to register since June 2003, the rest of the subsidiaries are improving sequentially their EBITDA performances.

And, what matters the most, margins keep improving in the second quarter, compared to first quarter figures -- an improvement that ranges from the 0.6 percentage points of Telesp and CTC to the 1.2 percentage points at Telefonica Peru.

From a cash generation perspective, operating cash flow calculated as EBITDA minus CapEx exceeded €1.2b, 10% above January-June of 2003 in constant currency terms. Complementary to EBITDA growth, all Companies are managing their investment requirements based on the strategic fit of projects, in giving priority to Broadband, and on the analysis of short to medium-term returns.

If you would now please turn to slide 19, we will walk you through-- I will walk you through the debt, liability and the progress on our share buy-back program reports. In slide 19, you can see that Telefonica continues to manage its financial exposure, with a view to offset foreign exchange impacts on profits, keep a strong and flexible balance sheet, and maintain all lines into the capital markets open.

In the first half of 2004, overall financial expense was €486.9m but - excluding the one-off effects recorded in the first half of 2003 on the Argentinean peso and the US dollar denominated Brazil debt - we would present a 39.1% decline in net financial expense, which is at the top of the table in the chart.

Average debt has shrunk between 2003 and 2004 by 12.2%, and the unit cost of debt service has come down from 7.6% to 5.3%. The drop in Brazilian rates of 990 basis points, and the declining euribor of 45 basis points have certainly contributed to alleviate the interest rate burden on our costs.

As of the end of June '04, Telefonica has 71% of its debt denominated in euros; 8% in US dollars; and 19% in Latin American currencies. The average life of our debt was at 6 even - 6.24 if you want to include our preferred share program. And that continues to be in line with our principle of keeping average debt maturity beyond expected cash flow generation.

On slide 20, we present the cash flow statement to the reconciliation of debt changes with cash flow. If you let me start with the chart at the bottom, we show that as debt has come down from €19.2b in December to €18.7b in June, and the rolling fourth quarter EBITDA has increased, our debt to EBITDA ratios has improved.

Including cash commitments outstanding at the end of June - specifically the redundancy program that we have already mentioned - we would reach a total debt and commitments figure of €22.87b, or about 1.8 times EBITDA, which keeps us very much on the right course to achieve our 2006 target of between 1.4 and 1.7 times.

On the uses of cash flow in the second half, we anticipate closing the BellSouth acquisition, and the purchase by Telefonica Moviles of Citizen Mobile in Chile. Together with the Terra dividend, which is going to be paid tomorrow, and the second tranche of the Telefonica dividend, which is 0.20 cents to be paid out in November, we will increase the size of the liability in our Company on the balance sheet by an amount close to €6b.

On the cash flow statement, let me highlight that the 10.1% increase in free cash flow to €3.2b, despite a €600m increase in working capital - which is explained by the increase of commercial activity at Telefonica Moviles in the form of higher inventories and terminals, and the customer's seasonal effect on CapEX paid versus accrued.

Finally, on slide 21, we report on the progress of our share buyback. As of the end of June 2004, Telefonica held 131.1m shares and 15m in-the-money call options on our own stock. This represents almost 3% of the share capital and a 43.5% completion rate of the €4b committed when only 23% of the time has elapsed.

We have been careful to fulfill our commitment to spend cash flow that is available, and to include the share price in the decision inputs. Most of the call options outstanding will expire this summer.

If you please turn to slide 22, and to sum up, we say that, number one, we are intensifying commercial efforts at all levels as the key lever to foster top line growth across the Group. Organic growth remains solidly within year-end targets and is being translated into euro denominated financials as ForEX impact continues to be mild.

All major business lines with financial performances are fully aligned with guidance, are sustaining some contributions to consolidated revenues and EBITDA growth. And we are keeping a tight management of resources, both in terms of costs and CapEx, setting the basis for the improvement of margins and cash generation.

