Telefonica SA (TEF) 2004 Q3 法說會逐字稿

Good afternoon ladies and gentlemen. And welcome to the Telefonica third quarter 2004 results. [OPERATOR INSTRUCTIONS]. I would now like to hand over to the chairperson Ezequiel Nieto. Please begin your meeting and I will be standing by.

Good afternoon ladies and gentlemen. Welcome to Telefonica’s conference call to discuss 2004 third quarter 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 risks 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 disclaimer included in the first page of this presentation, which you will find on our website. We encourage you to review our publicly-available disclosure document filed with Securities Market 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 our Chief Financial Officer, Mr Santiago Fernandez Valbuena, who will lead this conference call.

Thank you Ezequiel and good afternoon ladies and gentlemen. Thank you all for attending to the Telefonica’s full year’s 2004 to report our results conference call. Today, here with me are the Executive Chairman of Telefonica Espana, Julio Linares Lopes and Telefonica Latin America Jose Maria Alvarez-Pallete.

In 2004 the management of our operations is putting the emphasis on building a truly commercially-orientated company, while at the same time progressing an efficiency to a reach the triple financial target - top line growth, profitability and cash generation. We believe that our active approach to markets is the key to push top line up as it enhances our market position set in the bases to fully exploit existing world opportunities. And in particular, to combining mobile in Latin America and Broadband, as well as better withstand the pressures of competition.

If we start with [already] in performance in January to September, Group sales have grown by 5.2% year on year to top €21.9b, a growth rate that would reach 8.5% once the impact of Forex and changes in consolidation were excluded. It is worth noting that all major subsidiaries are positively contributing to total revenue growth on the 9 months.

In terms of cost, the Company’s intense commercial activity, driving both handset purchases and commercial expenses up, coupled with higher inter-connection fees, particularly in Telesp Brazil, are - have happened the 4.9% increase in operating costs.

To reach the profitability, the first 9 months EBITDA reached close to €9.8b, growing at a 5.5% rate year on year or 7.1% in constant currency terms. EBITDA margin improved by 0.2 percentage points compared to its June 2004 level having at the end of September at 44.7%.

And finally from a cash generation stand point, the January to September operating cash flow stood at €7.4b, which is equivalent to a 6.6% annual increase. In terms of free cash flow, Telefonica has generated more than €4.4b in the first 9 months of 2004, which is roughly equivalent to 20% of the Company’s sales.

Moving straight to slide number 4, where the Company’s active management of non-operating results has allowed it to post solid top line growth to fully flow to net income. Excluding the impact of the 2003 to 2007 pre-retirement program on extraordinaries of €400m net of taxes, net profit would have topped €2.5b, 25% above the January to September 2003 figure, supporting the strong underlying growth of our Group companies. Reported net income for the first 9 months has just exceeded €2.1b up 5% from last year’s figure.

If you could turn to slide number 5 for the review of the contribution to growth by business lines, you can see that Telefonica has built a balanced portfolio of assets, all of which are contributing positively to the growth of the Group’s main financial networks.

Our 3 key businesses -- Telefonica de Espana, Telefonica Latinoamerica and the cellular businesses -- are developing top line solidly transferring revenue growth across the P&L in different scales on the basis of their specific context of operations.

At this stage, it is worth noting-- I’m sorry, it is worth to briefly refresh the true weight of our businesses on consolidated EBITDA. At the end of September Wireline operations were representing more than 60% of Telefonica Group’s EBITDA, with Telefonica de Espana outstanding at 38% at [remedial] asset in terms of EBITDA weight.

In terms of contribution to growth, Wireline subsidiaries are increasing their weight of the Group’s growth from top to bottom representing from one-third of revenue growth to two-thirds of EBIT growth, while at the same time Telefonica Moviles reduces its weight over total growth from 85%, in terms of revenues to roughly over 12% at the EBIT level. Telefonica de Espana is benefiting from cost cutting initiatives and capital rationalization, which is leading to annual half percent annual decline in depreciation and amortization expenses.

On the contrary, a strong client growth in Latin America, start-up losses in Mexico and a consistent CapEx effort which drove a 2% increase in amortization year on year, and the factors putting pressure on Telefonica Moviles’ contribution to EBITDA and EBIT growth.

On slide number 6, we present income for both foreign exchanges and changes in consolidation in the Group’s financials. The general loss of euro value of Latin American currencies in the past 12 months has left Forex to drain 2.3 percentage points to January to September revenues.

The negative impact that is being reduced by 35% to just 1.5 percentage points at the EBITDA level. Downside EBITDA losses in Mexico, driven by a weakening peso, are also a major factor behind the lower impact of FX at the EBITDA level.

The impact of changes in consolidation Group revenues stood at -1 percentage points following the deconsolidation of Antenna 3 in July 2003, which is not being compensated by the incorporation of [TCO] in May of 2003. This impact is basically reduced to zero at the EBITDA level due to differences in margins of both operations.

On slide number 7, we present our organic growth profile, once we excluded the FX and the changes in consolidation effect. Constant currency growth has been showing signs of decelerations since the beginning of this year, fully reflecting the slowing down of the cellular business performance both in revenues and EBITDA terms. The Company’s ongoing efforts to capture and retain their clients across geographies is pressuring both methods, as loyalty programs, traffic promotions and commission expenses are all on the rise.

