Telefonica SA (TEF) 2005 Q3 法說會逐字稿

Good afternoon ladies and gentlemen and welcome to the Telefonica's conference for 2005 9-Month Results. I'd now like to turn over to Mr. Ezequiel Nieto Baquera, the Director of Investor Relations.

Thank you; good afternoon ladies and gentlemen. Welcome to Telefonica's conference call to discuss 2005 9-months’ results.

Everyone be aware on 31 October an announcement was made regarding a recommended cash-over [ph] which is to be made by Goldman Sachs International and Citigroup Global Markets, Ltd. on behalf of Telefonica to acquire 02 PLC. I would like to begin by emphasizing that this offer is subject to the City Code on Takeovers in the U .S. and the UK. The Code contains strict restrictions which limit what we are able to say regarding the offer. Further information regarding the offer will be contained in the offer document which will be posted to the [indiscernible] to Others.

For the time being however, we will not be able to discuss anything about the offer, but will of course be prepared to answer questions about the interim results.

We would be grateful if you expressed some patience and you could remain with the legal framework within which the offer has been made. We would be grateful for your understanding and cooperation so that the rules are duly observed. Before proceeding, let me also mention that the document contains financial information and data reported under IFRS. These data are preliminary and only for compliance with the International Financial Reporting Standards issued at December 31, 2004 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 on the 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, does not represent a complete and final adoption relations.

This presentation may contain announcements that constitute forward-looking statements, which are not warranties 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 market regulators.

In addition, and to the reflect the group’s new structure, third quarter results for Telefonica's Spanish and Latin American units are consolidated under Telefonica Espana and Telefonica de America respectively with first-half figures reported under the caption “Other Companies.” [Inaudible] has to be separated as a separate line business in July 2005. If you do not have a copy of the press release and the slides, please contact the Investor Relations Team, and the number is 34 91 584 4713.

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

Good afternoon ladies and gentlemen, and thank you for attending Telefonica's 2005 January to September results conference call.

Julio Linares, our Executive Chairman of Telefonica Espana and Jose Maria Alvarez Pallete, the Executive Chairman of Telefonica Latin America are joining us today here for the review of the Group's performance.

Starting with revenues, our Group sales grew by more than 24% year-on-year to top the €27 billion. This was pushed by a robust underlying performance of 4 major divisions, and the incorporation of BellSouth assets since the beginning of this year and Cesky Telecom as of July 2005.

On the cost side, ongoing commercial efforts to expand our growth levers, namely [indiscernible] continue to pressure operating expenses that ended September with a 27% annual rise. Operating income before G&A show that 20% annual increase to come close to €11 billion for the January - September period. Once depreciation and amortization is factored in growth in operating income remains at a solid 24.5% despite renewed CapEx spending and the amortization of intangibles arising from Begiere [ph] acquisition.

Please notice that Group’s growth has been gaining traction as the year progresses with 9-month rates once excluding Cesky Telecom as in first half performance by a margin between 1 to 2 percentage points.

In slide number 4, we show our active management of non-operating results, which is being decisive to improve the Group’s growth profile as we move down to the P&L. Annual growth rates are rising by 16 percentage points from operating income before G&A to net income, which ended the first 10 months of the year above the €3.2 billion mark, or 36% up from last year’s figure.

Please now turn to slide number 5 for the review of the contribution to growth by business lines. Managing the well-diversified portfolio assets as an integrated group has been key to build a top-quality growth profile as it allows us to extract the full potential of businesses at different stages of maturity, to limit risks and volatility at the consolidated level, and to exploit synergies across operations and geographies. The Cellular business ranks first in terms of contribution to revenue growth, a position it loses to Wireline as a cost to fund its plant expansion emerges at the operating income before D&A and operating income levels.

On the contrary Wireline contribution to consolidated growth moves from just 25% in terms of sales to almost two-thirds in terms of operating income, benefiting from contained OpEx and CapEx spending.

Currencies are adding this year to local performances, turning around a dilution in growth that we have been witnessing over the last 4 years as presented in slide number 6. Foreign exchange rates are contributing to nominal revenues and operating income before D&A with more than €670 million and €270 million respectively. In broader terms 2005 positive currency environment is adding 3 percentage points to both cost of sales and OIBDA growth rates to figures that were already solid and 21% and 17% respectively.

All major currencies but the Argentinean peso have been appreciating over the past 12 months. With the strong performance of the Brazilian rial emerging as the main factor behind the positive contribution of Forex, increasing its face value by 16% year-on-year. Our exposure to foreign exchange rates has become an increasing support to capitalize on our very healthy organic growth whose major drivers are outlined in slide number 7.

We believe that the Group’s Wireline divisions are currently winning the challenge of operating a more mature environment. While domestic Wireline organic growth remains at 5% at the end of September, clearly diverging from current segment trends thanks to its success in protecting traditional revenue streams and leaving the Broadband take up; Telefonica Dominica organic growth has stayed about 6% for the last 2 consecutive quarters.