Well, thank you very much, ladies and gentlemen, and now we are ready to take your questions.

Thank you gentlemen. [Operator's Instructions] And our first question comes from Alfredo Tennenbaum. Please go ahead with your question and announce your company name.

Yes, good morning. It is Alfredo Tennenbaum from Commerzbank. I have got, well, a number of questions. First, an easy one regarding working capital. What sort of working capitals are we [marked] for the full year? The second one on ULL -- if you could also walk us through the trends you expect for the full year, and also which players in Spain are being the most aggressive on that side?

And, the third one, if you could please provide or isolate the impact of the price rise in fixed line that happened in April? Both in terms of monthly fee and also the higher handset rental fee?

Thank you for your questions, Alfredo. Let me start with the working capital and over to Julio who will be able to answer you on the other two. Let me concentrate working capital explanations on the full semester figures. You will know, by the way, that you have quarterly information on our investor relations website in spreadsheet format.

In 2000-- in the first half of 2004, working capital has increased €982.9m. Both operating CapEX -I am sorry, both operating and CapEX-related working capital have significantly contributed to this figure.

Let me start with CapEX. In CapEX we have accrued €1.3b but we have paid €1.7b. That is a difference of €350m is fully explained by that. We certainly expect that difference to go away as the year progresses.

2003 Q4 CapEX is being paid for around the second quarter of 2004. If you look back in our recent history, you may see that we have experienced similar humps in the past. Most noticeably in 2003, we experienced that thing although it was not recorded in Q2 but in Q3. So, in short, on the CapEX side, which explains 350, we would expect that effect to wash out as the year progresses.

In operating working capital, we have accrued 619m less than we have paid, and we can roughly explain that by saying that in the first semester we bought 250m less than we paid for. There are a number of effects there. But basically supplier financing, as the OpEX in Q2 has been close to 250m lower than it was in the last quarter of '03 as I mentioned. And you also have to take into account close to €100m consumption-- cash consumption which is due to a reduction, a small reduction, in the average payment period.

Certainly inventories have-- increases in inventories have an effect of about €145m. And most of those, the overarching majority there, is Telefonica Moviles based in Spain, Mexico, Argentina and Brazil.

Finally, there is the spectrum tax that we have paid in the second quarter in both Spain and Brazil, although 20% of that tax has accrued, as we distribute it over the year. This is one-off and this explains off the 90m of the almost 1b that we are talking about.

So, for year ending, short I would say that the CapEX effect should wash out, and on the operating cash flows as things should normalize. It is not every quarter that we increase inventories so that sales are higher than they were - sorry, lower than they were in the last quarter.

So should levels of around 400 be a reasonable figure for the full year?

That is a moving target so I would rather not give a number. But let me stay on the CapEX washing out as we have experienced in the past. And certainly, the higher the sales, the more likely that it is that operating working capital should increase.

Thanks.

Okay, regarding to second question. At the end of June we have 43,422 unbundling local loops; 41,100 were fully unbundling; and the line sharing during this month of July, it has been very similar to June.

What I can tell you, the relationship with the rest of the year is that of -- we expect some acceleration, based on -- the competitors are providing already unbundling local loops. In 170 [inter offices] we have around 7,000.

They have asked for co-location in another additional 25 inter offices. They have already, from the 170, they have the capability to reach 38% of our access plan. In relationship with your third question, the 4.35% of increase in the monthly fee means an increase above €0.55 per month per line.

And there was also an increase in handset rental fees as well, no?

Yes. There was a review of what we call the integral maintenance service that we provide to some customers that has called this kind of service. We reviewed the service in April and that meant that -- because the service has been reduced by 11.7%. But at the same time that we reduced the price of the service, we also reduced the traffic [forms] that previously was attached to the traffic consumption. And in April we changed [the way this is done] of €1 per customer.

Next question please.

Thank you. Our next question comes from Brian Rusling. Please go ahead with your question and announce your company name.