On the other side, Wireline divisions are showing highly remarkable performances in demanding context of operations, keeping organic growth fully aligned with year-end targets. On top of Telefonica Latinoamerica, which has kept 9 months revenues and EBITDA consistently at solid levels, Telefonica de Espana has been outperforming on a quarterly basis.

Moving to slide number 8, we present an outline of our Group CapEx and cash flow. Total CapEx reached €2.4b in the first 9 months, 2.2% above last year’s figure and has budgeted the progressive roll out of UMTS in Spain, and the additional investments made by our -- by our major Latin America Mobile operations to adapt our network coverage and capacity to the booming subscriber basis, have led to a 46% annual growth Mobile CapEx, as [indiscernible] investments get accrued.

CapEx rise in Mobile, coupled with a minor 5% increase in Telefonica Latinoamerica’s investment, fully linked to Argentina, where a higher CapEx is connected to stronger demand, [partly] the effect of offsetting CapEx decline at Telefonica de Espana. In the January to September period CapEx efforts devoted to Broadband, industrial reaching mobile networks represented close to 44% of Group CapEx spending, up 11 percentage points from 2003 figure.

As a result of CapEx and EBITDA performances, operating cash flow grew at the 6.6% rate year-on-year to close September almost at €7.4b. It is worth mentioning that Telefonica de Espana’s operating cash flow is growing above 16% for the second consecutive quarter, with Telefonica Moviles cash generation being penalized by CapEx spending.

Now to study the [outfit] by business segment, I would like to Julio Linares, who will give you our domestic Wireline performance, and Jose Marie Alvarez will follow this later on to run you through Telefonica Latin key developments.

Thank you, Santiago, and good afternoon. The ongoing transformation of Telefonica de Espana for the third [Olympic] company to customer oriented organization to face successfully a challenging context of operations which lays at the centre of our strategy, continues to drive the financial metrics up.

Starting in slide number 9 for a review of top line performance, consolidated Group revenues exceeded the €8b mark at the end of September, representing a 2.3% annual growth rate compared to January to September 2003 figure. It is worth mentioning the recent expansion of revenues on a quarterly basis, with Telefonica de Espana foreign company revenue growth jumping from 0.7% rate in the first quarter to a 2.5% rate in the last reported quarter.

At a Group level top line growth is standing at the higher end of 2004 guidance for the first 2 quarters. In a context of operations where new pressure to the original revenue streams are being progressively added, our determination to develop a program of opportunity at a faster pace than some of our peers has been key to retain this strong top line results, well ahead of sector standards.

As such, Internet and mobile fully compensated voice revenue contraction for the first time in the second quarter, exceeding voice shortfall by almost €15m, a figure that has widened to just above €45m in the third quarter alone.

For the first 9 months of the year Internet and Broadband has become the main factor behind the 1.7% annual growth rate of Telefonica de Espana parent, having added 2.6 percentage points to Group sales growth, well ahead of the 2.1 percentage points negative contribution of traditional voice revenues.

Next turn to slide number 10 for the analysis of Telefonica de Espana’s progress on efficiency. The 10% cut in personnel expenses resulting from the seclusion of the Company’s workforce reduction program remains the key driver for the 0.7% annual decline of Group’s operating expenses. The program, coupled with a 2.3% drop in the [decoration] expenses, is pushing operating cost of Telefonica de Espana parent down by 21%.

Lower personnel expenses are offsetting the 12% and 2.4% increases in both External Services and Supplies respectively. Higher External Services are a consequence of intense commercial campaigns targeted to both improve competitive positioning on the traditional business and lead the development of global on the mass market scale. Familiar factors behind the race in Group Supplies are superior cost linked through handset sales at [Grico] and the purchase of PCs to supply the ADSL machine offering.

I would like to highlight that publishing on the seclusion of the pre-retirement program is giving us the necessary flexibility to balance the proactive commercial strategy with profitability. Thus 9 months EBITDA topped the €3.7b mark, equivalent to a 6.6% annual growth rate, a figure that has been constantly increasing during the year for the initial -- from the initial 4.2% growth rate posted in the third quarter. January to September EBITDA margin is [too] up 45.9%, 1.8 percentage points above last year level.

For an overview of the main operating metrics driven Telefonica de Espana’s traditional services performance, please turn to slide number 11. Quarterly access market share loss has been decelerating in 2004, moving from an average 0.6 percentage points in 2003 to just 0.3 percentage points in the first quarter this year. The Company lost close to 170,000 lines in the January to September period, 40% down from the 2003 figure. The launch of selective free connection fee promotions is proving to be a successful marketing tool to fight in the access market. The latest of these promotions was active during the fourth week of September and yielded 110,000 gross additions.

With regard to ULL, close to 29,000 unbundled lines have been connected from July to September, 17,000 of which were fully unbundled. In addition to the selected lines, there has been a slightly cut again in third quarter leading the win-back close to 75,000 clients since March.

In terms of traffic, the market continues to reap contacting -- contracting by close to 5 percentage points in the first 9 months. However, the positive impact of both loyalty schemes, mainly through voice packages and the recovery of the selective customers is limiting voice market share loss in 2004 to just 1.3 percentage points.

