Telefonica SA (TEF) 2005 Q2 法說會逐字稿

Good day ladies and gentlemen and welcome to the second quarter 2005 Telefonica's earnings conference call. My name is Enrique and I'll be your co-coordinator for today. At this time all participants are in a listen only mode. We will be conducting a question session towards the end of the conference. [OPERATOR INSTRUCTIONS]. I'd now like to turn this presentation over to your host for today's call, Mr. Ezequiel Nieto Baquera, Head of Investor Relations. Please proceed sir.

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

Before proceeding, let me mention that the document contains financial information and data reported under IFRS. This data is preliminary and is only for compliance with international financial reporting standards issued at December 31, 2005 as required and are subject to potential future modifications.

This financial information has been prepared based on the principles and relations known to date, and an assumption that IFRS principles presently in force, will be the same as those that will be adopted to prepare the 2005 full year consolidated financial statements and, consequently, [indiscernible] relations.

This presentation may contain announcements that constitute forward-looking statements. These are not warranties 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 on our website. We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators. If you do not have a copy of the relevant press release and slides, please contact Telefonica's investor relations team in Madrid by dialing, 34 91 584 4713.

Now, let me turn the call over to our Chief Financial Officer, Mr. Santiago Fernandez Valbuena, who will lead this call.

Thank you Ezequiel. Good afternoon ladies and gentlemen, and thank you for attending Telefonica's 2005 first half results conference call.

I am pleased to have today with me Julio Linares and Jose Maria Alvarez Pallete, the joint Chairman of Telefonica Espana and Telefonica Latin America respectively. We are jointly going to review the Group's performance this quarter.

At the top line level, the solid underlying performance across all divisions, coupled with the incorporation of the BellSouth assets this year, are the 2 factors behind the 20% annual increase in revenues. This has totaled more than €17b in the first 6 months. If we were to consolidate BellSouth into our accounts since January 1 of 2004, and exclude ForEx, the organic revenue growth would have topped the 10% mark.

Annual sales growth has accelerated sequentially as a result of the robust client additions in the second quarter, which have risen above 23% for the April to June period. On the cost side between 14 market positions and leaving the development of our growth drivers in the Mobile and Broadband are pushing operating expenses up by 23% on an annual basis.

The consolidation of the former BellSouth assets and the ForEx, are also impacting operating expenses that grew 12% organically. As a result, operating income before G&A came close to €5.7b at the end of June, which is equivalent to a 15% year-on-year increase, the figure that would have turned to be 6.6% organically.

Plus, adjusted depreciation and amortization which grew at a 9% rate, will generate operating income that almost reached €3b, or up 21% annually. Including BellSouth properties in our accounts since January of last year and excluding ForEx, operating income would have run at 12.6%. Actually the management of non-operating results is also [indiscernible] complement to top line growth, as this can be shown in slide number 4.

Net income for the January to June 2005 period ended above €1.8b, which is 25% higher than last year's. I would like to mention the expansion of growth rates recorded as we progress down the P&L, which is proof of the quality of our accounts and the results of our ability to extract value for managing associates, financial costs and taxes. Annual increases are accounting 10 percentage points from operating income before G&A to net income.

If you now please turn to slide number 5, we will do the review of the contribution to growth by business lines. Diversification by business and geographies is deemed essential to model top quality growth profile across the Group, leveraging on the value of being an integrated operator, to build stability to the P&L as we manage assets at complimentary stages of development.

The Cellular business is the Group's major driver of revenue growth, a position that it loses in favor of Wireline operations as we get closer to the bottom line and the cost to fund client expansion emerges. On the contrary, Wireline contribution to consolidated growth is amplified as we move down the P&L.

For the first time in 4 years our exposure to foreign currencies is starting to being accretive instead of diluted to local currency financial, as can be seen in slide number 6. ForEx is contributing to nominal revenues and operating income before G&A, close to €172m and €79m respectively. As such, currencies are adding more than 1 percentage point to constant sales and operating income before D&A growth rate of around 19% and 14% respectively [indiscernible] has negative contributions.

The strong performance of the Brazilian real, with a 6 month average appreciating 10.6% annually is the main factor behind the positive contribution of foreign exchange. I would like to point that the Brazilian real's top rate is currently above 12% - its first half average. A negative wave for a positive future news flow on currency [indiscernible] should the macro picture remain stable.

ForEx is adding to an already solid underlying performance of sales, as we've shown in slide number 7. The Spanish Wireline business retained its condition of [indiscernible] 5% between January and June. The remaining base of divisions have seen top line growth accelerate sequentially. Consolidated organic revenue growth topped the 10% mark in the first half of the year, exceeding the first quarter figure.

Market position is key to keep revenue growth, and enhance the Group's competitive position, not only to capture and retain clients, but also to multiply the numbers of services they are signing to is a day-to-day task for Telefonica team members, of which marketing is a key component.

Please now turn to the next slide for a summary of our commercial initiatives and their results. Brand repositioning, with the [indiscernible] re-launch of Movistar in 13 countries for a total of €75m campaign, the introduction of new services to increase share volume, and of new pricing schemes to create elasticity and loyalty in promotions, aimed at generating demand, are among the major commercial initiatives we are actively exploring in all our countries of operation.