In Mobile, organic revenue growth that is consolidating BellSouth into our account since 1 January 2004 and excluding FX has been consistently above the 17% mark this year.

Solid single-digit growth in Spain based on a higher quality lower churn client base and significant self-expansion through customer acquisitions in our Latino American franchise are the 2 factors behind Telefonica Mobile’s revenue performance. The strength of our major subsidiaries has placed Group organic revenue growth in the 10% region for the 9 months ending September, leading to an operating income before D&A organic growth of 6.7%.

The drive from revenues has continued to pressure cost in margins as we are presenting slide number 8. Our Group operating expenses grew by close to 25% in the first 9 months of this year once excluding the Cesky Telecom 6.5 percentage points above the January to March figure. Similarly, consolidated operating net income before D&A margin fell by 1.4 percentage points from its first quarter level to close the period ending September at 39.8% pre-Cesky.

As we anticipated the pressure on profitability has eased during the third quarter due to seasonality pushing operating income before D&A to recover by 1.8 percentage points with respect to its June level.

Group margins have continued to be backed by fixed-line deficiency with Wireline aggregate margins increasing by almost one percentage point on an annual basis, and exceeding 41.5% helping to partially offset the 6.6 percentage drop in Mobile profitability.

If we now turn to slide number 9 we’ll get a brief review of the operating cash flow components. Total CapEx ended the first i9 months of the year at €3 billion in cost and currency terms, or close to 30% adopted 2004 comparable figures as the problems to absorb the expansion of claims [ph] and usage in our Mobile market and leave the development of the Broadband have been sustained.

Despite our commitment to invest in growth, operating cash flow has increased by more than 13% annually and to exceed the €7.6 billion at the end of September. This cash flow is well balanced with the 4% growth in Mobile operating cash flow being incremental to the 9% rise posted by the sum of our Wireline division, which represented an aggregate more than 60% of growth in cash flow generation.

For an update on our guidance, please now turn to slide number 10. After adjustments for guidance calculations, growth in revenues, operating income before D&A, and operating income was close to 19%, 13%, and 17.5% respectively. Our positive stance towards future financial performance we already shared with you; 1% in first half results last July have been weakened for us after the publication of third quarter numbers, particularly in terms of sales. As a result, we are upgrading Group revenue growth from the initial 12% to 15% range to a new estimated increase at more than 15%, that on revised expectation for both Telefonica Espana Group and TIP Group sales profiles. All the rest of consolidated targets and divisional projected financial metrics remain unchanged.

And now ladies and gentlemen, for a review of Telefonica de Espana third quarter numbers, I pass the word on to Julio Linares.

Thank you Santiago, and good afternoon.

The delivery of LC top-line growth in the last 3 quarters boasting an increase in revenues of 5% for the 9 months through September is leading us to upgrade our revenue target for the fiscal year 2005 from the previous range of .5% to 2% to an estimated growth of more than 4%. Let me remind you that our guidance always excludes [inaudible].

Revenues have topped €8.7 billion during the first 9 months of the year. Internet and Broadband services contributed with over three-fourths of consolidated revenue growth after posting a 29% increase in sales in the 9 months through September. Revenues, operational services, decreased by just .1% year-on-year. Once the positive effects of the DSDN monthly fee rates and the SIM bonuses reduction, both implemented in April 2004, are fading away.

The Group’s performance of IT services driven by both the higher number of client, management centers operated by Telefonica, and the growing demand of systems integration services is pushing IT services revenue growth up by 9.4%.

Slide number 12 presents the trend in operating costs and profitability. Overall the trend in total expenses remains stable [indiscernible] an annual increase of 3.6% to top €5.4 billion. In contrast to the first half, personnel costs excluding the provision for retirement are marginally up for the January to September period once adjusting salaries to real CPI growth in the third quarter. On the contrary, the rise in supplies has accelerated in the third quarter due to lower mobile handset purchases at Teleco [ph] and the seasonal effect of weaker ADSL net packs.

Operating income before D&A margin excluded has kept close to 40%, 46% at the end of September producing its annual rate of decline from 1 percentage point in the first half of 2005 to just 0.7 percentage for the 9 months ending September. Operating income before D&A growth once adjusted for guidance is still at 8.5%. We are keeping our operating income before D&A guidance and changed based on estimated reduction of the [inaudible] provision positive effect.

Please turn to slide number 13 for the review of divisional services through its main operating [inaudible]. In terms of lines, 65,000 lines were lost during the first quarter. Please bear in mind that this period does not reflect the full impact of the [inaudible] next year the campaign launch at the end of September. We have had a very positive response to this campaign with 110,000 requests for new lines, most of which could install in October this year.

On value [indiscernible] net adds for the quarter stood at 54,000 presenting a visible slow down from previous quarters. Let me highlight that 77% of our value [indiscernible] net ads are migrations from our [inaudible] whole service.

With regard to carrier pre-selections, the total number of the selected lines has stayed almost unchanged below the 2.4 million after growing by as little as 4,000 lines in the third quarter.

