Telefonica SA (TEF) 2004 Q4 法說會逐字稿

Good morning and good afternoon, ladies and gentlemen, and welcome to the Telefonica 2004 Full Year Results Conference Call. At this time, all participants are in listen-only mode. Later, we will conduct a question and answer session and instructions will follow at that time. [OPERATOR INSTRUCTIONS]. Just to remind you all, this conference is being recorded. I would now like to hand over to the chairperson, Mr. Ezequiel Nieto, the Head of Investor Relations. Please go ahead with your meeting, sir.

Thank you. Good afternoon, ladies and gentlemen. Welcome to Telefonica's conference call to discuss 2004 full year results. I am Ezequiel Nieto, 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. 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 in 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 the slides, please contact Telefonica's Investor Relations team in Madrid by dialing the following telephone number - 34 915 844713.

Now let me turn the call over to our Executive Chairman, Mr. Cesar Alierta, who will be leading this conference call.

Thank you, Ezekiel. Good afternoon, ladies and gentlemen, and welcome to Telefonica's 2004 full year results conference call. I am pleased to introduce Julio Linares, Telefonica de Espana Executive Chairman, Jose Maria Alvarez-Pallete, Executive Chairman of Telefonica Latinoamerica, and Santiago Fernandez Valbuena, Chief Financial Officer, who are joining me today.

In my opinion, 2004 performance could be summarized in 4 comparisons that I would like to share with you. First, financial results were very strong across the profit and loss, with revenues and EBITDA growing at the middle single digit rate and EBIT expanding in the low teens.

Second, our priority is and will be to support organic growth across the Group through both an intense commercial approach to drive the client base up and a selective CapEx support to develop growing business. We are in an industry that has big growth opportunities of expansion of Mobile in Latin America Broadband and other new businesses [indiscernible]. In this context, already in the Company there was clearly satisfaction and improving our value position proposition to reinforce our competitive position and lead the development of our market of operations.

Third, we have kept our capacity to improve cash generation and returns in tax, even in the context of higher commercial expenses.

Fourth, we have seen our lead in terms of shareholder remuneration confirmed, with a solid cash flow despite being materially distributed to shareholders through a package that places Telefonica cartel at the top of the peer group.

Finally, in [indiscernible]. A major transaction last year and 1 that would improve the Group's future growth potential [indiscernible].

So starting a review of basic financials with revenues. Group sales grew by 6.8% year on year to top €17.3b. Mobile remained as the major contributor to consolidated growth, representing more than 80% of revenue expansion.

On the cost side, operating expenses were up by 8.7% for the full year, due to intense commercial activity in Mobile and Broadband that offset personnel expense savings, mainly at Telefonica Espana.

In terms of profitability, last year EBITDA exceeded the €17.2b mark or 4.9%. A 5% drop in depreciation and amortization expenses pushed EBIT to €7.2b, equivalent to an annual growth of 14.3%.

[indiscernible] that started to deconsolidated in November, growth in revenue, EBITDA and EBIT will have reached 5, 4 and 40% respectively. It is worth mentioning the positive performance of net income nearly growing at 31% year on year to end close to €2.9b. The highest level in the Company's history. Excluding the impact of Telefonica Espana retirement program net profit will have ended almost at €3.3b.

As presented in the slide number 5, all financial metrics set as a reference ending 2004 within their targets. Excluding ForEx and changes in consolidation, organic growth in revenues, EBITDA, EBIT and operating cash flow was close to 8, 6, 15.5 and 8% respectively.

Along 2004, the impact of currency depreciation has not limited significantly organic growth, flowing into the Group financials, as you can see in the slide number 6. The loss of value of Latin American currencies in the past 12 months has been avoided and contained below 10%, leaving ForEx to drain just 2.4 percentage points to January/December revenue growth. This negative impact is even lower at the EBITDA level, reaching -1.7 percentage points.

In addition, the impact of changes in consolidation on Group revenues and EBITDA stood at 0.9% and 0.6% respectively, reversing first 2 quarters in EBIT contribution. The integration of Bell South in November, which offset the deconsolidation of [Telesp] as of July 2003, is the factor behind these changes in trend.

Top line expansion which is 1 of our existing characteristics compared to European [indiscernible] sales in 2004 were [indiscernible] as you can see in the slide number 7. To achieve this strategic goal, we are fully committed to lead the development of the growth opportunities we have in front of us, like Mobile and Broadband, and we taking actions to keep the lead by working on 2 fronts. First, focusing on growing our commercial capabilities, selling our professional services and managing in [indiscernible].

And second, investing to fully capture all the revenue growth potential of our business.

These efforts are translating into the Group organic financials. For Wireline all divisions are posting highly remarkable performances in a demanding content of operations. On top of Telefonica Latin America, a fixed period growing at 7.5%, Telefonica Espana out performance on a quarterly basis with 2.4% growth.

For Mobile, and despite some deterioration since the beginning of the year, following the Company for captured and retained clients across Europe, the general business grew revenues by close to 70% at the top of European peers.

On slide number 8 present sustaining commercial efforts to push top line which is clearly paying in terms of client additions. Also this is putting pressure on the short term margin. This clearly reinforces our mid term growth potential. As such, 2004 consolidated expenses came close to €18b, up 8% from 2003. The 17 and 11.5 point increases in price in the semi services which are almost fully explained by Telefonica Moviles' reinforced commercial approach, added to factors behind the Group expenses evolution. On the contrary, personal expenses were cut by around 5% year on year, led by savings generated under Telefonica Espana retirement program.

In terms of market positioning, I would like to highlight that Telefonica has grown its client base from traditional wire line to wireless, adding more than 17.5m new clients that are purely organic.

If you turn to slide number 12 for a review of CapEx, which has been complementary to our commercial initiatives to take advantage of foreign growth opportunities. January/December CapEx which ended with same guidance in constant currency terms reached €3.8b. 1.2% ahead of last year figures and equivalent to less than 12.5%. The 25% growth in Mobile CapEx due to the flourishing rollout of new business and new investment in Latin America to adapt to [indiscernible] offset the 18% decline in domestic wireline investment achieved through higher efficiencies. It is worth noticing that more than 55% of CapEx was devoted to develop improvement in last generation mobile networks.