And these efforts, which we have stepped up in the second quarter, are clearly paying off. April to June net adds in the ADSL and Mobile fields have beaten first quarter performance, with the Group capturing more than 5.4m clients across regions in the last 3 months. It is worth highlighting the operating performance of Telefonica Moviles Espana since April, which has reduced churn from an average of 2% in the first quarter, to just 1.6% in June, and has reported a net positive balance in number portability in May and June as opposed to losses in the remainder part of the year.

The intensity of commercial campaigns has translated into our cost structures as we present in slide number 9. Total operating expenses growth has accelerated during the year, with 5 percentage points being added to the general margin increase and closed the first 6 months of the year with a rise of about 23%.

On top of Wireline divisions we are complementing networking services developing with stronger advertising and promotions to lead the Broadband upsurge. Mobile accounted for the bulk of the increase in the Group's cost, furthered by renewed marketing efforts and the BellSouth integration costs. In contrast to Mobile, the aggregate margin of Wireline divisions has increased 2 percentage points on an annual basis to top the 40% mark, hoping to cap overall Group margin annual decline to just 1.6 percentage points.

For the outline on year to date CapEx and operating cash flow, please now turn to slide number 10. Group capital expenditure almost reached €2b, which is close to a 38% increase. As in part quarters, we have continued to push on the development of Mobile and Broadband networks across geographies, to [indiscernible] extending client basis, nurture growth and in the specific case of our Mobile unit, digest the loss of properties and leverage on the ARPU potential.

CapEx oriented to transformation and growth represented two thirds of the total, after growing more than 70% annually.

Following now to cash generation, operating cash flow grew 5.5% year-on-year to achieve €4.6b at the end of June. Wireline, which accounts for more than 60% of the Group's operating cash flow, supported the [indiscernible] Group's cash profile, with our domestic and international fixed units expanding operating cash flow by a solid 8% and 10% respectively.

You can see in slide number 11 that our first half results fall squarely within our 2005 target. After adjustments for guidance cancellation, growth and revenues, operating income before D&A and operating income, was close to 19%, 13% and 18% respectively. We are confident that year end guidance will remain.

For those of you still not fully familiar with our guidance, I would like to briefly recap on how to read through all of these numbers. First, guidance is calculated based on first half '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 to BellSouth in Argentina and Chile, and the acquisition by Telefonica Latinoamerica of Atrium. And third, operating income before and after D&A exclude exceptional revenues and expenses which were not budgeted in 2005. These same categories of exceptionals have been also deducted from the first half '04 operating income before and after D&A. As you can see, guidance is comfortably ahead or in line with year end targets.

And now, for a review of our Wireline division, Telefonica de Espana in Spain, first half numbers, I pass on the word to Julio Linares.

Thank you Santiago [indiscernible]. Revenues [Indiscernible] €5.8b during the first half of the year, posting 5.4% growth rate on an annual basis. As we have been able to drive Broadband growth and capture IT opportunities, while defending our traditional business.

The results [indiscernible] the success of the strategic guidelines we outlined at the Barcelona conference. Internet and Broadband services remained the most dynamic, contributing to 70% sales growth at Telefonica de Espana [due] level by expanding by 30% in the first 6 months of the year. For the traditional services, sales kept growing, despite pressures, posting a 4.5% annual increase.

Positive effects of the DSDN monthly fee rates are SIM bonuses reduction, both implemented in April 2004, are fading away. Thus, explaining the lower contribution of traditional services, Group's top line expansion. The higher number of client management centers operated by Telefonica, and the increase in circuit rental and transport capacity of all the operators are behind the 9% growth in [AD] and data revenues, having each 25 percentage points total sales growths.

Regarding our affiliates, a 25% revenue growth posted by Teleco, is adding 0.3 percentage points to the Group's revenue expansion, as the re-branding campaign of Telefonica Moviles boosted handset sales.

Please turn now to slide number 11 for a review of costs and efficiencies. Total expenses have increased by 3% year-on-year, came just below €3.8b. The underlying factors behind the evolution of [indiscernible] are [indiscernible] and proven expansion in both purchase of ADSL and [indiscernible] equipment, bringing supplies expenses up by 12%, and ADSL commercial campaigns pushing external services costs growth by 13%.

Contrary, personnel expenses came down by 7% annually, as a result of lower provisions of redundancies in 2005 and leaner cost structures. It is worth mentioning that savings linked to the redundancy program are being partially offset by the 2005 salary increase effective January this year, and the accounting proportion the 2004 salary increase at the end of last year.

Despite higher costs, Group operating income before D&A margin declined by just 1 percentage point, after excluding the impact of the provision for retirements and actuarial provisions, ending the quarter at 46% - a healthy figure by all standards.

[We factor] adjustments for guidance calculation as we present in the next slide. Operating income before D&A would have grown at 3%, well above 2005 target. Please bear in mind that, half of this growth comes from the lower provision for retirements we registered in the first half of this year, a figure that will be reduced at the end of the year to just 0.7% at 2.7 percentage points.

This effect combined with a less favorable annual comparison in terms of pricing expected the second half of this year, of which each player contributes their line in the slide. As the basis for us to reaffirm the annual operating income before D&A guidance of 2005, providing at the end of March this year.

Slide number 15 shows the evolution of traditional business with its main operating matrix. Regarding the traditional access business healthy household lines were lost during the second quarter. Clearly we lost the first quarter figure once the free connection fee campaign we launched in April has started to show in our numbers. The second quarter campaign which was extended to the online channel has registered almost 100,000 net additions until the end of June.