Turning to Traffic, fixed outgoing voice minutes decreased by around 8% with International traffic still growing at very healthy rates.

Please turn to slide 14 for comments on ADSL performance. Our world range of commercial initiatives is [indiscernible] setting the basis to lead market growth. Summer promotions, the rise of Imagenio, and the recent launch in September of double and triple-play offers the latest of which is unique and the market has led us to purchase 67% of the first quarter net ads. And in September with a growth on market share of 54.3%; 0.2 percentage points ahead of June 30. We have confidence this strength will persist in the coming months and we expect the positive market response with a renewed offer in October to continue. In October more than 104,000 ADSL connections including retail and wholesales and over 51,000 new Imagenio customers were adding almost as many IP TV players as in the third quarter.

ARPU has barely been affected with cumulative annual decline reaching 3.4%, in line with our 3% to 4% annual reduction long-term target. ARPU from services and devices is growing by 27% annually to €6 and amounts to 12% of the total retail [indiscernible].

Now before handing over to Jose Maria, I would like to highlight the positive turnaround we are experiencing at Cesky Telecom in just 3 months since we have started running this operation. Although at its first state the integration of Cesky Telecom in Telefonica is starting to produce tangible benefits. First a better market positioning through innovation in products and services and the reduction of time to market.

In Broadband we added in the third quarter almost as many new connections as in the first half of the year. In Mobile, data uplift [ph] has led ARPU to stabilize sequentially. All in all three-quarters of 2005 revenue contraction [ph] more than half when compared to the first half performance.

A second benefit we are stimulating further operational efficiencies in costs and purpose through process engineering, shaping of best practices, and the inundation of synergies to [indiscernible]. As such, operating income before D&A has moved from contraction to expansion in just 3 months. With third quarter operating income before D&A margin reaching close to 50%, 5 percentage points above January to June 2005 figures.

And now I turn the call over to Jose Maria for his review of the latest development at Telefonica Latinoamerica.

Thank you Julio and good afternoon. Telefonica LatinoAmerica ended the first 9 months of the year with revenues exceeding €5.8 billion once excluding third quarter [indiscernible] operations that we have started to consolidate in July. Achieving this level of sales implies to have grown at 17% year-on-year in [indiscernible] terms or 6.5% in constant currency terms placing top-line performance comfortably within year-end guidance for the second quarter in a row.

A progressive appreciation of regional currency versus the Euro throughout this year and the solid underlying result. [Indiscernible] adding more than 10 percentage points to local currency growth for the 9 months ending September up from its 6 percentage points positive contribution in the first half.

We are being able to start with value from [indiscernible] concepts of operations as witnessed by the increasing revenues registered in every single market. [Indiscernible] because of accelerated growth since the beginning of the year to expand revenues in the last 2 quarter above the 8% mark, and Telefonica Argentina whose revenues have consistently grown at 20% on a cumulative basis ranked as major contributors to Group’s top-line expansion.

Our financial [indiscernible] continue to benefit from the combination of solid traditional revenue performance that represented half of consolidated revenue growth and rapid growth and development with Internet revenues almost adding 2 percentage points to total top-line expansion. Please keep in mind that growth on revenues alone was rising by 57% in the first 9 months of the year. And this positive set of numbers is leveraging on our capacity to grow simultaneously lines of service and proven connections as exhibited in the next slide.

Provisional accesses were growing at low single-digit rates for major countries on an annual basis driven fundamentally by the commercial success of prepay and restricted products but [indiscernible] low income segments of population with very limited risk. Prepay accounted for 25% of total Group access in the region at the end of September, enlarging the portfolio’s value-added services and launching new product packages are 2 additional instruments we focus on to drive loyalty and protect ARPU in this additional business.

Turning to Broadband, total ADSL connection in Latinoamerica have reached the 2 million mark at the end of September; 57% of that year compiled a figure [ph]. [Indiscernible] divisions are fighting to improve user experience by means of a [indiscernible] and to build demand through both innovation and value-added services and pricing to target a wider variety of market needs. A proof of this success is that all of our operations have seen their ADSL subscriber base growing between 1.5 times and 1.9 times in the last 12 months.

Despite reinforcing our market positions to drive growth, profitability remains high across the board as slide number 18 shows. January through September [indiscernible] reached €2.6 billion, up 8% from last year’s figure in custom currency terms, a rate fully aligned with 2005 targets. Like revenues, product added close to €240 million to local currency adjusted OIBDA pushing growth rate to 19%.

In terms of margins the Company ended September just above 44%, stable when compared to 2004 level except in Chile where OIBDA have been improving since the beginning of the year for all Wireline operators. This recovery is rising from 0.3 percentage points in the case of Telefonica Argentina who has matched 8 percentage points [indiscernible].

In addition to pursue efficiencies locally while regional management is being key to sustaining operation margin improvement.