Yes, good afternoon. It is Brian Rusling from Cazenove here. Santiago, I just want a little bit of understanding of your commentary about -- the share buyback is utilizing the free cash flow.

You have highlighted that in the second half of the year you have got a number of cash outflows on the basis of special dividends, second dividends and payments for BellSouth. Does that mean we should expect a much lower implementation of the share buyback in the second half of this year?

Okay, not necessarily. I did want to highlight that there are a significant amount of one-off payments which are large, that is why I provided the rough figure of €6b. You know we have a commitment to use cash flow as we generate it, not to get in debt, to do things that we have time to complete. And certainly this is not the complete picture. There is certainly increasing debt because of all those things I have mentioned. There is also cash flow generation.

And certainly I feel it is fair to say that we remain on track to the cash-- free cash flow generation ability going forward. So you should not take that as meaning that we are going to slow down or speed up or do anything else on the share buyback. Okay? The fact that we have proceeded at a brisk pace so far, and that we have, as you can see in the slide - accelerated the program on the second quarter, has in this particular instance more to do with price conditions and cash flow availability than anything else.

Just a further question in relation your €6b. It sounds a bit low on the original estimates for the BellSouth payments. Are you expecting a lot of the Bell South payments to go into next year?

We still expect that, if not 100%, because there are still some approvals pending, the vast amount of that will come in this year. Remember that the BellSouth was-- the total amount was $5.85b, that is about €4.7b. We were not able to finance or refinance any of the debt.

Certainly it is open to question whether we will be able to finance locally any of those amounts. The set amounts that we are certainly going to pay is the Terra dividend tomorrow, which is going to mean a leakage out of minorities for two hundred and something - I do not recall the exact figure - and certainly the Telefonica dividend.

And certainly Telefonica Moviles in Chile, that is also going to have to be paid for. So, you should use six as a rough indication, not as a strong commitment.

Thank you.

Thank you. Our next question comes from Bosco Ojeda. Please go ahead with your question and announce your company name.

Hi, good afternoon. I have a question on ADSL. I wonder if you could explain how you are going to implement the new pricing changes? If the new prices are going to be offered to only -- to the current clients or also to new clients, then how can you avoid people moving and migrating to cheaper options? And also, how is currently the regulation working if you want to make some further changes on that? Do you still have to wait for two months' approval?

And that question comes back to your comment when you mentioned that you do expect that unbundling would go up. What would happen if competition would start to move prices downwards? What is your capacity to move there and what kind of movement are you expecting? Thank you.

Okay, regarding your first question. The grade of the speed provides new prices in our portfolio that will lead for all the customers - the current ones and the new ones. So, once that we are low, that means at the September the products that we are going to sell are those with the newer speeds and with the old prices for the new customers. So it will lead for everybody - new and old customers.

And in relationship with the second question, the approval period is two months only if it is necessary to define a new wholesale service. Otherwise, the period is shorter. It may be one month if it is a revision on pricing. Then it could be 10 days if it is a kind of promotion in the service.

So, not always it is two months. It is only in case that a new wholesale service has to be defined and approved. Of course, if we ask for a change that means that the regulator may take two months. During that period of time, we will have to insist and to enhance our capability promotions in order to defend ourselves (indiscernible).

Thank you. The next question please.

Thank you. Our next question comes from Luis Prota. Please go ahead with your question and announce your company name.

Yes, hello. Luis Prota from Morgan Stanley. I have a couple of questions. The first one is on the use of excess cash. I am estimating currently around €6b to €7b of excess cash on an annual basis, after dividends and share buyback from 2005 onwards. I wonder if you could give us any clue on your plans for this cash? I know that you were highlighting different things, like protecting your debt rating, paying dividends, all the things that you were mentioning in the analyst day in Madrid back in October.