Before turning to ADSL, I would like to highlight the positive in traditional revenues. Close rate of the plan has been reduced from the -4.7% posted in the first quarter to just above -3%.

For the revenue of main ADSL metrics, please turn to slide number 12. In terms of operating performance, Telefonica de Espana ended September with more than 2.1m connections, up 30% from December 2003 figure. [We have] received of competitors for wholesale to ULL is behind the 10% annual decline in the first quarter net additions. Nevertheless, it is worth mentioning the strength of Telefonica de Espana’s retail base. That grew by 44% year on year exceeded -- exceed 1.4m subscribers at the end of September.

The Company’s very active approach to the market that ranges from doubling connection speeds to launching commercial initiatives and are removing barriers to entry, such as ADSL machine, but there is a modular offering is leading Telefonica Group to maintain its market share of their Broadband levels just above 58%. In addition, the Company keeps pushing to expand the take up of Broadband value-added services ending the quarter with more than 850,000 services operative.

As [every sole] value added services represented close to 9% of the 9 months retail ARPU, which posted an 8% annual increase to the end -- to end above €50. In terms of financial performance, Broadband revenues increased by 55% year-on-year to top €757m. EBITDA was just above €270m, retaining EBITDA margin at 34%.

It is now my pleasure to turn over Jose Maria for the analysis of Telefonica Latin America’s results.

Thank you Julio, and good afternoon. On an annual basis Telefonica Latinoamerica pushed revenues and EBITDA up by 8% and 7% respectively in constant currency terms, in line with 2004 guidance. Whilst adding capital expenditure, which are growing at 8% rate local currency in comparison with the drop registered in the past 2 quarters, and [budget] CapEx is spent.

Organic operating cash flow growth stood at 7% competitively converging towards year end guidance. It is worth noticing the 20.7% increase in EBIT for the first 9 months of the year in constant currency terms, and the continuing investment efforts of the past few years are fully flowing into the P&L, leading to a 2% drop in amortizations.

In euro terms, consolidated revenues and EBITDA increased by 2.5% and 1.8% respectively, affected by the general depreciation of major Latin American currencies against the euro. In the beginning of the year, the Company has been deepening its efforts to improve efficiency levels keeping the right balance between capturing growth opportunities, particularly in Broadband, and retaining profitability and solid cash flow generation. These efforts are clearly paying as [at an underlying] number 14%.

Total operation expenses growth rate have been progressively contained moving a 13.3% annual increase in the first quarter this year to just below 8% on the 9 months in constant currency terms. As such, operating costs are growing at a slower pace than revenues for the January to September period in local currency, breaking decline of the first 2 quarters.

The stronghold on cost is leading to a sequential improvement of Telefonica Latinoamerica’s EBITDA margins in 2004, closing the 9 months ending September at 45.4%, a similar level than last year by 1 percentage point above first quarter figure.

While TASA is maintaining its EBITDA margin as stable, margins keep improving quarter-over-quarter for the rest of the subsidiaries. I would like to highlight the performance of Telesp and CTC. The CTC are surpassing in the 47% mark in the third quarter, 3 and 2.25 percentage points ahead of first half levels respectively.

Turning to cash generation. Operating cash flow calculated, as EBITDA minus CapEx, almost reached €1.9b, 10% above last year’s figure in constant currency terms. In addition to Telesp, whose operating cash increased by 11% in local currency, it is worth mentioning that the rest of the subsidiaries have been generating similar levels of operating cash flow as in 2003, with the exception of TASA.

In Argentina capital expenditures exceeded by close to 4 times last year’s investment as an natural response to our growing demand.

Please turn to slide number 15 for the review of Telesp, which stands as a major contributor to Wireline performance in the region. Telesp’s operating [certainty] has been twofold this year, first capitalizing traditional lines and services, a target that has been reached in the last quarter. The launch of new pricing schemes tailored to lower income layers of population is meaning to us 138,000 ISDN lines in the third quarter, a figure that compares very favorably with the 76,000 net losses [written] in the first 6 months of 2004.

Second, actively spending commercial campaigns to lead the development of growth opportunities, namely Long Distance and Broadband. In the Long Distance market, the new promotions are in the 7 percentage point in DLD and IOD market shares in the 12 months. But it is only in the expansion of Broadband services where the Company consistently excelling, pushing the ADSL subscriber base to 300,000 clients at the end of September, 59% above 2003 figure.

Telesp’s quarterly net adds are constantly out-performing historic record heighs this year. With more than 230,000 new connection being added in the January to September figures, 1.5 times ahead of our 2003 full year net additions. We have a combination of solid operating metrics and tariff return has driven traditional revenues up by 50% in local currency. A strong ADSL pick up is pushing Internet and Broadband revenues to grow by 37% year on year.

At the consolidated level, Telesp local currency sales grew by 16%, a rate that diminished to 10% in euro terms.

Let’s now review Wireline operation as [delined] slide number 16. As in [both] quarters TASA is taking the most out of the recovery of the traditional fixed telephone market, which leverages on the sustained macro [indiscernible] upturn the country is experiencing. As such, traditional lines in service were growing for the third quarter in a row, with net adds ending the first 9 months with a positive [447,000 lines]. The share compares to the 15,500 lines that were lost in the same period last year.