Unbundled lines, net adds are speeding up as global services providers are migrating from our ADSL wholesale service to share unbundled lines. As a result, 103,000 lines were unbundled in the second quarter, 53,000 of which respond to shared unbundled lines. The results to carrier pre selection, the total number of the selected lines have been down by over 44,000 in the quarter, showing the best performance ever since the introduction of carrier pre selection. This very positive quarterly performance means 12 months growth in pre selection net adds close to 60,000.

Coming to Traffic, the Spanish [indiscernible] market improved marginally, [bridging] trends of last quarters, shrinking by 3.2% in the second quarter 2005 annual trends. Telefonica de Espana's market positioning did also improve slightly, after losing 3.9 percentage points over the last 12 months, compared to the 0.4 percentage points we lost in 2004.

International Traffic keeps accelerating its growth rate, and stands at 15% for the 6 months period, as a result of our success capturing immigrants traffic. Tariff decreases of 8.5% implemented in June 30, related to 2005's price cap should help sustain this trend.

Please turn to slide number 16 reporting on ADSL performance. The Spanish Broadband market has [in parts] 4m accesses, after adding 675,000 connections in the second quarter alone, 37.7% above last year's comparable figure. Our successful commercial strategy resulted in a more than 200,000 net adds in the quarter, representing market share of net adds of over 50%. As a result, Telefonica Group's estimated market share remains at its first quarter level of 44%.

The number of retail ADSL connections hit the 2m mark by June, driven by the growth of recently launched new services. Commercial success of the capacity base ADSL product, which has been marketed under the name of ADSL Mini, and that accounted for 19% of quarterly pre-paid net adds, together with long term promotions, are putting ADSL ARPU under pressure. As such, total ARPU declined by 3.2% from the 2004 figure, reached €48.4, the first quarter 2005 level.

Value-added services accounting for almost 12% of ARPU, are partly offsetting the decline on connectivity ARPU. The number of operative value-added services has increased by more than 300,000 in the quarter, almost reaching 1.9b at June 10. Telefonica keeps pushing the [indiscernible] development, having extended the coverage to 140 cities, reaching a total of 4m households.

The number of clients stood at 57,000 at the end of June, more than doubling March 2005 client base. It is worth mentioning that close to 55% of these clients have also contracted [global] assets.

And now it is my pleasure to turn the call over to Jose Maria for the review of Telefonica Latinoamerica's results.

Thank you Julio and good afternoon. Latin America generally [grew] [indiscernible] due to fixed revenue [indiscernible] growth to €3.5b in constant currency terms, equivalent to an underlying annual growth rate of 6.5%, well in line with 2005 targets.

Operating performance activity accelerated from a starting level of [2.4%] offsetting the first quarter of this year, as the broad improvement in sales in our countries has brought constant currency growth to almost reach 10% in the second quarter alone.

The appreciation of major [indiscernible] currencies against the dollar have led ForEx to go up 6 percentage points [to] constant currency growth, or almost €195m, pushing nominal revenue growth for the first 6 months to close at 12.5%. In terms of revenue contribution, more than 60% of [indiscernible] organic expansion [exposed] [indiscernible] performance, where our [indiscernible] traditional business and our projects in ADSL have combined to take second quarter's [indiscernible] growth into double digits.

[Indiscernible] economy [indiscernible] on growth of the Wireline operations in the region, after posting a growth rate of 10% for the second quarter in a row. Finally, I would like to highlight our success in managing our Chilean and Peruvian ventures, both of which ended the second quarter growing again in local currency, amid a [military] environment that are far from being supportive to business performance.

Developing the growth and opportunity and stretching value from traditional services are the two axis on which we base our strategy to drive Telefonica Latinoamerica's top line up. To review the latest development on ADSL, please turn to the next slide.

Group's total ADSL connection Latin America reached more than 1.7m clients at the end of June, up 70% on last year's figures. At present, we are clearly leading the development of our local market of operations, with all companies successful approaching the Broadband opportunities, by acting [indiscernible] leaders for ADSL take up, cheap price and value-added services. As such, ADSL subscriber growth rate by operators in the last 12 months ranged 1.5 times [of CPT], 2.2 times [indiscernible], in the context of expanding market share across countries.

A growing number of connections has led to very solid Broadband revenue performance in local currency for all operators. Telefonica Latin's doubled its local currency growth on revenues in annual terms for 2004, with [the rest of the] Company posting Broadband sales growth rates in the [30%] -- 50% to 60% range. [Indiscernible] level, Telefonica Latinoamerica's Broadband revenues grew by almost 60% in the first 6 months of year, significantly above January to March's figure.

Margins for additional revenues are proving to be complimentary to Broadband in our [cost] strategy to extend Wireline sales growth as slide number 19 shows. A deeper market segmentation [to tackle] low income segments, with the introduction of pre-paid and restricted connectivity products and the announcement of new value-added services, acting both as a loyalty tool and an incentive to ARPU progression, are the 2 key components of our strategy to [go and defend] [indiscernible] traditional revenue sales, and [indiscernible] growth.

As such, traditional lines and services were growing at a low single digit rate from major countries on an annual basis, with pre-pay and restricted products representing close to 24% of total [good lines] in the region at the end of June, 8 percentage points above last year's figure.

And more importantly, quarterly net adds continue to be positive this year across the board, with [indiscernible] reversing its negative first quarter performance, thanks to the success of the family line that registered more than 350,000 subscriptions since its launch in March.

