Telefonica SA (TEF) 2005 Q1 法說會逐字稿

Good morning, good afternoon ladies and gentlemen, and welcome to the Telefonica first quarter results conference call. At this time, all participants are in a 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 call is being recorded. I would like now to hand over the call to Mr. Ezequiel Nieto, Head of Investor Relations. Please go ahead sir, and I will be standing by.

Thank you. Good afternoon ladies and gentlemen. Welcome to Telefonica's conference call to discuss the 2005 first quarter results. I am Ezequiel Nieto, Head of Investor Relations.

Before proceeding, let me mention that the document contains financial information and data reported under IFRS. This data is preliminary, as only full compliance with International Financial Reporting Standards issue as at 31 December, 2005 is required un-audited, and thus is subject to potential future modifications.

This financial information has been prepared based on the principles and regulations known to date, and on the assumption that IFRS principles presently in force will be the same as those that we will be adopting to prepare the 2005 full-year consolidated financial statements and consequently, does not represent complete financial adoption of these regulations.

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

Good afternoon ladies and gentlemen, and thank you for attending Telefonica's 2005 first quarter results conference call. Julio Linares, Telefonica Espana's Executive Chairman, and Jose Maria Alvez Pallete, Executive Chairman of Telefonica Latinoamerica, are joining me today to run you through the Group's performance in this first quarter of 2005.

Starting our revision of basic financials with revenues, consolidated sales grew by close to 17% year-on-year, to top €8b. Supported by the solid underlying performance across all business lines and the incorporation of the Bellsouth assets. Organic revenue growth that is consolidated since January 1, 2004, all operations bought from Bellsouth stood just above 9% for the January/March 2005 period.

The Cellular business was ranked as a major contributor to organic revenue expansion, representing close to two-thirds of the Group's organic growth revenues. From a cost perspective, operating expenses were up by around 18%, as the Company's ongoing commercial initiatives to strengthen market positions across [indiscernible], and particularly for Mobile and Broadband Services, remain at the top of our management priorities.

As for revenues, the consolidation of Bellsouth is also having an impact on the evolution of operating expenses. As such, operating income before D&A posted a 16% annual growth rate, to end the quarter just above €3.4b. Organic growth of operating income before D&A would have been 9.5%. Operating income almost reached €1.9b, or a number equivalent to a 25% annual growth rate.

Including the Bellsouth properties in our accounts since January last year, operating income would have still been growing by more than 21%.

At this point, it is worth mentioning that current currency fluctuations have had a negligible impact on Telefonica's key financial metrics for this period. ForEx is draining just a half a percentage point from total revenue growth, which is a negative impact that reverses and goes down to zero as we go down the bottom line, all the way to the net profit number.

Finally, January/March 2005 net income achieved €912m, up 36% from last year's figure. The sustained improvement on non-operating results, complementary to top-line expansion, has been a key to net profit performance, as we can show in the next slide.

Positive financial impact of bottom-line management are spread among three main headings. First Associates, whose registered losses have been cut by 69% in the last 12 months, due to lower losses in our Internet and Mobile equity consolidated ventures and Sogecable, and the positive effect of our increased stake in Portugal Telecom.

Second, financial expense that was marginally down on aggregate, and we shall review our growth rates [overall] in this call.

And third, results from discontinued operations, which went from a negative €30m in the first quarter of '04 to a positive residual figure this quarter, reflecting Lycos' sale in October of last year.

Let me also remind you that the 52% increase in minorities is a reflection of the better underlying trends, with the Group's operating companies broadly improving net income.

If you now please turn to slide number five, we will deal with the review of the contribution to growth by business lines.

Telefonica has built a diversified and well-balanced portfolio of assets, all of which are contributing positively to the Group's growth in the first quarter of '05. It is worth mentioning the solid top-line performance of Wireline divisions that represented almost one-fourth of the Group's revenue growth for the period, standing clearly apart from current sector trends.

Running assets with complementary business profiles leads to a higher quality and lower-risk consolidated growth pattern across the P&L, with our three key businesses - namely Telefonica Espana, Telefonica Latinoamerica and our Cellular businesses - transferring revenue growth from top to bottom in different skills, on the basis of their specific context of operations.