Including [indiscernible] usage the profit per line per day lowered at an 8.5% rate year on year. Besides managing traditional service, recovery TASA continued to boost ASDL benefaction. The Company added growth to 80,000 new connections in the January to September period, more than doubling 2003 full year figure, and improving its market share in the southern region by 13 percentage points to almost reach 79%.

This [strong] operating performance is setting the basis for a strong top line growth. Referral is up by 9% in local currency thanks to a 7.5% increase and a 42% increase in traditional and Internet and Broadband revenues respectively.

Constant currency growth rate is being flattered in euro terms due to the 8.5% depreciation of the average Peso euro exchange rate in the last 12 months.

And now I hand over to Santiago to complete the presentation with a view of major financial development.

Thank you Jose Maria. Before turning to the specific ideologies of our major financial aspects, the interest date and cash flow management I would like to briefly walk you through the 2004 update on guidance.

We are updating 2004 financial projections based on the revision of estimates communicated by Telefonica Moviles Group on Wednesday, the original of which and the scale of which have been fully explained by them, within the Company’s conference call. For that reason it is alright to abbreviate my speech. I will not revisit the logic and our argument. I will just move on to slide number 18 for a summary of our new forecast.

In any case we will be, of course, open to answer any questions you may have on this subject during the Q&A session.

On top of Telefonica Moviles’ new estimates, we would like to reiterate all published financial projections for year 2004 corresponding to Telefonica de Espana Group and Telefonica Latinoamerica Group. At the consolidated level, we reaffirm existing growth rates in terms of revenues, EBIT and CapEx and expect to close 2004 with EBITDA increasing between 5% and 7% up, and operating cash flow rising between 7% and 11%.

I would to remind you that all targets that we set are expressed in constant currency terms that is assuming exchange rate at -- of the end of 2003 and excluding changes in consolidation.

Could you now please turn to slide number 19, we’d like to make a few comments on the interest expense management. Our net financial expenses have dropped close to 32% or €400m. The €2.4b debt reduction that accrued 7.6% only in 2003 explains around €185m of the reduction in financial expenses. The remainder being explained by the cut in the average cost of debt, mainly as a consequence of mobile interest rates in Brazil, down almost 900 basis points. And a modestly lower debt post in Europe, 24 basis points down.

The decrease in interest payment is similar to the [core] figure and explains 10 percentage points growth in the net free cash flow after CapEx number. The average -- I’m sorry regarding the currency composition of our debt, I would like to highlight that the percentages denominated in Latin American currencies and US dollars have not significantly changed versus the previous quarter, and stand at around 20% and 7% respectively.

We are also the owners of US dollar put options that would increase the effective percentage of US dollar denominated debt to around 9% of the total were they to be executed -- I’m sorry exercised. The amount of debt in foreign currencies has grown in October as a significant part of the US$4.3b already paid for part of the properties of Bell South in Latin America have been funded in or phased into US dollar in Latin American currencies.

On slide number 20 we present the information on our cash flow. [Up to line 1] between the figures that you see are -- have been taken from the financial information recorded in our additional explanation. Interest paid differs slightly from accrued €89m to €817m only in that coupons have been paid in third quarter, but are they accrued giving full [indiscernible] through out the year.

The cash tax payment at the consolidated Group level represents only 4.5% of earnings before taxes and about 15.4% of the reported taxes. Working capital, which is a caption which we are monitoring and minuting much more closely, is up to the tune of €960m year to date, but frankly down in the third quarter. Year to date CapEx related working capital increases have been close to €300m and the remainder is related to OPEX.

Live business lines Telefonica de Espana explains roughly €300m of the increase in working capital. Telefonica Moviles is slightly over €400m and Telefonica Latin close to €200m. Both the payments in the collection periods are being reduced by the higher sales volume in almost all our operations is roughly offsetting the positive effect of the quicker collection.

All in all, net free cash flow up to CapEx is up by 15% in the first 9 months. The cancellation of commitment is proceeding as expected, but the dividends to minorities have recorded a 1-off exceptional use of 646 -- I’m sorry €643.6m [that’s what] we sold of the CTC and Turbo extra distributions done this year.

That leaves so far over €4.4b to be applied to debt reduction, €1.35b. Shareholder remuneration over €1b and the share buy-back to the tune of €1.6b.

Finally on slide 21, we give you the now useful report on the progress of our share buy-back. So, for October 4, 2004 Telefonica reported the detailed 183.4m shares in treasury stock, to which 3m co-options expiring sometime in the first quarter of 2005 should be added. These represent roughly 3.8% of the share capital and would also mean a 55.3% completion rate of the €4b committed last year, where only 31% jump has elapsed.

This we think is a clear evidence of our capacity to execute our commitment to make it an attractive shareholder remuneration package and [for why the size] of the management confidence in the cash flow generation visibility of the Group. If you were to add to the 2004 dividends, the second payment of which has been done this very morning, if you were to add to that the buy-backs completed so far this year return on cash yield would be exceeding 5.9%, which we would think is a very attractive level which is attractive level is [achievable].

To sum up, we are first -- we are keeping solid organic top line growth by leverage on the more intense commercial approach. The targets are still the market positioning. Second, our Wireline divisions continue to show strong resilience to very challenging operating environment and contributing to organic growth well within guidance. Third, we are actively tackling the competitive pressures in the Spanish mobile market and addressing the growth potential of our Latin American operations at the expense of short term profitability.