Despite investing for growth, our capacity to generate cash flow and returns has remained intact, as is displayed in slide number 10. Operating cash flow equaled 51% of total revenues, after growing more than 6% annually to top €9.4b.

Telefonica Espana operating cash flow increased by 17% annually, up more than 15% for the third quarter in a row.

The Mobile business in Latin America wireline operations were penalized by extra spending to capital demand. Our capacity to generate financial resources is pursuant by the Group return on invested capital, which exceeded 12% in 2004. More than 4.5 percentage points above the 2003 figure.

At Telefonica, we have clearly set our policy for the use of funds. A disciplined policy we stick to that defines a multi-year remuneration package setting an industry benchmark. As quantified in slide number 11, Telefonica spent around €4b in 2004 in dividends and buybacks combined 2.3 times more than the previous year.

And we actively erect our remuneration policy to our cash flow profile and growth opportunities, on a shareholder friendly basis, as related [position].

First, the completion of the buyback program was faster than planned.

Second, the Board decision to distribute 1 percentage [indiscernible] 35% pending the Annual General Meeting approval.

And third, the Board resolution to propose a 25% increase in the dividend payable this year, to €0.5 per share. These levels will become [annual amount] for 2006.

In 2004, we have combined an effective shareholder remuneration with the acquisition of several Latin American properties. Whose basic profile and weight of the Group metrics is down in slide number 12. Operationally, based at the end of December with around 14.8m clients, bringing total Group subscribers to almost 122m. Financially, Telefonica 2004 revenues and EBITDA will have exceeded €32.5b and €17.9b respectively on a pro forma basis, including an aggregate of results.

And now I will hand over to Julio Linares to address the domestic wireline performance.

Thank you, Cesar and good afternoon. Before revising 2004 key regional drivers, I would like first to highlight our very solid financial performance in the early demanding context of operations, with rates for all key metrics outperforming the sector and our own guidance.

Revenues ended the year just below €11b, up 2.4% year on year. A growth rate that has stood at the high end of target. In the case of EBITDA and operating cash flow, which were over €5b and close to €3b in 2004 respectively, wireline increases to pass year estimates by far, reaching the 6.1% and 21% marks.

Telefonica Espana Group's financial performance has been shown across the P&L, as presented in the slide number 14. And shows the success of our ongoing transformation strategy, based on pushing Broadband services up and exceeding [innovative] inefficiency.

From a revenue perspective, Internet and Broadband services expected to fully compensate the contraction on voice revenues in the second quarter 2004, exceeding voice shortfall by more than €100m for the 12 months period. This positive gap has widened sequentially from just €15m in the second quarter to just about €70m in the fourth quarter alone.

Broadband increasing contribution is a key factor behind Group sales, rising consistently in the 2.6 percentage range in the last 3 quarters. From an efficiency perspective, total expenses dropped by 0.5% last year, to reach about €6b. The 9.3% annual cut in personnel expenses permitted to offset additional costs incurred to grow top line thanks to the impact of the 2003-2007 retirement program.

Managing top line and cost restructure led the Company to post a 46% EBITDA margin for the year. 1.6 percentage points above 2003 figure.

Let's turn to slide number 15 for another view of traditional operating metrics. Starting with access, the Company lost close to 186,000 lines between January and December, a reduction of 44% with respect to 2003 figure. This positive trend is even more striking when compared to 2002 net losses of close to 0.5m, 2.6 times above [indiscernible].

Turning to ULL, close to 44,000 unbundled lines have been connected from September to December, 20,700 of which were fully unbundled.

With regard the connection [indiscernible], the introduction of server connection in September has boosted the selected lines up again in the fourth quarter, having 83,000 lines. However, the total pre-selected lines have just increased by 100,000 for the 12 month period ending December. A significant reduction from the 500,000 lines that were pre-selected in 2003.

In terms of traffic, the Spanish voice market grew by around 5% in 2004. Within that context, Telefonica Espana's market share growth was 0.4 percentage points, supported by the positive impact of both loyalty schemes and the lower loss of pre-selected customers. This figure would have been 3.7 percentage points with the old figure.

I would also like to highlight a positive trend in traditional revenues whose rate of decline has been reduced from the -4.7% posted in the first quarter to just -2.5% for the full year.

For the review of ADSL metrics please turn to slide number 16. The launch of intense commercial [transactions] by major players particularly in the ADSL market is accelerating substantially the pace of Broadband development in Spain. As such, fourth quarter ADSL net adds exceeded 352,000 connections, equivalent to 75% of total global net adds. And leaving Telefonica de Espana to end the year with close to 2.5m connections. Up 50% from the December 2003 figure.

The Company's retained base has also benefited from the revitalized market, with total subscribers amounting to 1.6m. A stronger competition is cutting Telefonica Group market share of Broadband by 2.6 percentage points in the last quarter, to levels of 55.5%. I would like to mention that we remain fully committed to lead future market development in Broadband and that we are renewing our commercial packages in early 2005 to better respond to competing offerings. The original launch of ADSL voice products and information campaigns are best examples of this commitment.

In addition, the Company is pushing to expand Broadband value added services, ending the quarter with more than 1.1m services current.

Mobile Services represented close to 10% of 2004 retail active. A metric which was growing at 8% to reach [€50]. Despite the introduction of new operating offerings in the fourth quarter [indiscernible] connectivity active, our success in selling value added services has permitted to keep total revenue for the year stable at the September level. Although a still [indiscernible] of this contribution to ARPU I would like to highlight the efforts we have engaged to expand the Imagenio customer base, improving both its content offering by adding channels and we reached with close to 1.6m households already covered.

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

Thank you, Julio and good afternoon. In a challenging context of operations, both from a regulatory and competitive standpoint, Telefonica Latin America has shown steady growth across the year, with revenues and EBITDA up by 7.5% and 6.8% respectively in constant currency terms.