Wireline subsidiaries are increasing their weight of the Group's growth from top to bottom, while Mobile is being affected by the need to fund client expansion across all Latin American markets.

We manage all divisions to try and combine growth and returns, as we show on slide number six. During the first quarter of this year, all major operating companies are maintaining commercial efforts at a very high level, concentrating on client acquisition and potentially the Mobile and Broadband arena, to fully exploit their growth potential.

For Mobile, the increase in sales and marketing, combined with the full integration of Bellsouth assets, are the two major factors behind the Cellular business expenses growth, which accounted for the bulk of the Group's rising costs.

Commercial initiatives, coupled with new products and innovative pricing, is being clearly successful in better positioning the Group's operations in its markets of operations, as the increase in Mobile and Retail ADSL assets numbers shows.

In the last 12 months, close to 13m subscribers have been captured on aggregate, purely organic 1.2 times above the first quarter of 2004 figure. Let me remind you that the acquisition of Bellsouth Latin American assets adds an addition of 15.7m clients to these figures.

Despite commercial intensity, higher efficiencies and economies of scale are leading to keep all our operating income EBITDA margin stable above the 42% mark, with operating income margin increasing by 1.6 percentage points, to reach almost 23%.

And now, for a review of the first quarter CapEx and operating cash flows, please turn to slide number seven. January/March Group CapEx reached €744m, which is equivalent to a 20% annual increase. Mobile CapEx growth, half of which is related to the integration of Bellsouth and an increasing Wireline investment in Latin America to [capture] demand and expand Broadband services, are the two factors behind total CapEx evolution.

Operating cash flow exceeded €2.6b for the quarter, 15% ahead of last year's comparable figure.

As we present, in slide number eight, first quarter performance is in line with our 2005 targets. After adjustment for guidance calculation, Broadband revenues, operating income BDA, and operating income were close to 17%, 12% and 18% growth rates respectively.

I would like to briefly remind you of what our adjustments for guidance calculation mean. First, guidance is calculated based on the first quarter of '04 reported numbers, not pro forma numbers.

Second, guidance refers to local currency and excludes changes in consolidation, other than the incorporation in 2005 of the assets acquired from Bellsouth in Argentina and Chile, and the acquisition of [Altium] by Telefonica Latinoamerica.

Third, operating income before and after D&A excludes exceptional revenues and expenses not budgeted in 2005. As such, these same categories of exceptionals have been deducted from the first quarter of '04 operating income before and after D&A.

Let me emphasize that although the first quarter numbers are comfortably above the [numbers given] of guidance, both seasonal and date effects will combine later on in the year to bring it close to guidance as this same year progresses.

And now for a review of Telefonica Espana's first quarter numbers, let me pass on the word to Julio Linares.

Thank you Santiago, and good afternoon. A positive evolution of all of our business lines has led revenues to grow by 6% on an annual basis, and end the quarter above €2.8b.

Broadband is leading the transformation of the business, enhancing its growth profile and lending stability to financial performance, as it compensates revenues at risk, namely local and domestic long distance. In the last 12 months, the weight of revenues at risk over total revenues has declined by 1.4 percentage points to just 13%, whereas total Broadband revenues are now accounting for 15.5 of total sales, almost 4 percentage points ahead of first quarter 2004 figures.

In terms of contribution to sales growth, Internet and Broadband services have stood as major contributors to Telefonica Espana's top-line growth this quarter, representing more than 50% of the Group's incoming [expansion].

Now, let's turn to cost and efficiencies in slide number ten. Total expenses were up by 2% year-on-year, to just exceed €1.7b. The evolution of OpEx is heavily impacted by our efforts to develop Broadband ahead of competitors, with supplies and external services growing at 11% and 13% respectively.

In that regard, commercial expenses for the parent Company moved up by 15.5% on an annual basis. On the contrary, personnel expenses came down by close to 10%, a reduction which is essentially explained by the 35% decrease in the provision for preretirements, accounted for in the first quarter this year.

Excluding this provision, personnel expenses would have declined by just 0.9%, as savings related to the 2003/2007 redundancy program were partially offset by different timings for the revision of salaries and incentives for employees not included in the collective agreement, and jobs creation linked to the provision of IT services.