Integrating network management systems, sharing service platforms, central license support functions, and exporting best practices and services and processes are the 4 basic lines of action in which we keep working hard to realize synergies. Just as an example to illustrating portions of regional management to our competitive positioning, let me recall you that Gillespie OIBDA margin exceeded by more than 500 basis points those of his [indiscernible] counterpoints.

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

Thank you Jose Maria. Ladies and gentlemen on slide 19 we presented the debt figures and the financial expense numbers. Our average total debt is up €4 billion or 16% relative to the first 9 months of 2004. This is on the top right part of the chart.

This has been the [indiscernible] mostly to fund the acquisition of the BellSouth properties in Chile and Argentina at the beginning of this year and Cesky Telecom later on in the year.

Financial expense is up but only [indiscernible] the increase in total debt, bringing average effective debt servicing cost down from 5.6% a year ago. Total debt stands up 1.9 times trailing operating income before D&A and including cash commitments, we stand at 1.2 times trailing operating income before D&A.

On slide 20 we report on cash flow generation and try to explain changes in debt. Telefonica has generated €4.2 billion in free cash flow in the first 9 months of 2005. After the [indiscernible] for the pay-down in pre-retirement commitments and adjusting for dividends paid out to minorities, mostly Telefonica Mobile, and TPI we are [indiscernible] the free cash flow figure of €4.5 billion. [Indiscernible] you can read that although of those €4.5 billion of free cash flow €2 billion have gone to shareholder remuneration.

New investments in Chile, Argentina, and Cesky and our second China Netphone have raised overall debt by €4.7 billion. Finally it’s time for an exchange [indiscernible] to total debt as a consequence of Euro depreciation relative to most currencies in our perimeter.

On side 21 we update you on the progress of our share buyback program. Since we last reported in July, the Company has begun catching up with problem execution. You may recall that we had been restricted from [indiscernible] shares in treasury when we hit the 5% limit. After the dividend distribution and the completion of the TRR merger, we continued with the program. As per our report to the local securities markets regulator of 4 November, we fell 87.4 million share in treasury, or 1.8% of share count, and we held co-options on our own shares expiring for us 2006 for an additional 29 million shares.

To sum up ladies and gentlemen, first organic growth remains solid across the year as the benefits of integrated management flow into our financials.

Second, we have growing confidence in 2005 performance up to the set of some results posted in the third quarter as a result of which we upgrade Group’s top-line growth to more than 15%.

Third, 2005 positive currency environment is being incremental to the Group’s underlying performance.

And fourth margins remain healthy based by Wireline and Operation cash flow continues to be on the rise despite our commercial drive to strengthen market positioning.

And finally, our Wireline division remain industry benchmarks in terms of revenue growth, margins and cash generation, with Cesky Telecom starting to take profits from its integration into the Telefonica Group of companies.

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

[OPERATOR INSTRUCTIONS]. Andrew Hogley, Lehman Brothers.

Good afternoon gentlemen; firstly a very quick question I hope. On the slides you say that the contribution is Terra to Latinoamerica in the quarter was €54.4 million. I was wondering if you could quantify a figure for the impact on Spanish fixed in the third quarter.

And then on Cesky Telecom, the balance sheet there is very under-levered. What are your views as to optimal capital structure and cash remuneration as to the Telefonica from this asset? Thank you.

Yes let me start with the question related to Cesky’s balance sheet and the possible under-leverage. Cesky in its conference call has already announced that its Board of Directors and its Supervisory Board will review this matter and of course we have to forward you to a good decision that will be made at the Supervisory and Management Board levels of Cesky.

And recently with the integration of Terra the increase of revenues in the quarter was mainly in Euros 0.3 percentage points.

Thank you.

Mathieu Robilliard, Exane BNP Paribas.

I have 2 questions please; first in terms of your churns, portfolio of assets, could you tell us is you consider [indiscernible] a TN or TPI as core businesses or do you believe this is more financial investment? That’s my first question.

The second question is on tax payment; it seems that the cash tax payments in Q3 increased quite a bit compared to Q2 to around €1 billion. I was wondering what we should expect for Q4; should we expect a continued increase in that payment?

And the third question has to do with ADSL; just wanted to confirm that the number you report of €2.4 million retail includes Terra and what would be the comparable number in Q2? Thank you.

Yes of the portfolio assets, the only assets that the Company has to declare non-strategic of which we are in the process of disposing is minimal as you may have heard. This is an ongoing process, which we expect will proceed later on in the year. The rest of the companies in our portfolio have not been declared non-strategic, and therefore there is no change to our previous holdings.

And on the tax payments, you are absolutely right; the amount of cash taxes paid out in the third quarter is significant. There are too many reasons for that; first we said that some payments have come due, some tax payments have come due on companies of which we had no interest last year, notably in Venezuela. And therefore increases significantly the tax deal.

And second, this year we have taken in Spain in the Group’s consolidated tax figure to 280 million roughly, 180 million cash payment which we have drawn down on some deductions rather than drawing down on our natural break in losses. So it is a one-off and you should not expect that trend to continue in the coming quarters.