The rate of comparison of lines expansion to revenue was deeply affected by ARPU evolution, with [Telesp] and Telefonica Argentina growing the most at 6% and 9%, supported by targets and [indiscernible] respectively.

Telefonica [in Peru] [indiscernible] losing traditional revenues, as the execution of the price gap erased the positive performance of both client and [indiscernible]. At the Group level, first half traditional earnings were up by almost 5% year-on-year, compared to a 1.7% [dip] in the first quarter.

Our growth is not coming at the expense of profitability, as slide number 10 presents. All subsidiaries of Telefonica Argentina are [indiscernible] growth in operating expenses to their revenue generation profile, although [in] consolidated adjusted operating income before D&A growth rate to accelerate sequentially from 6.5% posted in the first quarter this year, to nearly 9% for the 6 months ending June. This performance is fully in line with the objectives set for this year.

As for revenue, ForEx is having close to €90m to the adjusted operating income before D&A on constant currency terms, bringing nominal adjusted operating income before D&A's growth rate close to the 60% mark. These numbers imply that Telefonica Latinoamerica operating income before D&A margin reached 44.3% in the first 6 months of this year, once impacting the positive impact of capital gains related to the sale of assets, in particular, [Infonet]. This figure was almost half a percentage point ahead of January to June 2004's figure.

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

Thank you Jose Maria. Telefonica's financial expenditure in this first half of the year has been strongly influenced by the new accounting standards, and the acquisitions that have been completed in the first half, namely the former properties [of BellSouth] in Argentina and Chile [inaudible].

Our average financial debt has increased 10.7%, and the effective cost of service in that debt is up 50 basis points, relative to the first half 2004, standing at 5.3%. We have been able to finance almost 60% of the new debt in Latin American currencies, which explains most of the increase in average effective financial costs.

Our total debt stands at €27.99b, or about 2 times trailing operating income before D&A. If we add the various cash commitments, we get a 31.9 overall debt [plus commitments] figure, which is closer to 2.3 times trailing EBITDA -- I'm sorry, operating income before D&A.

The average maturity of our debt continues to be longer than 6 years, including our recently launched €6b syndicated credit facility. The currency breakdown is, from this quarter, slightly more tilted towards Latin American currencies, but otherwise it stays stable.

On slide number 22, we show that, despite our step up effort in CapEx, and a vibrant 6 months in commercial expenditures, Telefonica has been able to generate over €2.8b of free cash flow. Dividends paid out and shares bought in have represented €1.4b roughly. And in the caption "financial investments", at this time it is abnormally high as a result of the payment for BellSouth Chilean and in Argentinean properties, and the first 51% of Cesky Telecom.

The euro depreciation in this semester has added roughly €1b to the nominal value of debt, and the new operations and changing parameters contributed about €800m to the increase in debt, of which the largest part corresponds to Cesky Telecom.

As we announced at the beginning of the year, Telefonica has cancelled, exchanged or distribution 252m shares, or roughly 5% of the share count. The buy-back program that was re-set to [€6m] in May is off to a good start. Telefonica has acquired roughly 30m shares up until now. Progress in program execution is thus proportional, roughly, to the time expired since the program inception.

At the same time we also hold call options for an additional 29m shares, which are going to expire some time in 2006, and we've done that to ensure that the current share prices are locked in, that the use of cash flow is postponed.

To sum up, first we are delivering on our commitment to push top line up, with organic growth accelerating sequentially, thanks to the strong revenue performance of Mobile. Second, ForEx is contributing positively to the consolidated growth rates - a picture that may stabilize or even intensify should the macro picture remain steady. Third, we are successfully competing in our markets through a different commercial focus that is [negatively] impacting short term profitability. And finally, our Wireline operations continue to excel in terms of revenue growth, margins and cash generation, setting a sector benchmark.

With this, we close this presentation. We thank you very much for your attendance, and are now ready to take your questions.

+++ q-and-a

Thank you sir. [OPERATOR INSTRUCTIONS]. We'll take a moment to compile a list of questions. Your first question comes from the line of Mathieu Robilliard from Exane.

Good afternoon, Mathieu Robilliard from Exane BNP Paribas. A few questions please. First, with France Telecom entering the Mobile market and then likely to follow a convergence strategy, mixing Fixed and Mobile, is that you think you'll be also following? That's not, in the past, something you've highlighted as a key strategy, but is that something that you're more likely to do now?

Second, if I could have some details on the ADSL numbers that you provide. You talk around 2.97m ADSL lines, and I wanted to know if you include Terra and the unbundled lines [be partial of full] in that number.

And finally, if you could give us some color on your rationale for taking a stake in China Telecom. Thank you.

Yes, thanks for your question Mathieu. A number of things there. Number 1, on the FT [Armenia] combination which we welcome with the aggression operators are always welcome for a good battle, and I'm sure that when the transaction is completed, we will have a level playing field.

On convergence and converging products, we've done a fair amount of work, some of that is already transpiring, the [weekly zones] is part the showcase, part of the [indiscernible] that get to us from our Wireline into our Wireless. We are continually working on what products and models can be put together that are both attractive for the consumer base, and at the same time, tolerable for the regulators.

And you should expect from us that, because we have a good [indiscernible] rate, and being an integrated operator we will do whatever is necessary and whatever flies with our clients. More of that to come, not because of the new influence in the market, but because of the steady development of what we have.