Despite higher costs, Group operating income before D&A margin remained almost stable in the last 12 months, after excluding the impact of the provision for preretirements, ending the quarter above 46%. If we factor the adjustments for guidance calculation, operating income before D&A would have grown at 12%, well above 2005 target.

Please bear in mind that half of this growth comes from the lower provision for preretirement we registered this quarter, a figure that will be reduced at the year-end.

Slide number 11 presents an overview of traditional operating metrics. Starting with Access, close to 85,000 lines were lost between January and March 2005. Although the base of Access line losses increased when compared to past quarters, we expect the free connection fee campaign launch in April to have a positive impact on the Group's Access market share in the coming quarters. This campaign, that added almost 63,000 new connections, will help us to fully benefit from the 2% monthly rental fee increase, effective January 22 this year.

In the Unbundling Local Loop field, a stiffer competition that started at the end of last year, with the introduction of double-play products by major new entrants stimulated unbundling, and we expect close to 77,000 lines have been unbundled during the first quarter of 2005, accelerating from the 44,000 unbundled lines added in the fourth quarter last year. Shared Unbundling Local Loop net adds are showing the strongest momentum, representing more than 70% of total Unbundling Local Loop net adds.

With regard to Carrier Pre-Selection, the increase in total pre-selected lines almost reached 24,000 lines for the three-month period ending March, 70% below the number of clients that were pre-selected in the fourth quarter 2004.

Now that we have started to execute win-back campaigns based on client [indiscernible] consent, we are starting to recover part of the clients we lost when [indiscernible] pre-selection was implemented in September 2004.

Turning to Traffic, the Spanish voice market remained weak, shrinking by 5% in the first quarter 2005 in normal terms. Within this context, Telefonica Espana's market share loss was 4.2 percentage points, a slight improvement when compared to the 4.4 percentage points lost during 2004. I would like to highlight the positive trend in international Traffic, expanding by close to 12%, a proof of our success in capturing [immigrant] Traffic.

Please turn to slide number 12 for the review of ADSL metrics. The Spanish Broadband market continues to post solid growth as competition intensifies, adding more than 420,000 new connections in the first three months of the year, 54% above last year's figure. Telefonica is leveraging on market growth to end the quarter with more than 2m prepay ADSL connections, up 43% from first quarter 2004 figures.

The stronger competition is cutting Telefonica's Group market share of Broadband by 1.3 percentage points in the last quarter, to reach 54.2% at the end of March. However, the Company's commercial initiative launched this year, in terms of new products, value-added services and promotions, has led to cut market share reduction by 50% in just three months.

The [indiscernible] approval by the CBD of new double and triple-play offerings will clearly strengthen our competitive position, and make us confident of our capacity to successfully face future market developments. In terms of ARPU, semi-flat pricing offerings and long-term promotions are pressuring average revenue per user, that declined by 3% from 2004 figure to reach 48.5 users.

We are keeping our efforts to drive value-added services revenues up, giving at the end of March more than 1.5m services operative, 25% above 2004 figure. ARPU from services and devices increased by 1.5 times since March last year, to get to €5.4 per month, equivalent to 11% of total ARPU figures.

The first quarter of 2005 represented a turning point in the development of Imagenio, one of our key initiatives to fight for market share and enhance our value proposition. First quarter net adds exceeded 13,500 subscribers, to end the quarter with close to 20,000 Imagenio users. Progress has continued to reach, in April, more than 32,000 customers.

It is now my pleasure to turn over to Jose Maria, for the analysis of Telefonica Latinoamerica's results.

Thank you Julio and good afternoon. Consolidated Wireline revenues in Latin America topped €1.7b in the first three months of the year, equivalent to a 4.5% growth rate year-on-year. Local currency growth stood at 3.4%, once excluding the positive effect of ForEx driven by the appreciation of all local currencies but the Argentinean peso against the dollar.

But in the past quarter, Telesp ranked first in terms of contribution to revenue growth, representing more than 80% of the advance in the [indiscernible] top line, with Telefonica Argentina consolidating a second growth driver, helped by solid financials that benefit from the constant progress in Traffic and Clients.

I would like to emphasize the growing contribution of Data and International Courier Operations to the Group's total, already representing 1 percentage point of the Company's growth.