Operating cash flow organic growth has stood 4%, affected by a 17% rise in capital expenditure, which is triggered by higher investment in ADSL. These set of results [confidently] within year end guidance.

The euros consolidated revenues and EBITDA growth rates came close to 2% and 1% respectively, affected by the general depreciation of major Latin American currencies against the euro on average. It is worth noticing the 11% increase in EBIT terms in euro terms, led by a 6% drop in depreciation and amortization.

During 2004, we were focused to grow top line, combining a more rapid expansion market in Traditional Services with securing the benefits of Broadband development, have not come at the expense of profitability and returns. On the contrary, we have kept the pressure to drive efficiency up across operating units, retaining margins and cash generation at solid levels, as slide number 18 illustrates.

Growth, in constant currency terms, for total operating expenses, has been progressively contained, ending the year at 7.5% down from the first quarter, 13.3%. On a cumulative basis, operating costs are growing at a slower pace than revenues for the second quarter in a row. Gradual efficiency gains are pushing EBITDA margins up sequentially in 2004, to end the year at 45.6%. Marginally down from 2003 figure. Now 1.3 percentage points ahead of first quarter level.

Except Telefonica Argentina, whose margins remain stable, full year margins for the rest of the subsidiaries has stood above first quarter performances. It is worth noticing Telesp 45.8% EBITDA in 2004, up 2.4 percentage points from third quarter level.

Last year, CapEx spent by operating subsidiaries grew by 11.5% annually, with Telefonica Argentina representing 78% of total growth as the Company's internal budget adapts to renewed demand for telecom services.

Despite investing in expansion of those countries, rationalization kept CapEx over sales contained between 10 and 11.5% for the remaining 3 assets. Increasing CapEx has led to a 2.4% annual decline in operating cash flow, which almost reached €2.4b at the end of the year. Excluding ForEx, operating cash flow growth would have been positive, plus 4%, with Telesp up 10% in local currency.

Please turn to slide number 19 to start the review of the 2 major contributors to growth, Telesp and Telefonica Argentina. In 2004, Telesp has strengthened commercial initiatives tailored not only to stabilize traditional lines and improve value added services, but also to heavily promote the expansion of ADSL.

With regard to Traditional Services, the launch of new pricing schemes adapted to lower income layers of the population is leading to up 250,000 PSTN lines in the second half of the year. In contrast with the 76,000 lines lost in the January-June period. Total lines were up by 1.3% year on year.

I would like to warn you that [indiscernible] remain which will limit our ability to review this trend this year.

Turning to Broadband, 342,000 new customers have signed up in 2004, bringing ADSL subscribers to top 825,000 at the end of December. A figure within guidance and 71% above 2003 levels.

The run rate [indiscernible] during the year, with second half net adds exceeding first half new connections by 1.8 times. While the combination of solid operating metrics and very good governance has driven traditional revenues up by close to 14% in local currency, a strong ADSL pick up is pushing Internet revenues up [11.6%] year on year.

On an aggregate, Telesp local currency sales grew close to 50%, equivalent to 9% in euro terms.

I would like to finish the overview of Latin America with a summary of Telefonica Argentina as presented in slide number 20. As in past quarters, TASA is managing operations to benefit the most from the economic recovery from which demand for telecom services is leveraging.

At the close of 2003, traditional lines and services had been growing since the beginning of the year, with net adds for the January December period remaining close to 160,000 lines. A significant proportion on pre paying schemes. Improving plans, were also reflected in usage, with traffic per line per day growing at a 7% annual rate.

In addition to Traditional Services recovery, TASA continued to boost ADSL take up, adding close to 120,000 new connections in year 2004. More than tripling previous year figure. The Company improved its market share in the Southern region by 12 percentage points, to almost exceed the 80% mark. Solid operating performance is setting the basis for a strong top line growth, with revenues up by close to 11% in local currency. The 9% increase in Traditional Services and a 41.5% growth in Internet and Broadband revenues are the factors behind double digit growth in consolidated sales.

And now, I hand over to Santiago for the review of major financial developments.

Thank you, Jose Maria and good afternoon, ladies and gentlemen. Turning now to the interest expense explained on slide number 21, I would like to highlight the net financial expense has dropped 20% after adjusting for foreign exchange in the Argentina and U.S. dollar implementation of 2003.

Roughly two-thirds of this reduction is explained by lower average cost of debt, which has stood 6.1% in 2004, or close to 100 basis points lower than in 2003, down to lower rates in Brazil and the cancellation of a high cost debt in Spain.

The remaining reduction in financial expense can be explained by the 7% reduction in the average net debt, which has stood close to €19b, although at year-end the debt nearly reached €21b, or 1.6 times EBITDA, as a consequence of the acquisition of some of the BellSouth properties.

At year end, 75% of our debt was denominated or hedged into euros, 7% in U.S. dollars and 18% in Latin American currencies. This includes U.S. dollar swaps for payment of the Chilean and Argentinean BellSouth properties that we completed in early January. If we excluded those, the U.S. dollar debt portion would be 4 percentage points higher. The average debt maturity was close to 5 years.

Commitments related to guarantees and free retirements, liabilities reached €24.7b, or 1.9 times EBITDA. On top of that, preferred shares issued by Telefonica amount to €2b, which will be treated as debt under new international financial reporting standards.

The total expenses related to commitments and preferred shares recorded in net income reached €296m, but these are not included in financial expense.

Finally, just 2 small remarks about our financial ratios. First, the total debt plus commitments falls to 1.8 when including the pro forma full EBITDA of the BellSouth Latin companies acquired and paid for in 2004.

And second, if we excluded both the EBITDA and the non-recourse financial debt of all our Latin American subsidiaries, the net financial debt stands below 2 times EBITDA.

In slide 22 we look at the cash flow generation and users of the Telefonica Group. Telefonica has generated €7.18b in 2004, after paying close to 260 ordinary in dividends to minorities. This implies a 13.7% growth rate versus 2003.