Then, o your third part, on China Telecom, this is probably -- I'm sorry on China Netcom, this is probably one of the issues that has been over-hyped. The rationale for us to get into China Netcom is not only financial, although it pays for itself with the dividends that it carries. I would like to remind everyone that China Netcom is traded in an otherwise respectable stock market, like the Hong Kong one, and we have an ambition to know better China, and China has its own ways of letting people peak into their businesses.

You are also aware that we have a not insignificant amount of operations in more challenged parts of the world, from the financial standpoint and that, therefore, anything that we can see happening on the Chinese, that we feel there is going to be of great value to us.

So, in a nutshell, you know that we own about 3%. We have committed to buy up to 5%. The financial [construction] pays for itself, and we have more an ambition to build relationships, rather than expand operations in China.

The second question will be answered by Julio Linares.

Regarding to the figure of [49m] in ADSL accesses, a little more than 2m are Telefonica de Espana retaining customers. The rest are wholesale customers and some of them are Terra customers using our wholesale service. And this figure, of course, does not include value local loop ADSL used by our competitors. It is only pre-paying wholesale ADSL services.

Okay. Could you tell us how many Terra customers are in there, or Terra lines?

Terra customers today are around 170,000 accesses.

And all of those are included in that 2m figure?

Correct.

Thank you.

Thank you, the next question please.

Your next question comes from the line of David Wright from JP Morgan.

Yes, hello. It's David Wright from London JPM. Just on the guidance for the fixed line business, you've obviously reiterated your OIBDA guidance and you clearly trying to flag that the pre-retiree shift, the pre-retiree costs do have an impact on that. But you didn't mention revenue guidance. Now, in terms of the very crude, back of the envelope calculation, if you were to hit the top end of your guidance this year, the 2%, and that would only require, in the second half, you to do a -1.3% revenue growth year-on-year and, obviously, there was some Q1 effects, because of the rental increase, but you were still doing 5% in Q2.

So it just seems very unlikely that the business could slide away so much. So I guess my question is, should we be expecting Telefonica de Espana revenues to beat guidance? It looks very conservative to maintain that.

And then just separately, very separately in fact. Just on Cesky, obviously, my understanding was that that gets consolidated from the second half of this year. I was just wondering if you had any simple guidance for us on that subject. Thank you.

Regarding your first question, you are right, [indiscernible] you made regarding our revenues and the projections for the rest of the year is on the changes of pricing we have already made.

Because of that, we feel today very comfortable on the upper side of our guidance for this year, and it happen that we might consider an upgrade in the coming months.

Okay thanks.

Yes, on the second part David, relating to Cesky, Cesky's fully consolidated at the balance sheet level at June 30, but not a single penny of [its flows] have still come our way. So in the second half you will have a fully impact of Cesky, both on the balance sheet naturally, and certainly on the income.

We don't have guidance for Cesky, other than that provided by Cesky itself, and we have no intention to change at this point.

Okay, that's fine. Thank you.

Okay next question please.

Your next question comes from the line of Andrew [Hogley] from Lehman Brothers.

Hi. I'd just like to follow up on David's question really, relating to Cesky, looking out to the forthcoming tender offer. What are your aspirations there, particularly observing that the current share price of 460 is above the proposed tender offer price of 456?

Yes thanks for your question. Well you know that we [inaudible] before we take over of [inaudible] at the price that we [inaudible] of shareholders that will decide this, and certainly we will [inaudible]. We don't have any specific [inaudible] there to everyone to certainly meet our legal requirements [inaudible] and due respect of all Telefonica shareholders.

But if it was [agreed to have had] a price of 502 to acquire the shares from the government, would you not, in principle, acquire more shares rather than fewer shares?

Let me just make a comment there. We certainly are aware that [inaudible] assets [inaudible] paid once.

Thank you.

Thank you. Next question please.

Your next question comes from the line of Guy Peddy from Germany Bank.

Good afternoon gentlemen, it's Guy Peddy here. Three quick questions. Firstly, on Telesp, you had quite a strong pick up in Q2. I'm just wondering if you could talk about some of the trends you're seeing in that market, and whether we're going to see further strength in that business in H2.

And just one point of reference, could you please give us an update on your concession target, or concession discussions, given the plans for a new regime for 2006?

And then on a second question, on Telefonica de Espana, you highlighted in your release, I don't know if it's a margin erosion, and it seems that a lot of that is being driven by the increase in supplies and external services. Due to the growth in Broadband and with unbundling, are you seeing a structural shift in your gross margin in that business which is why you're having margin deflation? And is the gross margin of your incremental products, such as DSL, starting to become materially lower than the products its substituting, such as traditional Voice. Thank you very much.

Thank you for the questions. And also in Telesp, the trends that we can comment with you are based on the behavior of Telesp in the second quarter, based on the following factors.

First of all, we are seeing traffic dipping a little bit, and we have been working very hard on reversing some of the [indiscernible] that we were taking at the beginning of the year, namely on the Voicemail and as a result, we have been able to retain and increase the number of minutes, the traffic per minute - [the line per minute and per day].

Second, remember that we have recovered the growth in traditional lines. We have been launching new family lines and last year we launched the economy and super economy lines and that's how we solved both [indiscernible].

Third, ADSL - remember that Telesp reached 1m ADSL lines in the second week of July, and year-on-year this is starting to have a significant impact. And last, but not least, remember that during this first 6 months we have not been having any impact of price, and as a result, the fixed to mobile have only been introduced the second week of June, and the fixed to fixed increase has been introduced on June 30.