And in relation to your question regarding our numbers on ADSL. The retail market [indiscernible] yes for Telefonica Espana is 2,164 million. For Terra it’s around 171,000, and the rest around 80,000 are customers of the Telefonica in business.

David Wright, JP Morgan.

Yes, it’s David here from JP Morgan. Just on Cesky, obviously there was, you pointed towards a very impressive number in Q3 which was DSL growth equivalent to or greater than the first half of the year. Now obviously you’re talking about some impact already of your management there, yet you’ve been there I guess only one quarter. Can you tell us exactly what you’ve done with ADSL business for instance to have such an impact? Is it a function of price marketing, the particular product? What is it exactly you’ve done in such a short period of time that has driven such strong results? Thanks.

Well regarding the Cesky results on ADSL, I think there were 2 basic actions. The first one was to position ADSL at a very convenient price for a speed of 128 kb per second in order to compete with the market which is very extended in that country which is the one base for WiFi solutions.

And the second action was being very active in the market from the commercial point of view with very significant TV contents.

Okay and I guess, is there any kind of, I mean I know you really want to give guidance to Cesky for the full year, but is there any guidance you can give us into Q4 maybe for ADSL, etc.?

Well what I can tell you now is that we are going to continue being very active on the commission point of view trying to position with better products in the relationship with Globe-One and also I can share that in the near future we will launch IP-TV based on our own experience here in Spain.

Bosco Ojeda, UBS.

I have a question on your Wireland business; I wonder if you could comment on the recent offering from competitors and from cheaper ADSL 2-Plus would change the positive trends you’ve seen in terms of market share or force you to be more aggressive in terms of pricing.

And also related to Wireland we’ve seen some growth on your IT services business. I’m not sure if there is some big contract that you’re gaining or what is driving that growth; and also if you could also give some color into the outlook for that business into the following years. Thank you.

What we have in the competitors’ behavior in Wireland was what we have seen in this quarter is we continue being very active and [indiscernible]. To say that we are in the market, we have received contents based on ADSL 2-Plus; fortunately very recently our ADSO 2-Plus proposal has been approved by CEBD [ph]. We already prefer to compete with ADSL 2-Plus because we are providing full our [indiscernible] based on ADSL 2-Plus. We are also ready to provide ADSL 2-Plus services in all the central offices where there is a [indiscernible] and we are also using ADSL 2-Plus in the different cities in the country where we need full coverage or because of speed needs in the market.

We are not concerned that the speed is the most important attribute in our offer; we still believe that there are other kinds of functionalities which are very important to be competitive in this market, like for instance quality of service. In addition to that, we are going to continue to be very active in Wireland services and it is also very important to share with you that our triple plates are in place to offer; their [indiscernible] was very good in the market. In fact, today we have more than 630,000 dual plates and triple plates operative services in the market. In relationship with your second question relative to the growth of IT services, as you said it’s quite important. As you know, this is one of the areas where we are concentrating; we have great focus in order to develop these kinds of markets, we are going to continue and then we expect in the future an explosion [ph] for these kinds of services.

James McKenzie, Fidentiis.

Just a couple of quick questions on ADSL -- on fixed line, sorry; firstly did you not say that you had 100,000 clients earlier in the year, or at 30 September, and how does that compare with the 92,000 that you put in the presentation?

Secondly, I look at your guidance for the fixed line and I see you’ve obviously upgraded revenue guidance, but you kept your 2% to 5% OIBDA guidance. Looking at last year, and last year you had a big commercial campaign in 2004, the margins in the fourth quarter actually went up and yet if I was to take your guidance literally, I see that probably the margins would be falling in the fourth quarter of the year. I wonder if first if you could discuss what do you see as the revenue trends in the fourth quarter of the year, if there’s anything that should interrupt the trend of the third quarter. And secondly what you expect for margins. particularly in terms of commercial costs?

In answer to your question in relation to revenue, we finished September with 92,000 [indiscernible] customers. During October, the net adds were more than healthy 1,000, and then at the end of October we had 123,000 in new customers.

So there was no 100,000 at the end of September?

The figure of 100,000 was reached the second week of October.

Okay, fantastic.

In relation with your second question, we didn’t change our guidance for the OIBDA before C&A indeed for 4 major reasons; the first one is of course it is important to share with you the possibility that at the end of the year they may sanction this [indiscernible] progress based on the final decisions of the people in the company at the end of the year, and then [inaudible].

Second, as you realize the competitive environment in the market is much more difficult than in the past because of that our share expenses has grown significantly and as you could see in our presentation, that goal was higher than 2% in relationship with the previous year.

Third, our operational expenses related with supplies is again quite significant because of the practices of more [indiscernible] at peak demand, and because of the higher infrastructure conditioning caused by bundling [indiscernible].

And finally, as you realize also there is a [indiscernible] because of the abating of the CPI [indiscernible] based on the real CPI for the year 2005.

Is that not carried out in the third quarter?

It was included in the third quarter but it may change again during the year, so --

Okay, can I just ask a quick follow-up on that? Looking at the expenses of Telefonica Espana the group expenses that you show in the presentation, do those now include Terra, or are those ex-Terra?