If we look at the free cash flow before any dividend payment to minorities plus after commitments cancellation, then the figure is €6.74b, or 17.6%. Up relative to 2003.

The total uses of cash flow have exceeded €8.8b in 2004 and this was used as follows. Extraordinary dividend payments were €673m [indiscernible] and the general minorities. In the context of corporate taxes, saw reducing free cash flow of minorities from 7.18 to €6.5b.

Telefonica dividends plus payments for share buyback were close to €4b.

Acquisitions, mainly the BellSouth Latin American properties, the acquisition of Portugal Telecom shares and the wireless minorities in Brazil, net of the total sale approached €3.5b.

And finally, the amortization of commitments, of cash commitments, was close to €700m. So the difference between the cash flow generation and usage in 2004 has pushed up the debt number by close to €1.65b. On top of that, the consolidated debt increased due to the incorporation of acquired companies, bringing close to €300m of debt plus other minor effects, like the zero coupon bonds accrual that have been partially compensated by €250m savings related to debt and the foreign currencies, mainly the U.S. dollar. That has [indiscernible – noise on audio] debt number that we just showed.

And finally, on slide number 23, we update you on the progress of our 2b buyback program. In the fourth quarter of 2004, we acquired 34m shares, bringing our total to 407m. Since then, we have reported that Telefonica has reached in ’04 to the legal limit of 5% as a consequence of buying back the 34.7m shares which were underlined the CIES stock option program for all the equities which expired worthless a few weeks ago. These shares must be cancelled eventually. And as Telefonica cannot exceed the 5% limit, we are currently exploring alternatives to the buyback [indiscernible – noise on audio] proposal that will be submitted to the AGM are cancelled as in the stock option program, or are delivered in exchange eventually for the Terra minorities.

I now turn over back to our Chairman to sum up the conclusion.

To sum up, we are [indiscernible] doubling growth. This [indiscernible] will continue to target intense commercial action to expand our client base.

Second, BellSouth acquisition brings additional strength and enhances the Group even further.

Third, we managed best in class wireline new business. Brazilian challenging operating backgrounds and contributing to consolidate the financial performance.

Fourth, our determination to grow top line is not impacting the Company's cash generation and returns, despite short term pressures on [indiscernible] particularly in Mobile.

And finally, we have [indiscernible – noise on audio] and we firmly believe that we are in a unique position to combine the growth and success.

Before turning to questions and answers let me say that we will not be providing 2004 [dividends] at this stage. In fact, we believe it is better to formulate a separate conference call just bringing major financial impact of the IFRS transition and provide at that time a comparison of 2004 and 2005 under the new accounting standards. This call will take place on March 13th. Nevertheless, we believe it is fortunate to disclose and to communicate to you of 2005 [indiscernible].

Thank you, sir. [OPERATOR INSTRUCTIONS]. Your first question comes from Andrew Beale from Arete Research in London. Please go ahead with your question.

Good afternoon. Could you tell us a bit about the trend in voice revenues in TE, which seem to be up 2% in Q4, and what the major drivers are there?

And secondly, could you just talk about the tax assets of the Group and what the expected cash tax will be for the next few years. Thank you.

Just let me give you a brief overview. As you know, we still have a significant tax credits in the Group. As you also know, we have 15 years to compensate for, or to make use of those tax credits. And there are other issues like investment tax credits that have a shorter life span which we might eventually to use.

Other than that, the amount of tax yields hasn't materially increased, other than the contribution of the Lycos sale via the Terra network.

Regarding the question of voice traffic in Spain, we believe that in the year 2004 the market decrease was around 4.8%.

My question on the voice was actually about the voice revenues, which seem to be in the quarter up about 2%.

Well, regarding voice revenues in the fourth quarter of the year 2004, there are 2 aspects that we should take into account. First of all is that, in the last quarter of the year 2003, we made an special and extraordinary adjustment because of the amount provision during the first part of the year, in order to take into account the discounts that we made for the Internet traffic plans was not enough. And because of that, in the fourth quarter in the year 2003, we had to make such special adjustment. And then we are comparing a quarter -- fourth quarter in 2004 that was quite [realized] from the traffic point of view, with a fourth quarter in the year 2003 that was extremely low because of that adjustment that I told you before.

Right. But it still seems to be up on a sequential basis as well. Is there any particular driver there?

The only traffic that has changed especially is the international traffic. The international traffic has quite nice growth around 4% because we were very active in trying to capture the international traffic with very good proportion for that market segment. And that's the only 1 that has a very special behavior.

Okay, thank you.

Thank you. Next question, please.

The following questions come from David Wright from JP Morgan in London. Please go ahead with your question.

Yes, hello. 2 questions, please, on the fixed line business. Firstly, you've clearly lost some market share in the DSL retail market in Q4. If you could possibly give us a view on how that market share is progressing into January and February this year, especially given the launch of your new packages. And also, if you could possibly elaborate on some comments made by your Chairman previously that Telefonica could be prepared to invest an incremental €4.5b on what was quoted as complementary investments and marketing in the Spanish DSL market between 2005 and 2008. Thank you.

That €4.5b combined CapEx in commercial efforts to increase the product figure in the target of 2008. [inaudible – noise on audio] more on the rest.

Well, regarding the market share in Broadband, as we told you before, we saw that a change in the market was going to happen in September last year. And in fact it happened. Until that time, our market share was quite stable during the year, even improving little by little. In the third quarter, we lost 2.6 percentage points of market share. That means -- which is among the average of 0.9 percentage points.

Additionally, at that time, during that quarter, cable companies lost 1.3 percentage points, and the winners of that market share was our wholesale ADSL and [indiscernible] that took 1 percentage point of market share.

In addition to that, weakened share -- that regarding generally the market share lost was 0.5%, which you could say is much better than the monthly average last quarter last year.

Okay, I'm sorry. I did actually miss the first answer. There was a little interference on the line. You originally, I think, planned €4.5b and then this was potentially an incremental €4.5b. Can you elaborate on that?