So you have 3 positive effects, and a fourth one that has not been [indiscernible] for you. So we foresee Telesp -- it is foreseeable that Telesp will have a reduced behavior in the second part of the year.

Regarding the concession contract, the new [indiscernible] not very big news on that front. The profits keeps on growing. As you know, the main decisions are still to be taken, namely the index reference for the new increases next year, but no news on that front so far.

Regarding your question in relationship with Telefonica de Espana margins, we are not facing a structural change. Other than that we have our higher traditional expenses [indiscernible] to supplies, the relationship with purchases of Broadband, [indiscernible] or ADSL and for [indiscernible]. In addition to that, they are facing as well [indiscernible] services expenses because they have been very active in the market with commercial campaigns.

Okay, thank you very much.

Thank you. Next question please.

Your next question comes from Javier Borrachero from ING.

Hi, good afternoon. This is Javier Borrachero from ING. I have a question also regarding Broadband. I've seen the [indiscernible] increase in your market share net adds in the second quarter. I wonder what you are expecting for the second half of the year, and also to what extent is this recovery in market share, to what does it have to do with the launch of Imagenio and to what extent is it to do with lower pricings of the increasing speed?

It's just a bit more on how -- what would you think is the impact of these 3 points? Thank you.

Well, the second part, as you say, we have been able to defend our market share quite well, and we were able to finish this half of the year at the same level as in the first quarter. And it was thanks to the new products that we launched in the market, the new pricing [indiscernible] we had launched in the market and, of course, Imagenio has, as well, significant impact, especially because we are the only one that we are providing today [PPV] and video on demand, and Imagenio [it passes] to defend this market share in this half of the year.

We will continue this kind of strategy. We will enforce our commercial strategy with new product, new pricing. We have the second half of the year, higher coverage of Imagenio. We are going to be able to have more offers and cheaper offers quite widely in Spain, and then even we recognize that the competition is going to be very strong in the second half for the market. We believe that we could defend, our objective is to maintain our market share.

Thank you.

Next question please.

Your next question comes from the line of Bosco Ojeda from UBS.

Hello, good afternoon. A follow up on the fixed line business. I wonder if you could comment on the pace of growth in unbundling, if you anticipate a step change in the impact on the fixed line business?

And also, I also wonder if you could give us some reference of how the churn rate in ADSL is performing, and how you're churn rate compares to your competitors who holds ADSL. I suppose you have the details on that, and also on unbundling players. Thank you.

Regarding your two questions, in relationship with unbundling in the last month we have received quite a stable market. Though, as you said, quarter as a whole you see a significant increase on the previous quarter. But in the last months the development of this market has been quite stable.

Pace Integration run our wholesale service to the unbundling local loop by many of the operators that are using unbundling local loop.

And in relationship with our churn rate we're haven't seen a significant impact, because of the market development. Our retail market share is lower than the churn rate -- excuse me, our churn rate for our retail market is lower than the churn rate of the whole market. And ours is today smaller than 2%, no more.

Thank you.

Okay. Our next question please.

The next question comes from the line of James McKenzie from Fidentiis.

Hello, just a very quick follow up question on ADSL. Looking at your earnings statistics, and the statistics coming out of the CNT, it looks like your share of net adds in ADSL, that's ADSL as opposed to broadband, were 88% in the first quarter of the year falling to 49% in the second quarter of the year.

One, I was wondering if you could, well, first of all, tell me if my analysis is correct, maybe give me a little bit of an interpretation on that?

[Would you mind to repeat that again please?]

Come again I can't hear you?

If we mind to repeat the figures of the question for us?

Yes. I've got in the first quarter net additions, or the market share of net additions in the ADSL market, were 88%. And in the second quarter they were 49%.

Yes, those figures are based on the CNT report, you said?

That's right.

Because I do not recognize those figures based on our own estimates.

What do you think your -- does your share of ADSL follow the same pattern of net adds?

You have the slides. Net adds these were on slide number 15.

The slide number?

15. You see that in our own estimate our market share second quarter 53%, first quarter 44%, and in the last quarter last year 38%.

Yes.

The quarter where we had the biggest losses.

Okay. Do you have market share of ADSL, as opposed to broadband?

I do not have that figure right now with me, because as you may think that's relevant to see our market share in the market -- in the whole market, because as you know, in Spain equal companies are very active. And because of that it is important for us to measure, the market sharing relationship with the whole market, rather than ADSL, or --

Okay. I understand that. Maybe if I could ask the question a different way, it looks to me as if in the second quarter the activity from the cable operator has been an awful lot lower and that's allowed you to recover market share. Would that be inline with your thinking?

Our view, the activity of cable operators were lower in the first quarter.

Okay.

In the second quarter it has been a little than in the first quarter.

Right.

But they are losing some market share. They lost more in the first quarter than in the second quarter in our own estimates. You have done always that. Just -- it's talking about our own estimate.

Okay, that's very helpful. Thank you.

Thank you.

Sir, your next question comes from the line of Jonathan Dann from Bear Stearns.

Hello. Two questions, really, around the same subject. On Imagenio, can you tell us what ARPU you're achieving?

And secondly, can you give us your expectations for broadband, plain DSL ARPUs, maybe for 2006? How severe do you think the price reductions will be?