In terms of top-line trends by individual operators, it is worth noticing that all local operations are keeping solid revenue performances this quarter, with CTC and Telefonica Peru almost reaching revenue breakeven amid challenging conflicts of operations, and Telefonica Argentina continuing to excel, despite frozen tariffs.

In the case of Telesp, lower Traffic revenues linked to fixed-to-mobile substitution and a weak long distance market were negatively affecting the relative performance of our Brazilian subsidiary.

Pressing on Broadband development has been key to support revenue performance across countries, as slide number 14 shows. Total ADSL connections in Latin America exceeded the 1.5m clients mark at the end of March, 1.8 times above last year's figure. All operating companies are multiplying their efforts to capture and retain clients by improving speed and service offerings, to enhance use of experience, and by launching new pricing schemes tailored to difference usage patterns. As such, ADSL subscriber growth rates by operator in the last 12 months ranged from 1.6 times for Chile to 2.5 times for Telefonica Argentina.

Expanding client bases were leading to a very solid Broadband revenue performance for all operators, with TASA doubling local currency Broadband revenues in annual terms, while the rest of the companies were seeing their Broadband sales expanding between the 40% rate posted by Telesp and the 70% rate registered by Telefonica de Peru.

Our basic path for Broadband development is clearly re-shaping the revenue profile of our operating companies. Additionally, Broadband is a significant complement to our second major strategic goal in the region, which is to defend traditional revenue streams through deeper segmentations, to tackle low income market segments, and the introduction of new value-added service to increase share quality.

Please notice that in the countries where traditional services are pressured the most, namely Chile and Peru, Broadband sales are already almost fully offsetting the shortfall.

Maintaining a strong hold on costs to keep benchmark efficiency levels remains a management priority, as slide number 15 highlights. Excluding Argentina, for the dynamic micro-picture of what we did to renew commercial efforts to attend growing demand, the rest of Wireline operating subsidiaries were containing growth in total operating expenses in constant currency terms. Excluding Telefonica Argentina, higher efficiencies are pushing operating income BDA margins up across our asset portfolio, with margin improvements ranging from 0.6 percentage points for Telefonica de Peru to 2 percentage points for Telesp.

Operating income BDA margins ended the quarter in the 44% to 40% bracket for major operating subsidiaries, with Telefonica Argentina surpassing the 55% mark. At the consolidated level, Telefonica Latinoamerica reached 44.6% operating income BDA margin, once eliminating the positive impact of capital gains related to the Infonet sale. This figure was 1 percentage point ahead of the first quarter 2004 figure.

In terms of guidance, first quarter 2005 operating income BDA growth stood at 6.5%, in line with the objective set for the full year. I now hand over to Santiago for the review of major financial developments.

Thank you Jose Maria. In the first quarter of 2005, we have kept financial expensing checked broadly to 2004, despite a 17.5% rise in overall debt as a consequence of the acquisitions, especially the Bellsouth acquisitions of last year.

This has been accomplished by shrinking the unit cost of debt 119 basis points, as shown in this slide. Hedging and risk management results, including foreign exchange, have also contributed an additional positive €63m to financial results, to the containment of overall financial expense.

Net financial debt stood at €23.9b at the end of the first quarter. Total debt cost commitments stood at €27.6b. Both figures provide support to our commitment to bring total debt cost commitments below 1.85 times by the end of 2006, that we expressed in our recent Barcelona conference.

Our currency exposure has changed little since we last reported. We continue to be indebted, predominantly in euros, for 71% of the total, 9% in U.S. dollars, and 18% in sundry Latin American currencies.

On slide 17 we present the free cash flow development for the first quarter of this year. Telefonica has been able to generate €1.35b of free cash flow in the first quarter, not the definitions used in our investor conferences. This is the figure that collects a number of one-off effects, like tax payments in Brazil and Venezuela, and an upsurge in CapEx payments. And we think it would not be wise to annualize it to estimate Telefonica's underlying free cash flow generation capabilities in 2005.

In the first quarter, we continued with our old buyback program until we reached the legal 5% limit. We expect to be able to resume the program before the end of the second quarter, as the cancellation of shares and the planned distribution - one for every 25 shares of treasury stock - are implemented.