As I said before, this is a combination in CapEx and OpEx. We will invest in Broadband this year. But we don't make a breakdown on the figures and what is CapEx and what is OpEx. It's a combined figure of both of them.

Okay, thanks.

Next question, please.

The following questions come from James Collett from Goldman Sachs in London. Please go ahead with your question.

Hello. If I could ask 2 questions. 1 is whether you've been able to make any progress on being allowed permission by the regulator to introduce some lower prices for DSL? And -- or whether you're just having to do it in small special offers.

And then, secondly, if you could just elaborate a little bit on your interest in Chesky (ph) Telecom and possible Turkish investment. Your name has obviously been connected with both, and you seem to be on shortlists, I guess. And if you could just perhaps discuss what you see as the attractions and the opportunities there.

With regard to Chesky and Turk Telecom, let me remind you that Telefonica policy is to [indiscernible] and combine it with very selective acquisitions. This has been the policy of Telefonica and it will remain the policy of Telefonica. However, it is a reality which is a fact is that it's not [indiscernible]. And what we are doing is looking into it like we did -- we have done always. Looking very deeply to see if we can get value for the shareholders, which is our main target. We look into it with the focus that -- with the framework of looking for value if we can through the price and through the management [indiscernible] because we have good record managing ongoing operations. But let me remind you that what I said at the beginning, we have looked historically into operations and we have submitted a proposal of the price. And we are looking into Chesky and we will be looking into Turk Telecom in the same framework. It is value for our shareholders on a selected basis. We will look into it.

Are there any particular benchmarks or criteria you would look to use in terms of cash flow or --

That’s a very different [indiscernible – noise on audio] acquisition for our shareholders, which is the main criteria for our shareholders in Telefonica [indiscernible].

Regarding your question on the regulatory issues regarding the ADSL. Of course, [indiscernible – noise on audio] proposals because we believe that it will help to increase the market in Spain. In any case, we are continuing developing new services and we are proposing and submitting to the CBC, to the CBC total services meeting in additional wholesale services. In addition to that, we believe that it has been very positive the establishment of clear framework in relationship with a determination of the promotions that we can do. And that facilitates quite a lot the identification on different promotions, and in fact we have already seen that [indiscernible] has been approved recently by the CBC.

Next question, please.

The following questions come from Bosco Ojeda from UBS in London. Please go ahead with your question.

Hi, good afternoon. I have a question on your [indiscernible] I'm not sure if that was confirmed, that they were clearly prepared to restrict the behavior content offering. And I would also to somehow understand how the economics of that [indiscernible] in the market.

Also if I could come back on the acquisition strategy? I don't know if -- how much are you prepared to commit on the core markets, and if you could see the leverage capacity of the parent company through the leverage of your Latin American assets? And in general, how much is your capacity of acquisitions? Thanks.

We will have to continue our philosophy [indiscernible] Broadband and to mobile and to all the [assets]. But we are not going to go enter other businesses other than being in the market where we are very happy the way they behave. But other than that we are happy they did very well, they're working well, and [indiscernible] most important thing is [indiscernible] sometimes, maybe it'll be another year beginning of the year because of the [indiscernible]. Other than that, is ideal. We are very happy about that and we will commercialized content in which we think we can do a very good job, and in which we feel very, very comfortable and we have [indiscernible].

Regards previous comment on this, made very clear what is the policy -- has been the policy to bring value for the shareholders and we maintain the framework we always said we maintain to be accretive and to maintain the firm financials and traditional standards [indiscernible]. Julio will elaborate on the behavior of the market.

Regarding the content for [indiscernible] there is no limitation at all. Maybe the only thing that you may remember is that nobody can provide us content in better condition than to any other system competitors in the market today. But apart from that, there are no other limitations. And of course, we are going to increase, little by little, the number of channels. In Imagenio you saw that recently we add 5 new channels. We are going to increase the number of content for the video on demand catalog. We are increasing, little by little, the number of hours that we store and we increased recently the right to deliver [indiscernible]. And based on those content, we believe that today we have a very complete offer, with very attractive price, in comparison with our competitors.

Okay, next question, please.

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

Yes, hello. My first question is on DSL ARPU. I've seen that in the fourth quarter DSL ARPU has come down sequentially against the first quarter this year. I know that you were making promotions, but my question is whether you are expecting ARPU to keep on growing next year or, on the contrary, to face competition and maybe to get some market share back you are contemplating cutting connectivity tariffs any time soon.

And the second question is, again, on Imagenio, but this time in relation with Sogecable. Now that you have the football rights as well, and you are offering a big discount to Sogecable's tariffs for the football matches, I wonder if you could elaborate a little bit on how you are expecting to deal with the conflict of interest which is arising from competing against 1 subsidiary of which Telefonica's a main shareholder. Are you ready to see the value of Sogecable in the market come down if you are very successful with Imagenio? Or is pretty much a defensive movement? If you could elaborate a bit on that it would be useful. Thank you.

With Sogecable and Imagenio [indiscernible]. But for the market which is our [tariff] for the level of content and for the total configuration [indiscernible]. So we think in a very good position and we’ll see clearly [indiscernible] in the future.

Regarding the evolution of ARPU in ADSL, of course we told you already that the ARPU for connectivity will decrease little by little because of the pressure we are facing in the market. But at the same time, we told you that we compensate this decrease with higher penetration than we predicted before. And additionally, you know that we are doing a strong effort for value added services in order to compensate additionally this decrease. In fact, I think it's very significant that, in December, the ARPU coming from value added services was 10.8% from the total ARPU with an increase of more than 52%. And at that time, we have €5 of ARPU coming from value added services. So it is compensating the decrease on connectivity.

I believe I understood properly what you are saying, decrease in connectivity, is that 100% coming from promotions that you are making, not a overall and broad cut of the monthly fee? Is that correct?

Well there is first of all, a change because of the mix of [expense]. Additionally, because, as you know, in the market, we have today additional offers. Offers of €29, offers of €24 and different proposals for different times of the day reduced by the cash [amount]. And additionally, the promotions that you mentioned.