Yes, it does include Terra.

Jesus Romero, Merrill Lynch.

I’ve got a question for Julio; in the third quarter, and this is the second quarter in a row we’ve seen a decline in lines in the ADSL wholesale figures. I was wondering if you could give us a bit more detail on what is the total exposure out of the 700,000 lines more or less you have as only as wholesale, what percentage of those do you think are potentially going to be migrated because you already know in which exchanges you are seeing URLs and what is the trend we should expect in wholesale ADSL? Should we expect a minor decline in the future or do you think there are opportunity for URL will never be an issue and would allow you to do ADSL wholesale again in the figure? Thank you.

In answer to your question, as you said there is a decline in the whole access fees in the third quarter -- not very high but there is a decline. We are very active in trying to [indiscernible] new wholesale services to compete with URLs and in addition to that, what [indiscernible] is that even now in the third quarter, there was integration of 77% of the URLs of the net [inaudible] for URL during the quarter -- I mean integration from our wholesale services to the URL of 77%.

If I could follow up, let me ask it in a different way; out of that €400 million of revenues more or less that you’re delineating on wholesale ADSL in the next 12 months is there more upside or downside in that number?

Of course, they will be some downside, [indiscernible] we are taking that into account.

And can you quantify more or less what percentage out of the total?

It is more difficult at this stage to get you a quite precise figure.

Jonathan Dann, Bear Stearns.

Two questions; if you could update us on negotiations regarding fiber-to-the-node and secondly, just if you could remind us of the sort of conclusion of basically what’s happening to the inflation-linked contracts in Brazil?

In relation to your first question, we are trying to fit different alternatives of what they call fiber-to-the-node to the home or to the [indiscernible] in general, we are using this kind of technology especially for Enterprise customers and we are [indiscernible] 4 potential customers. We are trying to test all the different alternatives and in fact, we are doing so in collaboration with our Cesky Telecom Company, and we have not decided yet what is going to be the right approach for the future. I think it’s too early based on our tests that we have on the field.

Could you just give a time frame for making that decision? Is it 12 months, 6 months?

I would say so; I guess next year will be a good year for that kind of decision.

And in relation to your second question on inflation in Brazil, this scheme [ph] is going to change in the near future; the period of concentration has already been concluded. It’s very technical [indiscernible] for objective interpretation. It will be a new telecommunication index in order to adapt their price in the future. Their period of adjustment will be [inaudible] most thoroughly and the next adjustment will be taking place in July next year. And probably for that period, it will be half the year with the former index; the wholesale index has already been taken into account for the last year, and the fixed amount next will be the new index. But the new index has not yet been published.

Are you able to guide us to what assumptions you made in the Madrid 3-year plan?

We were including similar claims with our index.

Brian Rusling, Cazenove.

Just a couple of questions; first of all Julio, earlier you were asked about the reason you didn’t change the OIBDA guidance for the fourth quarter, and the first reason you said was possibility of changes of pre-retirement conditions. Could you just expand on that? I don’t understand what those are, so could you tell me a little bit more about that?

You also earlier mentioned that you had got the CMT to give you approval for using ADSL 2-Plus; can you just outline what the approval will allow you to do now in terms of the retail offering, and also whether you have to offer wholesale ADSL 2-Plus product in the market as well.

And then can you finally actually confirm the number you gave us for the ADSL connections for Telefonica [inaudible]? I thought you said nine-zero which sounds like a remarkably -- 90,000. Did you say nine-zero thousand ADSL by Telefonica in Spain? That sounds a remarkably high number?

Okay, in relation with the retirement program, though it is already closed as you know, always has been that at the end of the year there are people that ask to join the program. A number in any case is not going to be a big number, but once new people are asking to join this program, we always try to study the possibilities, what we think is convenient for us, finally we will accept them. And this is the kind of consideration that we do at the end of each year as we made in the previous year before.

In relation with the approval of the CMT of the ADSL 2-Plus, fortunately in this case, the approval does not mean that we have to provide any wholesale services behind ADSL 2-Plus. So this is very important because it is the first time that we are able to provide ADSL product without any ADSL wholesale services on behalf of us. So this is a very important change for the [inaudible] criterion used now for these kinds of services.

Initially, we will be able to provide ADSL 2-Plus without any additional wholesale services just in those central offices where there is a [indiscernible].

Regarding your third question, the number of ADSL accesses in Telefonica [inaudible] are 80,000 -- eight-zero thousand.

Okay, can I just follow up with the issue on the retirement; are you saying that for the full year 2005, the costs for the retirement program could be higher than €524 million within Telefonica Espana? Is that what you’re saying?

It may be so, yes. There will not be a big change, but there may be some changes at the end of the year.

Are we talking about €5 or €10 million or are we talking about €50 to €100 million?

It’s very difficult to tell you now because we don’t know yet how many people are going to ask for during the program, taking into account that it is already closed.