To sum up, ladies and gentlemen, number one first. Organic top-line growth has remained robust in the first quarter, with all major subsidiaries contributing positively to it.

Second, our domestic divisions are giving solid revenue performances in a demanding context of operations, both for Fixed and Mobile services.

Third, Broadband and Bellsouth assets are the key drivers behind the Latin American positive sales.

Fourth, we are keeping profitability at very sound levels, despite maintaining strong commercial efforts to strengthen the competitive position.

And finally, the first quarter of '05 numbers are underpinning the Group's cash flow generation capabilities.

With this, I thank you very much for attending and now we are ready to take your questions.

Thank you sir. [OPERATOR INSTRUCTIONS]. The first question comes from Michael Armitage from MainFirst Bank in London. Please go ahead with your question.

Thanks very much indeed. Good afternoon gentlemen. A couple of questions, if I may, the first a very simple one. I wonder if you could help me understand why you think the fixed-to-mobile traffic volumes actually fell in the quarter? I'm obviously missing something in the trends in the Spanish market, but that seemed to be unexpected.

Second, I wonder if you could clarify in your guidance and in your results relative to guidance, whether you're including the capital gains on Infonet in your base calculation for 2004?

And finally, did I hear you mention the canceling of shares as part of the buyback program, because I thought the buyback program included the distribution of shares? Have I misunderstood the purpose of the program? Thanks very much.

Michael, would you mind to repeat the second question please?

The second question was in your calculation of adjusted -- the base number for guidance purposes, it's not clear to me whether you're including the capital gain on the Infonet sale in the base figure or whether you've taken that capital gain out.

This is Santiago. Let me start with your second question on Infonet. Infonet was not included in the 2004 base.

Great, thank you.

Regarding your first question, the relationship with the fixed-to-mobile traffic decreased 1%. You remember that in the last quarters the growth was very small, and in fact there is a little decrease in this quarter. We believe that this is mainly because of the increase of the Mobile base of customers that leads to an increase on the mobile-to-mobile traffic that had this impact on the fixed-to-mobile Traffic.

Okay, that's clear. Thank you.

Thank you Michael. Next question please.

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

Hi. It's Terry Sinclair from Citigroup. Two questions. What should we assume as a long-run ADSL ARPU in Latin America?

And secondly, what expectation should we have for the tax rate this year for the Group?

Yes, Santiago here. Let me start with the tax question. Two things. Firstly, the effective tax rate should not increase significantly, although it should go slightly up roughly to last year, because of the incorporation of new assets, especially the Bellsouth assets. Which in general, as I mentioned in the conference call, are already generating cash and paying taxes, notably the case of Venezuela is the most apparent of them.

Tax rates have not changed this year, and so what I think is fair to expect is a higher amount of cash taxes relative to other years, because the perimeter of the Group has changed and because many of the operations are already contributing positively to results, and therefore accruing income tax payments.

Taking your second question, about ADSL ARPU in Latin America, our internal predictions are for a steady slight increase in ARPU from the current levels, a slight one, in the next three years. The figures as of this year allow us to stay in this trend. So a slight increase, a very slight increase for the coming three years.

Can I just come back on the tax question? The accrual rate last year was a little under 30%. We obviously have a -- we know what your March [indiscernible] was, and there was significantly above €8b tax assets there. Should we assume that the tax assets declined at similar rates to last year and the year before?

It's difficult to say, Terry. It's not that we don't want to answer. The reason for that is that there are a number of things that we decide later, after the closing of the year, as to whether or not are we able to take some deductions, some tax rebates and things like that, that are sometimes optional, which is what makes it difficult.

So I don't think that assuming that the tax base asset is going to decline as the actual amount of taxes proceeds is the reasonable thing to do under all circumstances. It will very much depend on the tax environment and where those taxes are being paid.

Remember that outside of the tax consolidation rule, which is done according to Spanish legislation, things are much more complicated to engineer. So I think the two takeaways that I'd like you to come away with are cash taxes are likely to be higher this year relative to total taxes, than they were. And second, the effective tax rate could only be marginally higher than last years, on the [indiscernible] terms, because of the incorporation of the new assets that came with long tax histories attached.

Thank you very much.

Thank you. Next question please.