And a third question, given the acceleration of mobile voice competition in the second quarter, has that had a material impact, in your opinion, on your voice revenues? That is all my questions.

I thank you. Regarding your first question, today in Imagenio, we are following two different kind of customers, those that have Imagenio on top of ADSL, and those customers that only have Imagenio for the T.V. They are not using ADSL for internet access.

In those cases the customers have Imagenio on top of ADSL the ARPU generated today is around €20 to €21. In the case of those customers that do not use ADSL for internet access, and they only use ADSL for T.V. access, the ARPU today is around €28.

Can I ask a [follow on], can you split the subscribers between all the -- what is the take up? T.V. only or is it on top of broadband?

There we have 55% of our Imagenio customers that are as well internet access customers, and 45% of Imagenio customers that they only use AD services.

Yes.

Regarding our guidance for our ARPU in the future, we maintain the one that we provide in Barcelona conference. That means annual growth on 2005 to 2008 with a decrease from 2% to 4% is over period.

And regarding the impact of cannibalization of fixed to mobile in the second part of the year, till now we do not recognize a significant change. And today we are predicting that the level of cannibalization will continue more or less as far as it has been increasing now.

Thank you. Thank you very much.

Your next question please.

Your next question comes from the line of Michael Murray -- [Armintes] -- sorry from INCE First.

Yes, that's close enough. My client is Inline First. Thanks a lot, good afternoon everybody.

A couple of questions, sorry to keep going on the DSL subject, but one more question on that. In previous presentations, I think the last one I saw was in the fourth quarter you've given a figure for EBITDA margins for the DSL business in Spain, just to quote for 2004 34.9% EBITDA margin. And I wonder if you could give us an update mid year for 2005?

And the second question related, but now looking at the German market, we understand that you're selling -- reselling DSL capacity in Germany, presumably with TDL product, or maybe from another provider. I wonder if you could give us an update on your German strategy. Thanks very much.

Regarding your first question ADSL margin. That we are not providing now in our releases. It's more or less at the same level at last year. There is not a significant change.

Thank you.

Yes and on the quarterly reduction and on the number of [inaudible]. Yes, and on the reason we're having this quarterly reduction in the number of DSL lines at Telefonica Deutschland in Germany, we have a new accounting method that calculates equivalent users by contracted and used traffic capacity on a wholesale basis. And this is going to give some volatility to the final figure.

I'm sorry. If I could have a follow up, now I probably wasn't very clear on my question. It's simply just an update on your German strategy, what your plans are, what your committed budget is for spending, what point you would expect to get to break even. Just to give us a little bit of an update.

Hello?

Yes, no, we were -- I was -- we were trying to find whether anyone could come up with the right answer here. Unfortunately, we do not have here the correct numbers with you. If that's okay, I don't think we have an official -- an officially published number on that. We certainly will have the IR guys to report back to you with whatever we can provide, okay?

Right. Can I take it therefore that your ambitions for Germany are quite modest that we're not looking at any significant increase of your commitments to that market?

I think that's a fair statement.

Thank you very much.

Next question please.

Sir, your next question comes from [Ivan] Luis Prota from Morgan Stanley.

Yes, hello. I wonder if you could elaborate a bit on any potential conflict of interest between Imagenio and Sogecable. It looks to me like you may be targeting a different nature of customers than Sogecable, but potentially you could offer that in some customers like it happened between Telefonica de'Espana Intera ending up with a merger.

So, just wondering how important might become in the future owning the content to differentiate your offer, and maybe improve your margins. Thank you.

No, we haven't faced any conflict with Sogecable, because, as you said, Sogecable product is facing a completely market segment than Imagenio. Imagenio is positioned more in relationship with the market that is being attacked big by the cable operators. Then our product is mainly positioned for that market segment, and you may realize that our pricing is significantly lower than Sogecable pricing, of course, also with different content. It's in the different product.

In addition to that, you must take into account that Sogecable is our main supplier for content of Imagenio and we go for [moves] and different [dramatic] challenge.

Okay, thank you.

Next question please.

Your next question comes from David Strauch from Oddo.

I have two follow up questions, after the France Telecom [indiscernible] operation, first so France Telecom is becoming a very significant competitor on your domestic market. So, could you prompt you to enter the French market?

And secondly, as France Telecom would like to have an integrated operator strategy, so with fixed to mobile convergence, could this change your position on the potential buyback of Telefonica Moviles minority shareholders, please?

Okay. On the first question, on [indiscernible] I think we have partially answered that at the beginning of this call. We welcome the competition, especially if it is from a formidable, but at the same time, rational operator. It it's not France Telecom that is entered here, it is something that is being bought out by France Telecom. So, it's nothing new.

The owners are going to be new. The operation is the same. We know them very well. They are a very respectable competitor, and we have no doubt that they will try and fight, and hold the right battles. But w do not envisage any change in strategy, because of the change in ownership.

Is --

Whether or not we would be interested in doing anything in France, our strategy is very clearly set out. In our very recent Investor Day, we've been -- we've tried our best to explain what we think is fit for our Company -- group of companies and what is not. And for inference, does not have anything on the horizon that, at this point, we should think of being of interest.