Okay, thank you.

Thank you. Next question, please.

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

Hi, gentlemen. Just a couple of follow up questions, and please excuse my voice. Just wondering if you could give us a feel for what we should expect in your PSTN and ISDN line loss trends in 2005, given that you have had a very significant slow down. And also, I'd be interested to know at what point you are prepared to allow your market share of DSL to slip to before you start to worry about the long term impact that market share's going to have? Previously I remember you saying you had a target to keep it at 58%. That's obviously on the move down, so I'm wondering where the target would be? Thank you.

When we provide you with the information on these topics and any other topics in our next investor conference in April. But what I can share with you now is that we believe that the access market is going to have maybe heavier in 2005 very similar to the 1 that it had in 2004. So we expect a growth of the market around 1% or even a little more. And also I can tell you that we are very active doing different promotions in order to get new access lines like the 1 that we have in fact right now on very active commercial campaigns right now.

In addition to that question, you asked also about market share in the Broadband market, and of course we will try to defend our market share as much as possible. But it's very difficult to tell you a clear asset on that topic. But penetration and market share are the 2 focuses that we are going to have for the whole year regarding ADSL.

Next question, please.

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

Yes 2 questions gentlemen. First of all going to back to Imagenio. You talk about in the release giving free installation, free connection and also a suggestion of no monthly fees until May. Can you just outline for someone who joined the Imagenio service in January, how much was that, in terms of lost revenues to Telefonica?

And the second question for Jose Maria is in relation to Telesp, where in the fourth quarter, for the first time, we seem to be seeing a few negative trends on usage, which suggests that some of the price increases may be having a negative impact on the market. Can you just go through some of those and outline whether you think those price increases will lead to double digit revenue growth in ’05?

Well regarding Imagenio you know that at the beginning of this year, we were in a pre-commercial phase, just tuning up the product and trying to have a minimum coverage to launch the product. From the beginning of this year, we are commercially more active and because it’s necessary for us to give the people the opportunity to know their product, we are doing the commercial campaign to describe why it’s necessary. This is very important in order to launch this product that was in the market before, and taking into account the other options that are in the market. So it’s very important for us to differentiate be in front of our competitors, to give an important opportunity to know our product. That’s why we’re so aggressive our campaign today.

With regard to your first question, thank you for the question. The answer on the impacts. First of all it is true that we are experiencing effect on traffic at the level of the [domestic], but there are mix effects. From 1 part to have very intense expansion of the mobile traffic. 1 second we have aggressive migration from Internet traditional profit to ADSL, this was significant effort. And on top of that you have had change in mix of lines in telephony. So that pre-paid total call on new product lines base 15% out of the total base at the end of the year, while at the beginning of the year was 11%.

On top of that you have quantitative effects. First of all there is the increase in tariffs that have been awarded in the second half of the year. And as a result of all those trends and as a result of the increasing numbers of lines that we have been having in the Telefonica for the first time in 2 years, the net effect for 2005 will be very positive.

The total amount will be depending highly on the traffic increase that we will be awarded during the year 2005, and as I said I cannot commit on that. But as a result you have several effects on the total revenue mix on Telefonica.

If I could come back on the first 1, you’ve added 2000 customers so far, in the middle of February. I’m just trying to get a sense of what the hit on margin is from letting those customers. Obviously longer term it’s important, but what is the hit in the short term?

Well you know that we charge to each customer depending if they are customers of Internet or not. If they are customers already of Internet we charge €20. If they are not customers of Internet because they are not using ADSL to Internet access, then we charge €90 and that’s mainly when we charge customers only.

What about the connection fee and installation fee?

In addition to that, we charge €6 for the caller okay And installation fee is now has been in promotion okay? It was always promotion installation fee.

Okay, so there’s no big negative hit on EBITDA margins in Q1?

Not at all. It’s immaterial.

Thank you.

The next question comes from Jesus Romero from Merrill Lynch in London. Please go ahead with your question.

I have a couple of questions. The first 1 for Santiago, if you could also the working capital movement we’ve seen in Q4. And the second 1 for Julio. Going back to the market share of [Voltan] point, could you give us a sense of how quickly the resellers could move the wholesale lines to other lines in the future? How do you think that mix is going to develop? Thank you.

Okay, let me answer these on -- first the question on the working capital. As you may have seen, the total amount of working capital has substantially decreased on the half year numbers, as we expected it to be the case. The change in working capital has a lot to do with the long periods, between which CapEx is contracted, and it’s accrued then it’s actually paid out. That explains the vast majority of the decline in numbers. And the total change in the quarter 4, which totals for the year, a number of falls to 300 but significantly below that 1, is totally explained by this change in calendar of CapEx contracting following payment.

It’s very difficult to answer that question because it changes very much from month to month. What we see is that our competitors are very active, but they use our datastream, or they use our unbundled local loop, in a very different way depending on the facilities they have in order to reach the market easiest. What I can tell you is that, for instance, they generally they increase of our unbundled local loops were a little more than the 15,000, which is not a big figure. And most of our competitors are still using our datastream as the preferred option. We believe that, little by little, we change and they will move from our datastream option to unbundled local loop, but it is very difficult to be more precise at this stage.

Thank you.

The following question comes from Mark Cardwell from Bernstein Investment in London. Please go ahead with your question.

Thank you. 2 questions if I can? For Mr. Linares. Can you explain a little bit on what you’ve been talking about on the ARPU and value added services? I’m curious to understand what new value added services you have coming, and what percentage of the base you think you can actually sell services into? So you’ve made it to 10% of the ARPU today, how much further to you think that can go over time? And what sorts of things do you have coming that you expect to sell? That’s my first question.

My second question is on just understanding the unbundling a little further the topic you were just on. I’m trying to understand which of your competitors are most active in bundling today, and which competitor do you think have the right networks to stay active over the next year or 2 -- how many others -- are there really more than 1 or 2 competitors that are active, and that you think can be active in a broad way?