Thank you. The next question comes from Bosco Ojeda from UBS in London. Please go ahead with your question.

Hi, good afternoon. I have a question on the currency impact. We have seen quite a steep movement on the Latam currencies in the past few months and I wonder if you could give us some color on the impact, particularly on the hedging structure, if you are anticipating any major impact on that side? Thank you.

Yes, Bosco. As you already know, that we try and manage the currency exposure of the Group in all dimensions in a very active and dynamic way. I think the €63m, that I have mentioned, of positive results in the first quarter are a good witness to that.

So it would be risky to assimilate the path of currency exchange rate and our results, because most of the bad things that could possibly happen to us are pitched to a very large degree, as again, the first quarter of this year can show. So one thing that we will see this year is that the euro is no longer as strong as it used to be, and that some of the Latin American currencies where we do business are stronger, even relative to the dollar, than they were.

So, so far, it is a [stupid] statement to expect that currency will not be a detrimental effect, okay, just to say on a base quarter. Whether you contribute positively, there is a lot of year yet ahead of us.

Thank you.

Next question please.

The next question comes from James Golob from Goldman Sachs in London. Please go ahead with your question.

Hello. If I could ask two questions. One is if you could just break out the ADSL connection fees, so the initial connection fees that you had? I guess it's for Spain and for Latin America, if you have it, just to get some sense of what those are year-over-year and how that's evolved?

And then the second thing is on the consolidation of the Telefonica Latinoamerica EBITDA. In the past, there was a negative reconciliation factor, which in the first quarter of last year, under Spanish GAAP, I guess was €46m or so. If, excluding the Infonet gain on disposal, it now seems to be a €15m, well €16m positive, is that reconciliation going to be a positive item going forward or is there something else that makes that first quarter positive adjustment exceptional, especially when you think about that reconciliation?

Good afternoon James, and thank you for the question. I will take the second one, about the operating income BDA consolidated in Latam. What I can tell you, as of this quarter result, is that the main difference that we have, if you were to adapt the operating companies and compare it with consolidated figures, is that the main difference is just the Infonet disposal, the result of the Infonet disposal. As all other holding companies' expenses are marginal, very marginal.

So, I would tell you that the only effect that we'll have as of this quarter is the Infonet, if you take the very marginal impact of operating expenses at the holding company level. That's what I can tell you as of today. We are including for Infonet roughly €80m of result. So I guess that with that you could reconcile the different margins.

But that's leaving about €16m of positive reconciliation, whereas a year ago it was a €40m/€50m negative item.

Well, not according to the numbers. Remember that you have to adapt Telesp [data] and Chile, Telefonica de Peru, Telefonica Impresas, Telefonica International Wholesale. And if you were to add up those, you will reach a figure of €771m. Then if you were to adapt €80m for the Infonet, you will reach the €852m figure. Okay?

Thank you.

Thank you sir. The next question comes from -- sorry

Just about the ADSL stuff.

Okay. Regarding your question on connection fees of the ADSL impact on our operating revenues. Speaking of the market here in Spain, the connection fee is permanently basically included in our promotions. So, our impact from connection fees is very small and the impact is then very small.

Sorry, but I regret that we don't have here the connection fees of -- in different countries in Latin America. We will send you these for you to [indiscernible].

Thank you.

Sorry for that.

Thank you James. Next question please.

Sorry about that. The next question comes from Luis Prota from Morgan Stanley in Madrid. Please go ahead with your question.

Yes, hello. I have two questions, if I can. The first question is on Telesp. I wonder if you could elaborate a bit on the Q1 results, which were looking a bit weak to me, especially on the revenue side, going up only 3% despite the tariff increases? I wonder if you could tell us what's the trend expected in the coming quarters and maybe the full-year expectation here?

And the second question is on the Domestic Wireline business, the [BSDL] lines lost, which has been quite big this quarter, being around 50% of the full-year lines lost despite the promotions, which probably is implying that the run rate is even worse than what you have reported. I would like to have your view on the obvious short-term positive impact from the reduction in the bonus and discounts of the maintenance service, against the medium-term impact of potential lines lost, so where's the balance here? Thank you.