But I guess that €6b/7b next year is a pretty high amount. And I do not know if you are planning, or if you could be accelerating the share buyback or increasing the share buyback, or buying minorities. Or what are your plans there? That is the first question.

The second question is on DSL. The ARPU trend that you are reporting, well -- in all the quarters up to now, it has been impressive. And I wonder if you could give us some examples of the most popular value added service. I do not know if there are two or three most required value added services from clients that you could list for us?

And also, doubling the speed of the service, I guess that is going to allow to keep the monthly fee or the access price for DSL stable for a while. But I guess that sooner or later the access fee will have to come down and this will have a negative impact on ARPU.

So I do not know if you could elaborate a bit on the profile that you are expecting for ARPU in the coming years? I know that-- I remember that you were giving the guidance of €52-56 per month for 2006, and I do not know if that is still an actual or a real guidance? Or should we be sticking to the lower end of the range? Or what are your thoughts on that? Thank you.

On the first one, that you have to make your own projections. We certainly do not make those projections, although we do abide by what we said in October. We are still committed to trying to generate more than €27b in constant currency terms over the '03 to '07 period. I think it is fair to say that so far so good. We are delivering, we are generating pretty much what we expected, and we are working towards the shareholder remuneration package in the form of dividends and share buyback.

We are trying to keep solvency protected; although, because of the BellSouth acquisition, this year overall debt numbers are going to increase, although certainly you also have an asset increase and, hopefully, an EBITDA generation capability increase there.

At this point we do not-- we would not like to make any updates on that. We are comfortable. We stick to those targets and I say we will cross the next bridge when we get to the river.

Okay, regarding your ADSL question. As you said, till now we have been able to defend quite well the ARPU in ADSL, and value added services are having a significant impact on this ARPU. To date, the kind of value added services that have a definite effect in the market are, first of all, those related with security – firewalls, anti-virus, and these kind of value added services. In fact, we have in the market today more than 100,000.

Second, it has been very well-accepted -- those products related with maintenance -- maintenance on [telephony] on customer premises. We have already sold more than 200,000 units.

Third, I think it is very well-accepted in the small and medium enterprises market -- the product that we call Soluciones ADSL, which is a set of different products. They are related with the needs of this market segment. And today we have around 140,000 operative packages in the market.

And fourth, it is the product related with the residential market and sell for the PC base that we call Mundo ADSL. We provide a set of different services for regulation customers, and we have in operation 140,000 units.

In relationship with the second part of your question related with ADSL prices, our strategy today is trying to increase the penetration and [reduce] all the services, so that we will be able to compensate any possible decrease on prices if, as you mentioned, in the future we are forced to do. But you have to take into account that for us the most important is to keep our revenues level as we committed. And to get it, of course, penetration of ADSL and penetration of value added services on top of connectivity are very important.

Can you be a bit more specific on from what level of DSL ARPU -- would you be happy just to see a compensation of value added services, if a reduction in the monthly fee happens? I mean we are now at 49 point something. Is that level 52? Is that 50, 51, or-- I mean is the current guidance still there or should we assume that it is not any more a live guidance?

Today we keep the guidance on revenues. It is very difficult to share with you today the kind of information that you are asking for because it will depend very much on market reaction and market positioning of very (indiscernible) competitors. You may think that we are going to be very flexible in our strategy to adapt it to the new circumstances, so that we are able to keep our market share and increase the penetration.

Okay, thank you very much.

Thank you. Our next question comes from Guy Peddy. Please go ahead with your question and announce your company name.

Yes, good afternoon gentlemen. It is Guy Peddy from Deutsche Bank. Just a couple of quick questions also on Telefonica de Espana. I think this was alluded to earlier, but if you just explain it again. I just wanted to understand in a little bit more detail how, or despite your voice traffic volumes deteriorating in Q2 relative to Q1, you were able to reduce the year-on-year negativity in voice usage revenues from 7.6% in Q1 to 2.6%. I think you alluded to do that but I would just like a little bit more of an expectation, please?