Okay regarding your first question. The first kind of value added services regarding our sales, are those related with security, and in fact we already sold 800 -- 7000 units. The second are those related with maintenance. Maintenance of [CBs] in customers premises. And we sold already more than 218,000.

Secondly, there are those solutions that we deliver especially for a small and middle prices and SOHO customers. We sold already more than 170,000. Our fourth are services related with content delivery for residential customers. 1 that we call Mundo ADSL and we sold already more than 153,000. In December 48% of our ADSL lines have at least contracted 1 value added service.

In relationship with your second question. You know that today we are facing competition from different competitors, that are using mainly our datastream solution, and at the same time unbundling local loop in 1 sense. But in [Arora] 1, we are facing competition in Broadband regarding cable companies.

Most of the cable companies are today using its own network. But at least 1 significant competitor, that in addition to use its cable network, is using our datastream and our unbundled local loop. So what I can say is that at least there are 5 to 6 major competitors in the stream that today are using the 3 main different alternatives they have.

So that’s 3 or 4 using unbundling and then 2 or 3 cable?

More or less.

Okay. Thank you.

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

Okay. Hello. Most of my questions have been answered, but on Telefonica Espana, that was for Julio. I want to know also on the quarterly front, if we should expect any change? And I’m referring [indiscernible] for example on wholesale ADSL types? And what kind of change -- or when Telefonica Espana is going to be able to launch a similar offer than Wanadoo and [indiscernible] Spanish markets bringing together voice and ADSL and even voice for free?

And the second question would be for Jose Maria Alvarez-Pallete, Telefonica Latin America. Because I was surprised to see the revenue growth in local currency considering a price increase has been implemented in July, September and November. And what I want to understand this low revenue growth in relation to the ADSL business. If I understand well, part of the revenue from ADSL has to be set in Brazil between PSTN and the ISP. And I wanted to know, to check that and also to know if there could be any change or when will be implication of the inclusion of the acquisition of Terra? And that’s all. Thank you.

Maria, I think the changes that were to the framework we believe, that we could expect those changes when the CB finished their analysis of rating recognized markets. We expect that they will finish that activity in the middle of this year. We expect that base of that analysis to have a more visible, a more flexible commercial framework.

The relationship with your second question, when are we going to be able to have the same kind of products top line products as Wanadoo have. At least we have been able to have promotions of ADSL like voice that work very well. And we were able in this promotion, that we already finished, we were able to sell more than 73,000 packages of this kind.

Good afternoon Maria. I’ll answer your questions about telestream. We don’t have to share income and ADSL in Brazil first of all.

Second, on the revenue increase, on the revenue increase in Telesp in the fourth quarter there are several effects.

First of all, we [indiscernible] was significantly higher than this year, and that explains part of the decline. That’s traditional in Telesp for the last 2 years. On top of that, remember also that the lease of life has been changing especially in the fourth quarter. That’s when we have been launching the new economic and super economic lines in Telesp, and those lines have a lower output than traditional lines. It’s true that we have been able to stop decline in numbers of lines, but it is also true that the active levels of these new lines gets lower than the previous 1. Those 2 effects together will explain this trend. Thank you.

Thank you.

The next question comes from James McKenzie from Fidentiis in Madrid. Please go ahead with your question.

Hi. Just 2 quick follow up questions. Firstly, on the ADSL market, you mentioned that the market has been growing faster than your expectations and yet, you have lost a little bit of market share. I was just wondering, as we’re going forward, you had a target I think, by the end of 2006 of 3.5 to 4m lines. Would your strategy be based more on the maintenance of market share. I think Guy Peddy was talking about 58%, or on the absolute number of lines that you’re hoping to have in place by the end of 2006?

And just a follow up question on content. You mention that you’re going to be selling Endemol. I was wondering what makes Endemol non-strategic when Sogecable is basically a holder of a lot of content, and would that be considered for sale?

Regarding our particularly Sogecable and Endemol. In Sogecable we think it comes from a very complimentary to our Broadband activities, and I want to say that, [indiscernible]. The same in Endemol. Endemol we [indiscernible] we think it will be positive for the Company. It will be more value to the shareholders. I feel that we will make [indiscernible].

Well regarding your question on market share, for us today, opportunities are first of all, to continue to increase the penetration of Broadband in the market. And in fact, we believe that the market is growing very well, especially in the last quarter. And we are going to continue to market growth during this year too. And second, we are going to fight very hard in order to maintain our market share, and even to try to increase it. So we recognize that the market is very active, and very competitive and sometimes we have to face limitations. But our objective is to try to maintain and to try to increase a little bit, our market share in global markets.

Thank you.

The following question comes from John Pearson from Dresdner in London. Please go ahead with your question.

Hi. It’s John Pearson from Dresdner Credit Research here. Your debt levels have gone up, which was expected of course, and 1 of the credit rating agencies is clearly concerned, about what it thinks is a more aggressive financial policy at Telefonica. Could you tell us please is a more aggressive policy now developing, and intended for Telefonica in 2005 and going forwards? And is management taking any action to try to retain the existing A and A3 ratings? Thank you.

Yes thanks for the question. We were slightly surprised by the swift reaction of Standard & Poor’s when they put us where we are today. I think it’s also fair to say that the reason why Telefonica has been put on credit watch, has a lot to do with its shareholder revenue rating policy, but it’s maybe not one of the worst possible ways in which to be put on a credit watch.

Telefonica is fully and absolutely committed to keeping its stance in the credit market. We’re in the A region which we have in the past assigned to our preference region, where its comparable and we totally will not try to lose that on purpose. Totally, it is the rating agency’s criteria to decide what it’s worth today, which is totally a different number than what it could have been worth a couple of years ago. But, make no mistake, we are still committed to a very strong credit rating which continues to be among our -- the top of our peer group.

Okay. Thank you.

The next question comes from Terence Sinclair from Citigroup in London. Please go ahead with your question.

Can you just comment on the yield increase for voice minutes in Spain. How much of that was due to the [indiscernible] of comprehensive maintenance service and how much was due to the discounts and bonuses you changed across the year?