Thank you for your question Luis. I will take the first question about Telesp. What I can tell you is that in terms of revenues, we have had two negative effects that were not contemplated initially. The first one is the delay in the implementation of the fixed-to-mobile tariffs. Remember that it was supposed to happen in February and it hasn't happened yet, because now we need to reach an agreement with the Mobile operator and it's taking more than initially [expected].

The first year that we had to reach that agreement before this year, it was an [indiscernible] position. So this has been making some delay. According to the last news that I have from Brazil, it is already underway. So, you should expect this in the second quarter to be reversed.

And the second effect is a decision from Anatel, according to the mailbox in Sao Paolo. Well, it was in Brazil, but for us in Sao Paolo the effect has been, I would say, [relevant]. But it's also underway because we have launched a new product and we are already recovering on that.

What I can tell you is that as of April we have recovered this growth trend and we stick to the guidance that we gave initially. So, things are underway. And on the operating income BDA margin, I guess that we have been more than recovering these shortfalls in revenues. So things are going well on the operating income BDA margin. So I guess that in the second quarter we could show a different figure in terms of earnings.

Well, regarding the Wireline business questions, you know that during the first quarter this year we didn't have any free connection fee campaign, in this first quarter. So, mainly because of that, we had such a loss of lines, which was higher than the previous quarter. In fact, in April, when we had this campaign, we were able to show, thanks to this campaign, more than 63,000 lines. And because of that, the net addition in April was 20,000.

And now, we do not see any relationship between the evolution of the market -- of the lines and the maintenance service modifications that we have done in the last year.

Okay, thank you.

Thank you Luis. Next question.

Thank you. The next question comes from John Pearce from Dresdner. Please go ahead with your question.

Hi, yes. John Pearce from Dresdner Credit Research. I'm interested in the fact that you have to make some substantial payments for Cesky Telecom fairly soon, I presume this year. Could you please talk a little bit about these payments, their timing, particularly how you plan to raise the money that's likely to be necessary to pay those? Whether this is likely to be bank loans, or more bond debt? Thanks.

Yes. The timetable for the number of things we have to do on Cesky is not completely certain, as we are still expecting regulatory approval by both the Brussels Commission and the Czech government. We expect to be able to close the deal, which is the purchase of the 51% of Cesky, before the end of June, although the final date is still uncertain.

After that, as you probably know, we will have to launch in no more than 60 days a takeover bid, subject to a number of conditions, which we of course will. And that should last for another - I'm not sure - six to ten weeks, depending on the thing. So it's going to be a pretty much strung-out process that is going to take a bit of 2005 with it. The only certainty is that if we are successful, as we expect, to pay for the 51% before the end of June, is that €2.75b will have to go out of our [indiscernible].

That is not an issue, as you already know that we have available a number of credit lines and a number of cash available at banks, that we could draw upon to pay that literally tomorrow. In the meanwhile, and on top of that, the free cash flow generation ability of the Company is proceeding at the expected pace, as we mentioned in our conference call. And we expect that pace not to go down during the second quarter, and that would certainly help continue with the funding.

Third, there are definites regarding your question on how to finance this. We continue to monitor actively both the bond and the bank loan markets for the best available opportunities. And so far we have not made fully final decisions. We will tap both ends of the market as we see fit, in the best interests of our shareholders.

Okay, thank you.

Thank you. Next question please.

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

Yes, good afternoon gentlemen. Just three quick questions. Firstly, a follow up to Michael's very first call. You mentioned in your opening spiel, Santiago, that obviously you are going to return 4% of the equity to shareholders, but you own 5% currently. Are you going to cancel the other 1% to allow you to take your stake back up to 5% with a buyback?

Secondly, could you please just discuss at Telefonica de Espana what the wage inflation you've agreed is? Because it would appear as if you've taken some incremental workforce reduction salary costs in Q1, or brought forward timing of some of the payments, I was wondering if you could give us an update on those?

And secondly, can you just confirm what Jose Maria said when he said we should expect Q2 revenues in Telesp to pick up and to be closer to the full-year guidance range, which I think was high to mid-single digits? Thank you.

Yes, Guy, hello. Santiago here. Let me run you throughout the disposal of the treasury shares and its likely timing. Again, this is not final and certain, because many - or rather the largest part - is still subject to shareholder approval. We honestly do not expect any major complications to arise from there, but this is as far as planned and not a commitment, because we cannot possibly make that.