And I would also be interested to know as to what provisioning you are putting into your guidance for the second half of Telefonica de Espana? And, therefore, why you did not increase your guidance of EBITDA, given you delivered over 6% EBITDA growth in the first half? Thank you.

Okay, regarding your first question, it is related with a change we have made in April in the service scene in integral maintenance service that I mentioned before. Because of that change, it happened that the better performance for the voice usage revenues during the second quarter can be partially explained because this effect (sic).

So, if we do not take into account that effect, the decline would have been 7-- the decline would have been 7.3%. Okay? Instead of the 7.6% for the first quarter, it would have been 7.3% if we had not done the change that I mentioned already and we have done.

In relationship with your second question, today we give our EBITDA guidance because we must take into consideration that EBITDA performance in the last quarter of 2003 was much better than the previous quarter, because at that time we already had the benefit of the resolution of the personnel expenses because the retirement program started the fourth quarter last year.

So because of that we are not going to change the guidance, though we believe that we are going to end the year around 5%, in the upper part of the range that we provided to you.

Thank you very much.

Thank you. Our next question comes from James Goloth. Please go ahead with your question and announce your company name.

Hello, it is James Goloth from Goldman Sachs. If I could ask a couple of questions. One is on the decline in fixed mobile traffic, just your thoughts on whether that is going to be a continuing trend and what lay behind that, and whether it is an acceleration in mobile-to-mobile traffic? So, if people are calling a mobile number, are they now just doing it from a mobile phone?

Secondly, on the Telesp margins. It sounds as though, from the explanation of the growth in operating expenses, as though that is going to be an ongoing level of costs. And I am just wondering if we should look for the margins to stay around the current levels? And then, I believe there is a 5% cap on the amount of treasury stock that a Spanish Ccompany can own, and just how that impacts or does not impact the share buyback?

James, let me start with your 5% top treasury stock. You are absolutely right in saying that Spanish law prevents a company from acquiring more than 5% of its own stock. This is still in place.

Roughly, we have now 3% and we have committed to cancel the shares that we buy. This canceling of shares has to be submitted to the AGM if I am not mistaken. And in all likelihood, if we continue with the share buyback as we intend to, those will be cancelled. Okay? So that you are absolutely right in saying that no more than 5% should be held.

Good afternoon, James. It's Maria Alvarez speaking taking your second question, our EBITDA margin in Telesp. As we told you in the conference call the previous quarter, the drop in margin in the first quarter of this year was mainly due to the increase in the relative rating in total revenues of the new services -- namely, long-distance outside Sao Paulo on [SMD] that as you know, have higher interconnection costs associated.

As a result, there were some – a reduction in the Telesp margin year-on-year. Moreover, the growth in the mobile market also implies important increases in revenues in local telephony in the fixed mobile calls, which have lower EBITDA margin compared to the average margin of the Company as of last year.

But we also told you at that time that we will keep fighting for turning this strength, and we have been able to do so marginally in this second quarter and we keep fighting for it. And, in fact, the margin of Telesp in the second quarter has increased, has improved, roughly 0.6%. And as a result, we have now delivered a 44.6%.

We keep fighting for that. And, as you also know, that in terms of bad debt we have also been improving. As a result, we will [condition] to increase it marginally for the remaining part of the year.

Regarding to your question in relationship with fixed mobile traffic, we are experiencing that the fixed to mobile traffic market growth is declining little by little in the last month, as an impact of the mobile-to-mobile substitution. Because of that we have some decrease of this traffic. But, in any case, this smaller decrease that we have from the different kinds of traffic - in fact, is to date almost flat.

In addition to that, I can share with you that this price is one of those prices that may change in the future because of the impact on the price of the termination -- price in the--- in connection with the mobile networks. So we expect this-- that the price of the fixed mobile traffic will become a little more competitive.