Would you mind to repeat your question please.

When we look at the increase in the yield per minute, the realized price per minute of the voice service. Your revenues is a solid 2.5% but your total volumes of minutes fell were over 10%, and you’ve given 2 reasons for that. 1 was the abolition of CMS, the comprehensive maintenance service, and the other the changes you’ve made in the discounts across the year. Can you allocate improvement in yield per minute to those 2 effects?

This question is a very difficult 1. Would you mind to call investor relation and we will make the calculation for you. It is a complex calculation.

Thank you.

The following question comes from Jonathan Dann from Bear Stearns in London. Please go ahead with your question.

Hello. It’s 2 questions. On Imagenio can you give us an idea of the sort of rollout plan, the marketing budgets is perhaps advertising, perhaps the P&L impact that you would expect the cash will commit to in Imagenio. And secondly, on the Endemol IPO, could we imagine that it would be very similar to Antena 3, that is, an IPO and then distribution of stock? Thank you.

It will be an IPO for the part of the Company [indiscernible]. The money will come basically through [indiscernible] and upside. So we said that it was better for Telefonica to have the [indiscernible] and we made the IPO of Endemol which will be [indiscernible].

Regarding Imagenio we are currently rewriting all our Imagenio plans. You have seen that we have introduced Imagenio in some cities in the last month. Particularly in the Basque countries in 3 cities. You will see that the before the conference -- the investors conference in April, you will see the introduction of Imagenio also in some new cities in Madrid. Then we are increasing the coverage, and we are planning to give you all the details and all information regarding our Imagenio plans in the conference meeting in Madrid next April. In Barcelona as well.

May I ask a follow up? In terms of what’s the rationale for IPO in only a minority of Endemol and keeping the majority, in terms of value creation for shareholders? I don’t understand. Would it perhaps better disclosure than owning 100% of creating value be better? Or realizing 100% of the value? I fail to understand the history of minority disposals haven’t or minority IPOs haven’t been great?

For that I would say that we believe the market doesn’t see the potential of Endemol because [inaudible]. Now we think for the number 1 position for TV in Europe and we see a lot of potential and we think to have IPO and put it to market will be very hurtful on any front. On the product front and this will be the end of [indiscernible] the value of Endemol.

Thank you.

The following question comes from Ricardo Seara from BPI in Porto. Please go ahead with your question.

Hi. Good afternoon. I have 3 questions if I may? The first 1 regards your page 10 of the press release in Spanish, where you mention the reorganization in personnel of other units within the Group was €200m. I’d like you to comment a little bit more on this please.

And the second 1, by looking at CTC Chile’s results in local currency, you can see that in revenues in EBITA, it was a negative performance from the third quarter to the fourth quarter. Both then declined by 3% and 15% respectively. While looking at the figures in euros, revenues increased by 15 and EBITA increased by 5%. I was wondering if there was any change in the consultation methodology in the last quarter of the year?

And finally, a follow up question on Turk Telecom. Should you be interested in acquiring Turk Telecom? Because the news on the press has been including both -– the fixed and the mobile business of Turk Telecom. Will you be doing these separately, while Telefonica Moviles will buy the mobile operation? Telefonica will buy the fixed line. How will you make it? Thank you.

With regard to Turk Telecom, we have in United States we have been looking into the figures but this is going to take longer. I can say more about it in the United States in the months ahead the Turk Telecom operation which is [indiscernible].

I will take the question on CTC Chile. First of all, I think that probably you need to compare the figures I gave the different currency figures without the Mobile business. But having said that, you have 3 main effects. First of all, you have the effect of the new tariff decree that has not been applied so far. You have an increase and therefore, on top of that you have extraordinary provision for bad debt that has been accounted in the fourth quarter, but has not been previously recorded in the third quarter. This extraordinary effect would broadly explain part of the big difference that you have. Apart from that, I’m not able to recall right now what would be a proper effect. If you have further questions please let us know and we will be more than glad to guide you through.

To let you know the charts that you mention, it is a mixed bag of a long list of many things. First of all, personnel related and the main contributors, as you would expect, are Telefonica Espana, Telefonica Moviles and Telefonica Latin America. They are by far, the largest contributor and representing roughly €140m of the €211m and the rest is made up of a very long list of different offsetting effects.

So, you said that part of it was due to Telefonica Espana?

No, what I said was that the combined effect of Telefonica Espana, Moviles and the 3 main business lines is €140m.

Okay. Thank you.

Okay you have time for the last question please.

The last question comes from Michelle Numarer (ph) from Caris (ph) Investment in London. Please go ahead with your question.

The question’s been withdrawn, so the following question will come from Rui Pereira from Espirito Santo Research. Please go ahead with your question.

Hi. Good afternoon. It’s Rui Pereira from Espirito Santo. Just 2 follow up questions on the fixed line business. I believe in the fourth quarter international long distance was the main responsible for the good performance in the revenues. The traffic in the international long distance was up 4% and the revenues were up quite more than that. Is there any particular reason because I think the Group for international long distance was more than 50%? So if you could clear that I’d appreciate it. Thanks.

Well again, I think we must take into account what happened in 2003. In the fourth quarter 2003, once we had all the data related with traffic available, the discounts provided by the traffic plans we had on the year, were totally assigned to the different types of traffic, at that point in time. Because of that, we had to make a very specific and extraordinary reduction in the fourth quarter 2003, in international traffic, that we estimated at that time was €11.5m. Because of that, when you compare the fourth quarter of 2004, with the fourth quarter of 2003, you must take into the account these extraordinary adjustments we made in 2003.

If you would take into account this effort, in several international groups of international traffic which had been 53%. It is still a big amount. And this is like that, because our successful policy relating with our activities to culture international traffic from immigrants. Where we have very aggressive pricing discounts with quite good results.

Okay. Thank you very much. And I hope we will meet you again on the March 17, 2005, the conference call we’re going to have for international accounting standards impact and to deliver the guidance for the year 2005. Thank you very much and goodbye.

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