And finally, we are keeping healthy consolidated margins by sustaining efficiency initiatives across the Group that offset are in increasing commercial efforts.

Thank you all very much and now we are ready to take your questions.

Thank you sir. [OPERATOR INSTRUCTIONS]. The first question comes from David Wright. Please go ahead with your question sir and announce your company name and location.

Yes, hello it’s David Wright here from J P Morgan in London. Just a couple of questions, we’ve obviously seen the sale of the Pearson and Infonet stakes, and you’ve also clearly defined Endemol as non-core within your current asset portfolio. Now given these proceeds are not within your 3 year plan you’ve defined for cash flows, is it possible that these might be returned to shareholders possibly as a bolt on to your buy-back?

And then secondly, just on the fixed line business I was a little surprised flat ULL net adds quarter on quarter, although I did note shared adds -- shared adds stepping up a little. Can you give us a progress report so far into Q4 on both those run rates?

And just finally, given the 6.6% EBITDA growth at the 9 month period in your fixed business, is it fair to assume you do now intend to exceed the 2% to 5% guidance? Because I think you only need to hit around 0.5% growth in Q4 to actually hit the top end of that guidance.

Thanks.

Okay David and the answer to the first question on the proceeds that we’ve sold. You’re absolutely right that we have disposed and I think we’ve reported fully on that. The present stake in Infonet although this, I’m not quite sure if that has actually closed before the end of the quarter, but nevertheless we’ve been -- we’ve published that sufficiently.

So, that’s -- it’s true that those proceeds have been generated. It’s also true that we did not have in the budget a couple of investments we’ve done this year like increasing our stake in Portugal Telecom of which we reported last year.

So, net the effect is -- it doesn’t really negligible.

Your question with unbundled lines, the figure at the end of September, the total number of unbundled lines was a little more than 72,000. From those a little more than 67,000 were full unbundled. And a little more than 14,000 were line save.

I may provide you better information regarding our close of October. And at the end of October the total loop unbundled were 85,000. 64,500 were fully unbundled and 20,500 line saving.

Regarding our EBITDA guidance we are not going to modify such a guidelines, though we believe we are going to be in the upper part of the guidance that we provided in -- in the meeting in Madrid.

Okay, thanks very much.

The following question comes from Maria Rotondo from Santander in Madrid. Please go ahead with your question.

Hello, Maria Rotondo from Santander. I have 1 question for Telefonica de Espana and 1 for the Group.

So, on Telefonica de Espana I would like to know if you could tell us a little bit more about [Informenio]. You were mentioning on the Company release that you were -- have reinforced the content. So, I would like to know what is that from a logical point of view? I mean how many lines in Spain are prepared for [Informenio]? How many clients may be you have right now? And what are your -- what do you expect for next year maybe?

And secondly is a question Telefonica de Espana will be as regards the monthly fee increase. If you can give us some guidance as regards when can we expect that and how much is the increase?

And for the Group as a -- for the Group the question I have is on CapEx. If you think the 2.2% increase we have in the first 9 month can be extrapolated for the rest of -- for the -- for year end.

And that’s all thank you very much.

Yes, Maria if you allow me to start in answering from the last question, we would like to keep the constant currency CapEx guidance that we gave.

Okay.

Does this answer your question madam?

Mostly yes on the CapEx yes. I’m waiting for information on [Informeni].

Maria, can you hear me? To your first question in [Informenio] today we have more than 400,000 clients. We are improving our coverage in the areas where we are present so that we will be able in the future to have a more intensive campaigns, commercial campaigns. We have improved very recently the quantum of [Inonyengen] adding 3 new channels to our offer.

So, today we are giving to our customers 25 [BB] channels. And we believe that this technology, the DSL technology is proving to be a very good solution to support technically offer. So, we are very confident of these kind of services based on DSL technology.

Regarding to your second question, the monthly fee increase, today the Ministry is analyzing the price cut for next year. And as you know, we do not have any information yet. We believe that the Ministry will decide on the price cut for next year next month or the following month. What I mean before the end of the year.

Thank you next question please.

The following question comes from James Scollop from Golman Sachs in London. Please go ahead with your question.

Hello, could I ask a couple of questions? 1 is just, I believe the €10 prepaid DSL package you were hoping to launch was rejected by the Regulator, just what progress you’re making on getting an alternative.

On slide 9 you showed what is very impressive progress in terms of having the Broadband revenues exceeding the -- the growth in Broadband exceeding the contraction in fixed. I’m just wondering if you think that it will continue to be positive on say a 5 year view, or do you think the eventual slowdown of the growth in Broadband will mean that in the more medium term we go back to a negative number there?

And then I couldn’t help but notice that on slide 21 relative to the buy-back you seem to have inserted a new qualifier of minimum for the €4b buy-back. And I just wondered if you could expand at all on what you mean by minimum now.

James, [it’s Santiago], we -- I’m not sure we have introduced the word minimum on the slide but essentially it is not anything new. It was the exact word uttered by our Chairman when he announced that in October 2003. It’s always been considered like that and to some extent that dividend has always been kept as a minimum number, okay for 3 years.

So, nothing has changed on that front.

Okay, I thought the dividend was minimum but didn’t think the buy-back had been minimum.

Yes.

Okay, fair enough.