Could I just return to the 5% cap on treasury stock, and if the shares can only be cancelled at the AGM, can they be cancelled at an EGM? Or do you wait for the AGM next year to cancel them?

You need an AGM to do so, whether it is the ordinary annual meeting or an extraordinary one, [indiscernible] but ultimately it is a shareholders' decision.

Thanks.

Next question, please.

Thank you. Our next question comes from Maria Rotondo. Please go ahead with your question and announce your company name.

Hello, Maria Rotondo at Santander. I have two question (sic). One is for Mr. Alvarez-Pallete -- is on Telesp. I just wanted to know if you could give us an idea of the calendar for the implementation of the additional 8% tariff increase at Telesp? And also, at Telesp there has been some noise as regards the monthly fee. I know you have introduced new offers for Telesp, but also is there anything going on with the monthly fee? Or you -- just the problems that you had in one of the cities in Brazil?

And the other question is for Telefonica de Espana. You spoke about accelerating ADSL, being more aggressive. Could you give us some kind of target for year end in terms of ADSL users? And also for IMAGENIO - so you have any kind of target or you can elaborate a little more on what this acceleration or this push on IMAGENIO means? And thank you.

Good afternoon, Maria. Taking your first question about Telesp's further tariff increase-- it is not closed yet. We have been proposing Anatel [indiscernible] in Greece before the end of the year. But it is has not been agreed so far. We have reasons to believe that it is going to be agreed very soon and we are confident that we will be able to implement those before year end.

And regarding your concern about the monthly fee, we have so far been winning every legal injunction that has been in that front. And as a result, we are very confident that the rules of the game are going to be respected in Brazil. Remember that it was also -- concerned some of the tariff increase this year and it has been respected. And as a result, as of today we have reasons to believe that those rules are going to be respected.

Thank you.

Maria, regarding to your question -- the relationship with ADSL. We still keep the guidance for the end of the year that is to reach around 2.4m ADSL lines at the end of the year. So, we are still hard in that figure.

And regarding IMAGENIO, the best that I can tell you is that today we have 1,200 customers in operation. And, as you see, we have initiated this commercial trial just a few months ago. And based on that, we have to review our plan in order to increase the coverage of the different cities in Spain. So it is a little early to tell you anything else.

Okay, thank you.

Next question, please.

Thank you. Our next question comes from Mark Cardwell. Please go ahead with your question and announce your company name.

Hi, it is Mark Cardwell of Bernstein, thanks. Two questions if I can. First of all, can you tell us in Spain what is going with your cable competitors and Unidos? And who else are you seeing? And what does the competitive environment look like in general for TDE? Secondly, can you give us an update on both yours and the regulators' regulatory priorities, both for Spain and LATAM, please?

Hello there. I can take the second part of your question concerning Latin America. Basically, what we have on the table right now is that the regulatory decree in Chile has been issued, and as a result we have [indiscernible] for the next 5 years.

In Brazil the tariff debate has been solved with this decision of the Supreme Court and we are pending on the implementations. And for next year in the new concessions contracts – that is still on discussion.

In Argentina we do not expect any news before year end. And the only pending issues are in Peru, where we have, as you know, we have been denied persistently extension of the contract for 5 years. And we have been required-- inquiring for our reconsideration of that. And on top of that, we have-- it has been issued by the regulator in Peru, price cuts of CPI minus 10%. That has also been required for reconsideration and we will be fighting on that front. So this is the -- mainly in big trends the regulatory agenda in Latin America.

Can you give us an idea of the impact in Peru if you do not get the change to those proceedings?

I do not have this here with me today but it is-- remember that we are just issuing of a CPI minus 6%. We have been able to maintain the revenue level. Remember, we have been decreasing ARPU in Peru in 16% year-on-year. We have been able to maintain the revenue level because we are so far finding positive elasticity to these trends. We have not been running the motor so far with CPI minus 10% because we will not give up in fighting for a more reasonable [capital].