And on the second part of whether or not this move would have prompt or triggered any change of interest in the Moviles. We repeat it and say that we are among the very few companies that have been separately listed currency of acquisition that we [send] through. That we have not been able to use it yet, it doesn't mean it has no value, only God knows what will the future will be like. And we find no rationale for even thinking about lost the minorities. There is no tax reason. There is no cash flow actual reason, and so essentially there is no management issue. And Moviles has minority share everywhere. And we have a habit of living -- and living with minority shareholder. We continue to see no especial reason to entertain that idea.

Okay, thank you.

Thank you, next question please.

Your next question comes from the line of Terry Sinclair from Citigroup.

Good afternoon. Two things, first of all, I wonder if you could help me a little bit with the information on page 19 of your presentation, where we see the revenue growth in Latinoamerica has accelerated. Is that simply a function of the arithmetic of lines, or can you give us some more information on ARPU trends, particularly outside DSL.

And I want to ask a follow up after that if I may.

Okay. The answer to your question in terms of our ARPU for traditional line, we are seeing stable ARPUs, and marginal increase in two of the countries. As a result, what we can tell you that the addition of the product that we have been launching, for example, in Telesti in Telefonica Peru, and more recently in Chile, of course, will have an impact on our reduced ARPU, because those new lines have a lower ARPU than the previous one. So, you will see ARPU slightly going down in the future, but not very significantly. For the time being the ARPU it is stable.

Okay. And I wonder if you'd be willing to rule out any interest in either the Company's O2 or Bouygue Telecom?

The short answer is, of course, yes. To the best of our knowledge, any of those companies is currently in the middle of anything, and we continue to have the produce that we've had so far.

Thank you.

Thank you. Next question please.

Your next question comes from [Emmett] James [Golat] from Goldman Sachs.

Hello, if I could ask a couple of questions. One is just on the DSL ARPU trend which was down in the second quarter, should we expect that to continue to drift down in the third quarter?

The Telefonica de'Espana margin, which was down a little bit in the second versus the first quarter, given that we have tariff cuts coming in at the end of June, and you still have strong growth in DSL, and therefore high OPEX costs, should we assume that the margin stays at the 2Q level in the second -- in the third quarter, or is there some chance that we might start to see a recovery?

And then on carrier pre select, it's looks from your chart as though there's a seasonal pattern there where the number of pre select lines falls in the second quarter and rises in the fourth and first quarters. And is that just illusory and is this to do with marketing programs? Do you expect to continue to see the number of pre select lines falling, or should we expect it to begin to grow again?

Regarding your first question in relationship with ADSL with the ARPU. You remember last quarter this ARPU €48.5. At the end of second quarter, it was €48.4. So, the difference is just €0.1. So, it has been pretty stable in the second quarter this year. The main change was in the first quarter this year. The main impact was the special campaigns we had at it -- at that time.

In relationship with pre selection, there was a change in the market when the [indiscernible] or the local [consent] was introduced. Because of that, we had to wait four months before we could use the new procedure with the new customers that were taken by our competitor. Once those four months were passed, we were able to make a win back campaigns in all customers regardless the procedure being used by our competitors to capture them.

At that time we were in the same conditions of our competitor. And because of that, we improved very significantly the results of our win back campaigns. And we expect to continue like that in the rest of the year.

And the Telefonica de'Espana margins?

And regarding margins we keep our guidance for the whole year. So, the tendency for the rest of the year will be to get closer to the guidance that we provide to you in March this year for the whole year.

Okay, thanks.

Thank you. We have time for a last question.

Our last question comes from the line of Maria Rotondo from Santander Madrid.

Hello. I have one for Telefonica Espana. In fact, I have three questions. The first one is that I was surprised to see, when I was analyzing Telefonica Espana, a very strong fall in incoming traffic in the second quarter. If I've done well the numbers, the traffic is down like 23%, so I want to understand that.

And the second question is on Imagenio also I'm surprised to see that the deployment is really impressive. You have 4m households now. But, in fact, in terms of customers it's 58,000. So, should we expect like a strong commercial push on Imagenio in the second half of the year?

And finally the last question for Telefonica Espana is I don't listen very well to your answer, or I don't understand very. The results have been extremely strong, so why -- what are the reasons not to provide the guidance, or if you think that would have a revision of the guidance. And that's all. And thank you very much Julio.

Maria, in relationship with your first question, the main impact on the incoming traffic was because of the internet traffic coming to us from other competitors. And there was a significant change. There was a significant reduction on that kind of traffic that has a significant impact on the total incoming traffic to our Company.

In relationship with your second question, we think it's the deployment of Imagenio that we share with you in our conference in Barcelona, we have, at the end of this month, covered the plan that we had in order to cover the whole of Spain. That means 140 cities. We share with you in Barcelona 138, and today we are in 140 cities. We feel comfortable today with that number of cities, in order to be able to support T.V. campaigns all over Spain, and not only look at campaign as we have been basing our campaigns during the first half of the year. And then we are pretty confident, based on these capabilities, to meet our guidance for Imagenio for this year, and to reach the figure of 2,000 by the end of the year.

In relationship with the revision of our guidance, as I said before, it could happen that we do it in the future. But we will like to have more information about these months that -- you know that they are usually quite different than the rest of the year. And then we will see if it is appropriate to review the guidance provided here now.

Okay, thank you very much.

Alright. With this ladies and gentlemen we like -- we would like to thank you for attending this call. And for those who are going to be willing and able to take a few days off, all the best. And we'll continue the reporting season when we all come back. And thanks very much.

Ladies and gentlemen thank you for participating in today's presentation. This concludes your conference. You may now disconnect. Have a good day.