Regarding to your 2 questions on Telefonica de Espana. [Simiti] rejected our proposal to deliver an ADSL of €9.9, as you said . But they approve different proposals of €21.9, which are the ones that we have learnt very recently and that we are [promising] today, in addition to the other services that we had already in the market.

In addition to that, we have promotions today in the market that make more attractive those services for our customers and we will continue [researching] new services in the market in order to improve the market growth for the global market in Spain.

I can tell you that October has been a very good month in mobile in Spain. And we finish October with 2,266,000 ADSL lines in operation. If you take into account that in addition to that it may happen that behind each unbundled local loop there is an additional ADSL. So, at the end of October we estimate that in Spain may be a market bigger than 2,350,000 ADSL lines. So, it means that October has been a very good month for the total market and for Telefonica de Espana too.

Regarding your second question, of course we are going to continue working very hard in the Broadband business so that we will be able to compensate the decrease in the traditional business. We believe that we could do it because of the increase -- the increase in penetration of Broadband in the market. And also because the increase of the penetration of the value added services that we are selling together with ADSL connectivity.

Thank you. Next question please.

The following question comes from Brian Rusling from Casanove in London. Please go ahead with your question sir.

Yes, gentlemen just some further questions on the ADSL market in Spain. In your slide number 12 you point to TE actually gaining 62% of the total Broadband net adds. I’m just wondering how you derive that because if you use the unbundled in your DSL lines it looks you achieved 73%. And that suggests that the cable modem that’s been added weren’t actually very many in the Q3 period. Are you including cable modems in that number? That’s the first question.

And then really second question for Santiago, in terms of returns in recent investor conferences you’ve been talking about the possibility of proposing to the Board an expansion of returns. I was wondering if you could update us on what the timing of those proposals might be and when we might hear about those.

Yes Brian we start with the second. It’s true that we announced about when and how those decision were taken [for saluted] to the need for the Board of Directors to make that kind of decision. Nothing has changed on that front and we have no news to report.

Regarding the DSL question, 58.1% figure of market share includes Telefonica de Espana Anterra, so, a note [for that]. They include the whole Telefonica Group. And is it a relationship with the Group -- the whole global market. We mean it’s the DSL and cable modem both

Okay, next question please.

The next question comes from Anthony Shaw from Bear Stearns in London. Please go ahead with your question sir.

Yes, just 2 questions here. I was wondering would it be possible to give guidance for Telesp DSL net adds?

And then secondly, in terms of -- in your Telefonicade Espana revenue break up the lines corporate networks and solutions appear to have actually declined slightly this quarter. I was just wondering in terms of the profile of those revenues. Are there a number of 1-off project revenue items in there that we should now expect to either increase or fall off? I’m just trying to really get the profile of those revenues.

And then the third question. Do you think you’ll have to restate Telefonica de Espana EBITDA with IRFS? What I mean by this is that you’ve been treating work force reduction provisions as extraordinary expenses. I understand under IFRS those aren’t actually genuine extraordinary expenses and should perhaps actually be recorded above the line.

That’s it.

I’ll take the first question and also Telesp target of year end ADSL. The figure as we have it internally is 825,000 ASDL lines by year end.

Regarding your question in relationship with the data and solutions revenue growth. There to -- to define those efforts that impact that growth. First of all, there is an extraordinary adjustment because of the changes in the parameter. And it is also it is necessary to take into account that the revenues related with solutions are not as stable as the other revenues in this item.

But in addition to that, could we consider extraordinary, there is emigration towards more cheaper IP BPN solutions. And we have to recognize that there is movement from the traditional [for relate] next 25 accesses to the new [denomination] is based on IP BPN.

In relationship with your second question, of course in the future we have to include extraordinary expenses before EBITDA.

Yes, I’d like to that actually that it is absolutely true what you have said, but that the basis for comparison will also have to change. Meaning that while it is true that the possible net charges to the accounts will those be put the EBITDA level so will have to happen with the past which we are going to compare ourselves.

Yes, I presume that’ll be beneficial because your historic provisions are this year higher than your provisions going forward. Will that -- that won’t -- I mean you won’t have to change your guidance for EBITDA growth on -- because of that?

Those are the number of things and only that will change when the IFRS accounting rules come into force. But you know, we will I hope be able to provide as much detailed information in terms that you will draw your own conclusions.

Thank you very much.

Thank you next question please.

The following question comes from Luis Prota from Morgan Stanley in Madrid. Please go ahead with your question sir.

Yes hello. I would like to get an update on carrier per selection following your comment in the press release that we could see a potential in acceleration in the fourth quarter.

And also you have received a stronger competitive pressure in DSL following the offer from [Oanaduan] [unit offer] of their 36 viewers per month.

Thank you.

Regarding your question related with the selection. We said that it may happen that in the fourth quarter there may be -- we may see again a positive selection because they recently have started the new brochure which is the [Broadband] concept. And because of that, we have seen already that in October the [pessimentive] lines are positive on our -- on our own 30,000.

Of course, we can benefit ourselves for this procedure and we have also initiated the win back based on level consent. But, we have to recognize that we have to wait 4 months since the customers have been selected by our competitors. That’s the reason why we have said that it may happen that in this fourth quarter we may see again some positive in the selection.