Remember that CPI minus 10% is totally one of the highest in the world. But if that was to be the case, we will be fighting for serving our client with [third] products and try to make it as neutral as possible in revenues.

So regarding to your third question about cable competitors and Unidos. To date, we do not see any significant change in the competition and behavior of the cable competitor, cable operators, or Unidos or [Xanadu]. Perhaps cable operators are not growing today at the same speed as they do in the past. But, in any case, they are doing quite well in the market. Though, perhaps because of the coverage limitation they have, they do not have the same growth range.

Regarding the regulator question, for us today the main topic is the process that has been initiated in Spain around the discussion of the 12 relevant market analyses that the CMT has to do in accordance to the European Union framework. It was initiated a couple of weeks -- it will be finished at the end of this month. And then it will be an important reference for future decisions - pardon, it was at the end of August, at the end of July is almost there.

There is at the end of next month, at the end of August it is going to be finished -- the process. And then they will have the base in order to decide the different decisions that they should take, based on the dominance of the different operators in the different markets that they are analyzing.

And the second issue that is important for us, is the one related with the universal service. And at the end of this month, of the month of July in this case, we have to present to the regulator the cost of the universal service for 2003. And we expect that in this case they will have said to pay a part of that cost to us.

On the first one, on the framework, can you give us a sense of whether you expect any of the wholesale structures or prices to change as an outcome from that?

I think it is too early now.

Thank you.

Thank you. Next question, please.

Thank you. Our next question comes from Anthony [Shern]. Please go ahead with your question and announce your company name.

Hi, it is Anthony Shern here from Bear Stearns. Just two questions really. In terms of the BellSouth agreement -- and they are still (technical difficulty) some minorities within each of those companies, or certain of the companies. Is it possible to give us an update in terms of which of those companies, also which of those countries, are you seeing either -- the minorities accept your buyout offer? Or are they countries where the minorities are dragging their feet?

And then a second question just relating to the early retirement or redundancy program. You said you had 2,362 applicants for the year so far. Is that essentially it for 2004? Could we actually expect some more applicants or employees taking up that plan for the remainder of the year?

Anthony, unfortunately we cannot make any comment on the situation on the BellSouth minorities. We will certainly will give you full disclosure when the [indiscernible] gets completed and closed.

The application bursar was closed at the end of March for the whole year. So at the end of March we knew already all the applicants. And later on in June the [indiscernible] decided to accept all of them. But it is not possible to increase it in this year because the bursar was closed at the end of March.

Okay, thank you very much.

Thank you. We have time for the last question, please.

Thank you. Our last question comes from Andrew [Hogley]. Please go ahead with your question and announce your company name.

Good afternoon, Andrew Hogley from Lehman Brothers. A couple of quick questions. First of all, following up on the competitive environment on Broadband in Spain. Could you give us the market shares on the DSL wholesale product of your most significant competitors? So, Xanadu and Auna on the wholesale DSL.

And also, could you give us a quick update? Have you increased your stake in Portugal Telecom at all since the last update at your last set of results? Thank you.

Regarding your first question, we estimate the end of-- the market share in Broadband a little less than 58% - Telefonica Group in Broadband; a little more than 15% our competitors based on ADSL;. a little less than 26% cable operators. A total number of Broadband lines in our own estimate at the end of June was around 2.755m.

Andy, on before, on the PT question, with our reporting results as of the end of June, we said we will keep you updated as to the stake. Remember we could get up to 10%. This is our commitment and this the legal ability, although it may take some time for us to increase from the numbers already reported.

Thank you very much.

Ladies and gentlemen, thanks a lot. Thank you all for being here. Thank you to Maria for having made this strong effort to be with us today. He has been most helpful and, for those of you who have planned to take a few days out this summer, enjoy. And thanks again for attending.

Ladies and gentlemen, this concludes today's conference. You may now disconnect your lines. Thank you.