Last year it was €30 million in the fourth quarter. Is that the kind of number we should expect?

I could be something like that.

Mark Cardwell, Bernstein Investments.

Thank you very much; my first question is on the [indiscernible]; now that you have as many customers as you do, can you give us some insight on what the progression of those customers has been; what were they spending before; what are they spending now; how many of them are seeking how many services from you? Could you just give us a sense of what the development of those customers is and are they still mostly customers that were already high-end customers to begin with, or have you seen low-end customers really moving up?

My second question relates to Latin America; I guess 2 parts to this; first of all in Brazil is it correct to assume that most of the growth is being driven by the pricing changes or are there -- and obviously the growth of broadband -- or are there other factors that you’re finding making a significant contribution to the growth there? And secondly if you could just go through the 4 countries in Latin America and give us a sense of what regulatory issues have progressed in the last quarter or so and where things stand from the regulators there, I would appreciate it.

Okay regarding your first question [inaudible] as you know our market base today is 123,000 customers, 31,000 of them have been just with us in the last month. So we see and hear we have [indiscernible] so the market is already quite nice in relationship with our [indiscernible]. Based on our experience based on this number of customers, what they [indiscernible] is that 65% [ph] of them have [inaudible] taxes; that means that they have ADSL in addition to [indiscernible]. And then 35% of them only have [indiscernible] and they do not have [indiscernible]; 30% of them are consuming VOD on demand, which is the very nice network, and in fact it’s higher than we expected. And for the consumers that are using VOD on demand the average is 8.76 per month. So based on that figure, estimate that the additional ARPU that we have based on those [indiscernible] customers is around €20 today.

And your question about Latin America, we have seen revenue growth, let me tell you that on top of the [indiscernible] increase, we have been more limited this year than the previous year because the previous year we have 2 [indiscernible] and this year we only have one [indiscernible]. We have 3 more [indiscernible]; first is the increasing traditional accesses that we are having thanks to the product that we are launching for low segment clients; second is the improving profit. We have been able to reverse this trend at the beginning of the year especially in the low profit due to new services especially in voice mail. And finally third, we have been able to increase significantly Broadband clients in ADSL.

So I would say that there are 4 main effects; of course the [indiscernible] increase, but also [indiscernible], which are the profit increase, the new accesses, more accesses in traditional lines, and the ADSL.

Taking the second part of your question about the main regulatory issues in Latin America, we are on the way to the final stage to the extension of the concession contract period. We expect that we might have news before the year end in that regard. We have been following monetarily the situation; we have been contributing to the public audiences so we do not expect major impact. We have already scoring [ph] those impacts in our internal accounts.

Second, I would say in Peru, now news but we keep fighting against this price cut that was established last year, the CPL minus 10%. We think that’s not a fair number and we keep fighting with the regulator in order to push it down. And I would say that in Chile, we have [indiscernible] back in the year 2004, which gives us our stable framework for the next 5 years. We [indiscernible] but we think that nothing is going to happen before elections next February. And finally, in Argentina no news; we have had tariffs frozen for the last 4 years; we keep open conversation with the government so no news on that front.

Michael Armitage, MainFirst Bank AG.

A simple question around the issue of the perspective entry of France Telecom into Spanish markets. We hear that they’ll like be offering some form of converged fixed mobile services, and I’m wondering to what extent you are constrained either by the regulatory conditions imposed on you cross-selling fixed mobile services or organizationally whether the minority position of telephonic mobile constrains your ability to act and be commercial. Thank you.

Well, in relation to converging services we believe that we are in a really good position in this market because of the strong efforts that we are already doing together with Telefonica Mobile Espana and the kids of services that we launch together, and that we are continuing to develop together. I do not see any [indiscernible] in the se kinds of services because of the minority in the [indiscernible] company, and we expect that the regulator should consider [inaudible] neutral to this effect.

Guy Peddy, Deutsche Bank.

I’ve got a few questions; firstly you talk about imaging your product which is going very strongly. I’m just wondering if you could elaborate a little bit more on your content strategy.

Secondly, a question for Santiago; what is the really optimum capital structure? Previously you articulated a number around 1.75 times net OIBDA including the headcount provision, so I’m just wondering what is the latest number going forward.

And then finally a question to Jose Maria; we’re heard a lot about refinancings in Latin America over the past 6 months, but so far we haven’t see anything. I might have missed it but if you could please talk about what you plan to do in regard to refinancing some of the Latin American assets to try and hedge y our operating exposure? Thank you.

Regarding your first question in relation with imaging, to date we have 48 TV channels; 50 music channels; we have Video-on-Demand, more than 400 movies; more than 500 movies; 510 chapters from 44 different serials; 300 documentaries; we have doubled the capacity of our Video-on-Demand, so we have capacity for 3,000 hours. And in fact, based on the technology that we are using for our imaging which is the IP TV technology, we do not foresee any [indiscernible] in order to improve our offer in terms of number of channels or in terms of capacity to store movies. So today we are quite comfortable with these capabilities and we are trying to analyze and to establish deeper market behavior and customer behavior in order to attach our offer to their need and their wishes.