Regarding the ADSL market, first of all we have to recognize that during the months of June, July and August our competitors were not active at all. We have seen that in October, at the end of September and in October they are more active in the market. And this is 1 of the reasons why the market has grown up, as I told you before, in the month of October.

What I can tell you is that most of the customers that our competitors are taking are new customers. And they are taking very few of them from us. So, we are not really seeing a significant increase in the churn rate because of that.

In addition to that, I think that it is very important that you take into account that our competitors in October made higher dues of wholesale global offer than the URL. So, because of that we are going to have a significant growth in October in our wholesale service.

And we expect in the Christmas time a really active campaign for all of the agents in the market including ourselves. And we will be very active with new promotions with the recent -- the recent ADSL services that will answer in the market.

Okay, thank you.

Thank you, next question please.

The following question comes from Guy Peddy from Deutsche Bank in London. Please go ahead with your question sir.

Yes, good afternoon gentleman. I’ve just a few questions, firstly to Jose Maria. I was just wondering if you could talk about what’s going on in Brazilian fixed line market. You continue to have very strong revenue growth. I know it’s helped by the tariff increases, but I ‘m just wondering if you could talk about the trends in that business, because you’ve also had the first quarter where access lines have actually increased for a while.

Secondly on Telefonica de Espana, I know your value added services have increased within your DSL ARPU, but I was just wondering if you could talk a bit more about what’s happening within your DSL ARPU, and in particular what the mix effect and how many customers are moving up the DSL speed pricing mechanism.

And then finally, I wonder whether Santiago almost a question for all here, could please elaborate on how much gross cash you expect to return from Latin America back to Spain in 2004.

Thank you.

I will take the first question, a brief the market in San Paolo for -- of lines that’s probably in terms of revenues. It is true that we have been positively affected the target increase this year. But it is also true that we are accelerating very much on a commercial front on 2 sides.

First, and as you have been noticing, we have very hardly -- as we have been aggressive on the ADSL roll out we are quarter on quarter and month on month picking the [nega] here with a very sound and reasoned commercial campaign behind and controlling ARPU and controlling churn. So, the first part of the year we saw good growth is -- is ADSL.

And secondly and that’s new on this last quarter. For the first time we have been including the numbers for the pack of lines for basic telephone lines. And that’s because we have been launching a new product that is devoted lower income layers of populations in which we have been prudent on the approach and has led to present annualization and we have been successful. In fact we have been having net adds about for 300,000 in the last quarter. But we grow that thing -- that’s above that figure.

So, you have basically 3 effects. First, separating [these], second in the ADSL effort that we are rolling out in the year very intense, and third it is a brand new effort of the last quarter which is these basic telephone lines based prepaid and economy line.

Right, regarding your second in relationship ADSL ARPU. At the end of September 39% of our retail ADSL line has contracted at least 1 value added service on top of ADSL. The value added services that have highest success in the market are those related with maintenance packages that we have in the market. And we have already sold 230,000 units of these maintenance packages.

In addition to this 1, also is working very well the security packages we have in the market, and we have already sold and the operation more than 180,000. Then also working is very well the package we have for small and medium enterprises, where we have in that specific segment more than 155,000 packages.

And in addition to that, we have a package for the residential market that we call [Mundarecere]. And we have in operation 140,000 units. The mix of [speed] is plenty stable, today even taking into account the great speed that we have already done. You have to take into account that 88% of our ADSL retail lines are what we call today basic lines. It means that they have a speed of 512 kilobit per second.

Well Guy on the cash flow [situation], the rough number that we expect to complete by the end of 2004 and certainly beyond what we have already reported. Certainly close to $1.5b.

Thank you very much gentlemen.

Thank you next question please.

The following question comes from Robert Mocatta from Citigroup in London. Please go ahead with your question.

Yes, good afternoon gentleman. I’ve got 2 questions. 1 on slide 20 and slide 21, first on slide 20. Can you give us a bit of help with the prognosis for fourth quarter at 2005 for several of those cash flow items, particularly items like the income tax payment, the working capital change and the commitment for the early retirement?

And on slide 21, can you talk through how you’re determining at the pace of which the buy-back will continue? Why are you sometimes going sometimes growing slightly quicker, sometimes growing slightly slower? What’s your thought process as the way the buy-back moves forward?

Okay Robert. Yes it’s of course very difficult to predict how much of income taxes are actually going to go out in the way of cash. This can depend on where the tax -- I’m sorry the dividends or the income taxes are coming from. You know that everything in Spain of which we own 75% or higher is within the Spanish tax consolidation group, which basically means that we can offset losses on 1 company with gains in another and therefore pay no cash taxes out.

The numbers that you have seen and that we have reported on the slides you mentioned, have everything to do with the companies of which we do not either own 75%, like TPI that pays a hefty dividend, or are located in different jurisdictions like most notably Brazil, or in the [cash that we share out] to some extent Chile.

I wish I could give you a rule of thumb to predict that. But it is -- it is simply not possible. The cash rule of thumb that some analysts have used is that between 4% and 6% of the total is -- goes out in cash and until we have sourced the tax credits that we have, that might very well be the case. But I don’t want to [miscalculate] on that because if not it does not depend on the way we manage things.