The likely course of events is as follows. On March 31, we have the AGMs and the EGM relative to the Terra merger. Then we have to cancel 35m shares roughly, because of the cancellation of the stock option program that was in existence until the end of 2003. So those 35 -- I'm sorry, until the end of last year. This is the old [TIVS] program, and 35m shares of treasury stock were supporting it. As the program expired to worthless, those shares must be cancelled. We have no other choice and that is what we will do, in all likelihood, the beginning days of June, say the first fortnight or so.

Then, we will proceed as fast as possible, but we have a number of steps to follow to distribute the 4% at one for 25. We think it is not likely that we will be able to do that before very late in the month, okay. And then the remainder will be used, either to be contributed to the Terra shareholders, so in both EGMs and go through in the way we would expect, and would like them to proceed.

So, the first date that we could resume our buyback program would be the date of the cancellation of the 35m shares, which are going to be cancelled as a result of the old TIVS stock option program. And that is going to be in the first fortnight of June.

Regarding the question in relationship with personnel expenses in Telefonica Espana, we've had to review salaries based on the foreseen CPI. And of course, we would have to update these at the end of the year. But I think it is important that you take into account that in this first quarter there are two significant changes in comparison with the first quarter last year.

The first one is in relationship with the people that are not included in the collective agreement. In this specific case, we'll review the salaries, of course, based on CPI evolution. And additionally, we'll review incentives for these people in this first quarter. Last year, that revision was done in the second quarter.

In addition to that, within this year we have incorporated 290 people from different companies within the Telefonica Group, in order to have in our new organization the right skills for systems integration and outsourcing that, as you know, is one of the new approaches in the enterprise market.

Taking your third question, the overview that we have today, as of Telesp revenues, according to what I said before, is that we should probably take a little bit of more dynamic in terms of growth in sales. And the main assumption behind that is that what is already happening is that -- remember that also in the first quarter we have five less business days than in the first quarter of last year.

And remember also this delay in the application of the fixed-to-mobile tariff increase. If you adapt to that the fact that we should have the fixed-to-fixed price increase at the end of this quarter, plus the fact that we have already taken the launch of the new economy lines in Sao Paolo, plus the fact that we are accelerating the ADSL deployment in Sao Paolo, plus the fact that we have launched at the end of the March the new mailbox product, that allows us to stick to the guidance that we provide in terms of revenue growth.

Thank you very much gentlemen.

Thank you. Next question please.

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

Yes, it's a question for, I don't know. It's in relation to bundling of services. In the release you talk about having received permission for eight bundles of services from the regulator. Can you do a couple of things for me? Can you, one, set out whether the approval by the regulator includes the prices of those services?

Secondly, can you just remind me, does this allow your competitors to complain when you launch those services, in which case they may be suspended?

And the one service you outline to us - are you allowed to offer a discount on these bundles, or is it a matter of adding Voice plus Imagenio together?

Well, as you said, [CNP] has approved eight different bundles. Four bundles are related with ADSL, plus Voice. Two kinds of ADSLs - one with flat rate and another one with some volume limitations - in combination with a regional flat rate for Voice, and in combination with a national flat rate for ten selected numbers.

In addition to that, the regulator approved two bundles of Imagenio plus ADSL, plus the two flat rates of Voice traffic that I told you before. And in addition to that, the regulator approved two Imagenio bundles just with TV, without ADSL for Internet access, plus the two Voice packages that I mentioned before. So totally, eight packages.

The discounts included in those packages are between 13 and 90%. We don't believe there is any reason for our competitors to complain in those bundles, because, as you know, we are not the first in the market in bundling these kind of products. But more than that, almost the last one. So we don't see any reason for any complaints.

Can you just repeat the level of discount - was it 90 or 19 at the top end?

13 - from 13 to 19.

Thank you.

Thank you. Next question please.

Sir, we've got no more questions. I'll hand the conference back to you.

Thank you. Ladies and gentlemen, if there are no further questions, let me thank you again for having taken part in Telefonica's first quarter 2005 conference call. We appreciate your presence and stand ready to continue [indiscernible]. Thank you.

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