Okay on the financial questions, we will have to update the market in our [inaudible] after we finish with what we have now on our hands. Certainly we have stretched some of the limits, but we have no intention of going past those limits. This is unfortunately as far as I can go; when these concessions that we’re not supposed to talk about today are complete, we will fully update you on what the new targets are going to look like, and that is not going to be very far off today.

On the strategy and the refinancing risks, let me tell you that one of the big benefits of being inside the group of companies is that first of all refinancing renegotiations are held at the top level and therefore we have greater leverage than any of the local operations have to refinance themselves. Second, the change in policy in terms of currency and interest, [indiscernible] we cannot report full-year level, that is for the Telefonica SA top level which has the benefit of diversification now that we have so many different currencies in so many different markets at different stages of development. So we sleep very well at night on the refinancing issue and certainly anything the debt to operation ratios in the Latin businesses is low; that only attributes to the high cash flow generation abilities of those companies.

Terence Sinclair, Citigroup.

Just a few simple questions; you note the new tariff if I remember correctly in early September for DSL in Spain. Given the market share last quarter, I wonder if you could help us understand whether the price changes you made were material in that in September; and secondly without wishing to go over the deal we’re now talking about, [inaudible] commentary that a structure in which ’02 and others reporting to you separately would result in unnecessary costs and I wonder if you’re prepared once again to rule out the merger and within that the use of treasury stock in affecting merger between the assets you’re buying from ’02 and [indiscernible]?

Okay I’m sorry to say that we’re just not allowed okay? We’d get into a quagmire of legal issues, so forgive us for not being more communication friendly today on the second part of your question. And the second part will be taken up by Julio.

Okay, regarding your question you said the [indiscernible] we have in the market were very, very good; the figures are very stimulating; we are very happy with our position in this market. We have been trying for a long period of time to have these kinds of offers in the market and finally we have them and we have [inaudible] ourselves. Customers appreciated these kinds of bundles and in addition to have anything they need in the bundle, you must take into account that in our [indiscernible] there is a discount depending on the bundle that then goes from 14% to 21%, and in the case of the dual plates the discount goes from 15% to around 26%. So it is a very attractive discount in addition to nice set of functionality for the customers.

Okay, do you believe that the pricing changes you made were material in these kinds of market [indiscernible] you made? Also we think this has not bee a particularly price-led market. One of the reasons for asking, I appreciate that you [indiscernible] of the offer, but one of the reasons we’re asking to look at what the competitors can do in terms of pricing and how you will have to react to them and so on, so really the question comes down to what extent the pricing itself is the factor that drives market share pickup.

Well of course the proposal to the market these are very competitive from the point of view of the price. In addition to that, you must take into account that our products will appreciate in this market because of the quality of service that we are providing. In addition to that, I think it is important to take into account today that imaging is the unique proposal of this kind in this market, we are the only Company that we are providing in this market IP TV with the full functionality including Video-on-Demand and altogether makes our proposal very attractive for the customers.

Jeanne Garidis [ph], Mann Securities London.

A very good evening to you; Jeanne Garidis from Mann Securities in London. I have 2 questions please; the first one is could you help me understand what’s behind the 178 million gain on the sale of fixed assets?

And then secondly at the risk of straying from tradition, would it be possible to ask a question on Spanish Mobile, vis-à-vis the per second discussions between yourselves and the government and what likely time table is there moving to charging on a per-second basis?

Jeanne thank you for your questions. On the second part we’re going to have to forward you to our IR Department either here or at the [indiscernible] so that they can provide you with the minutiae of details on that particular part.

Your first question in the first 10 months of 2005 we have a gain on sale of fixed assets of 178. This corresponds basically from the sale of [indiscernible] in Argentina [indiscernible] the Argentinean Group and InfoNet. InfoNet is one of the largest contributors with 80 million and we’ve also sold a few million shares or so of TPI a consequence of the share of the [indiscernible] going past the 60% mark and then therefore having the lower wages [ph]. So we took the decision to alleviate a little bit away so that Telefonica would own less than 60%.

Those two, InfoNet and TPI are the largest contributors.

John Pierce, Dresden Research.

Hi, this is John Pierce from Dresden Research. I’m interested in your targets for credit ratings or leverage. I’m kind of presuming your previous targets of 1.85 times leverage and single-A ratings have gone away. But what now will the Company’s loan run targets be, do you know? And if can’t tell us now, when do you think you might be able to? Thank you.

Thanks for the question. We are technically speaking holding onto the old targets until we renew them, that’s as long as we have [indiscernible] session. And when that [indiscernible] session closes, we think that it’s going to be some time in mid January; we will fully update you on what the targets are going to look like.

Okay thank you.

Okay ladies and gentlemen, thanks a lot and at this point I would like to draw this presentation to a close. We thank you all for your understanding and cooperation regarding the restrictions that we have had to exert today and that we cannot comment on the offer. Thanks a lot for that and have a good weekend.

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