In working capital it’s more difficult because that’s a moving target. We are essentially monitoring and managing it much more closely, as I think I announced in my information. Working capital consumption has a lot to do with how strong and how varied the commercial environment is. That’s why you see a significant cash consumption in working capital this year, but we have no doubt we’ll prove to be a good investment.

That, therefore, it will be very -- it would not be respectful with your intelligence to give guidances or targets for working capital, because it’s a receivable number that comes up after all the commercial methods depending [to when the] regulation periods have been done. We simply manage for growth and cash. And sometimes the intermediate piece that is working capital is there.

On the buy-back we think we probably say the same thing, which is that it would be dependent on the pace of free cash flow generation. The safer we feel about the free cash flow generation the stronger we go there accepting the share price.

You know, if you try and do a modeling of what we’ve done related to the share price and relative to the share price generation, you might get a recent addition inkling as to how we think about that. There is nothing mysterious about it.

And in terms of retirements next year, the effect on cash outflows of -- of the payments. They are actually very predictable by year, by quarter it could be much, much more difficult. But something to the tune of €800 to €850m, I think would be a reasonable number to expect in cash and gross tax -- I’m sorry gross cash out flows for 2005. But again, take that as an indication and not necessarily as an orientational guidance number.

Okay. Can I just follow up and check your comments about the share price. Does that mean your trying to keep the average share price around 12.3 of what you have in treasury?

We’re not trying to keep the share price in any way, shape or form at any price. Okay? We are a market price takers. We’ve -- we never intervene or act in the market in any significant way. And that’s why we try and value the treasury stock at the average price at which the stock has [credit] throughout the year.

Our -- our target is not to influence the stock price. Our target is certainly to spread out and to retain the flexibility of giving deeper in allocations and getting lighter on other occasions rather than having a mathematical problem that anybody could follow and everyone could [amortize] away deriving -- driving that away from our shareholders and [integrating nests].

That’s great, thank you.

Next question please.

Sir -- sorry -- the following question comes from Bosco Ojeda from UBS in London. Please go ahead with your question.

Hi, good afternoon. If I could come back Jose Maria on the line performance in Telesp businesses is on the economy lines. The question is about the views on whether this could be a 1-off campaign or rather than it, it could be a more of a long term trend and something which could be expanded in other countries.

And also a question to, I think it’s to Julio, we see contained CapEx in Spain and my question is whether this is sustainable. I’m worried that on a long term view whether with the actual network, would we need some upgrade there on a long term view with the kind of services you’re planning to give?

Thank you.

I’ll take your first question. First, it’s not a campaign. We intend to keep the effort that we are -- we’ll be doing in a very good market. In fact we are -- we are -- it is an initiative that we started last year in [Salou] where we actioned to the different packages and testing different products. And this also has been pushing -- has been pushed in to Argentina. And then finally it has been launched in Brazil.

In fact, we intend to keep going. You know this economy line it is on EBITDA. We are structuring the different -- the different [Internet line] it is in minus. We are lowering a little bit the monthly fee. We enable to make local calls [fixed to these] the recharging in the [ordinary] market.

And in order to make long distance calls of course to [similar] numbers, we allow the use of public paid card that grant a great [indiscernible]. In fact, we be -- [indiscernible] I hope on a basis on this effort, but our intention is to keep going into that trend. We do launch new product. We do structuring product and we need to meet demand where it stand and we’ll be -- we’ll be very constant at that.

With regarding your question of CapEx in Telefonica de Espana our target for this year and also for next year in accordance with our guidance is to reach a capital revenue ratio between 11% and 12%. And we believe that we can’t keep our CapEx in that ratio because our program of investment rationalization [indiscernible] that we have in place and we are going to continue.

But, within that program a very specific plan to review and to renew the network and the technology we use in the network. [Ultimately] we are planning to use the ADSL technology in order to have a very wide coverage of global in Spain. We have employed optical fiber from the enterprise market and from the main customers in enterprise market. We’ve estimated technology, we have employed very actively a new IP network with NTLS that will be the infrastructure to support any service and we already are using that infrastructure in order to transport for almost of our 70% of our traffic.

And in addition to that, we are not planning to have replacement of our network by the new 1 [Paralevante] our [indiscernible] solution.

Okay we have time for a last question please.

The last question for this conference comes from Jonathan Dunn from Bear Stearns in London. Please go ahead with your question.

Hello, my question is if you look at your spread of businesses and as we approach the end of the year, do you think you’ll be giving guidance for 2005 that looks fairly similar to the guidance you gave for this year?

The [unofficial] guidance typically we’ll provide guidance for the [indiscernible] year when we have first finished the accounts for 2004 and second have a clear outlook. Basically our outlook issue which tends to be around the first quarter [indiscernible] around the year end results, is clouded in this occasion by IFRS and the introduction of IFRS standards, of which we want to be extraordinary careful and informative, and in additional all operating or strategic issue for us which is the integration, the full integration of the Bell South properties.

We will do our best effort to make all 3 challenges meet as early as possible. Potentially we can not possibly commit to a specific date that would be set at this point. And certainly it is not going to be before the end of this year.

Okay, thank you.

Okay, ladies and gentlemen thanks a lot for attending this conference call and for having taken the time to ask all those very intelligent questions. We appreciate your questions and we thank you until the next time.

Ladies and gentlemen thank you for your participation today. This concludes today’s conference. You may now disconnect your lines. Thank you.