Telefonica SA (TEF) 2006 Q4 法說會逐字稿

Good afternoon ladies and gentlemen. And welcome to the Telefonica 2006 full year results conference call. At this time all participants are in a listen only mode. Later, we will conduct a question and answer session and instructions will follow at that time. [OPERATOR INSTRUCTIONS]. And just to remind you all, this conference call is being recorded.

I would now like to hand over to Head of Investor Relations, Ezequiel Nieto. Please begin your meeting and I shall be standing by.

Thank you. Good afternoon ladies and gentlemen. Welcome to Telefonica's conference call to discuss 2006 full year results. Before proceeding, let me mention that this document contains financial information data reported under IFRS. The financial information contained in this document has been prepared under International Financial Reporting Standards.

This financial information is unaudited and therefore subject to potential future modifications. This presentation may contain announcements that constitute forward looking statements which are not guarantees of future performance and involve uncertainties. Our actual results may differ materially from those in the forward looking statements as a result of various factors.

We invite you to read to Company 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 don't have a copy of the relevant press release and the slides, please contact Telefonica's Investor Relation's team in Madrid by dialing the following telephone number 3491 584 4713.

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

Good afternoon ladies and gentlemen. And thank you for attending Telefonica's 2006 full year results conference call.

First let me introduce Santiago Fernandez Valbuena, Telefonica Chief Financial Officer with whom I will share the review of the Group performance. In the question and answer, you will have the opportunity to ask questions directly to the Executive Committee. And I have today with me, Julio Linares, General Manager for Coordination, Business and Development Synergies. Antonio Viana-Baptista, Head of Telefonica Espana. Jose Maria Alvarez-Pallete, Head of Telefonica Latin America and Peter Erskine, Head of O2 who is connected from London.

The results we are presenting today reinforce our profile are the best combination of growth and good returns in the industry. A profile, we have guaranteed by focusing management in four areas that deliver tangible results.

First, stimulating our unique growth profile with earnings per share up by 43% in the last 12 months. Second, extracting value for a deeper integration generating synergies of over EUR1b in the year 2006. Third, re-building a solid financial structure with net debt to OIBDA progressing towards our 2.5 times target. And finally, focusing on shareholder returns and we have distributed 40% of the free cash flow for last year.

Please turn to slide number four to review the major financial message. Group sales grew by 41.5% year on year to end close to EUR53b. In organic terms, consolidated revenues went up by close to 8%, outperforming the sector.

Operating income before depreciation and amortization increased by 27% on an annual basis, or 6% organic. And in December, above the EUR19b mark.

Operating income exceeded EUR9b, almost 30% above the last year's figure. In nominal terms at 16% organic. As a profit to cash generation, operating cash flow surpassed the EUR11b for the year end December period, more than 12% above the last year's figure.

The financial [execution] is presented in slide number five. 2006 numbers are hitting our profit and loss targets which we already upgraded back in the third quarter. Revenues went up by almost 39%. Our growth, the 37% we set as a floor. Operating income before depreciation and amortization growth reached the high end of the guidance range of 26 to 29%, while operating income increased by just over 29% - the top of the expectation.

Underlying CapEx came above our estimate at close to EUR7.7b, mainly due to high end investments improving in Spain, to meet the demand and a greater than expected in the fourth quarter more networks in Europe and Latin America.

Earning per share growth continued to soar as slide number six shows. Reported earnings per share reached EUR1.3 per share, or around 43% annually. Underlying earnings per share increased by 23% year on year. A growth rate that is totally in line with our long term target of EUR2 earnings per share by 2009. We are tipping underlying earnings per share to continue to progress at this similar pace in the coming years.

Investing in growth has been key to provide this strong set of results as is presented in slide number seven. Commercial expenses went up 6% annually to exceed EUR9b, while CapEx grew at 8% organically. Our commercial drive focused with our renewed efforts to expand our network give us a profile to grow that very few companies can match. As such, we ended 2006 with more than 200m clients at the Group level. 14% above last year's figure, purely organic. With net adds strong across-business in [Europe] at 50%, 40% and close to 50% growth rate posted by Mobile, Broadband and Pay TV are moving higher.

Group diversification which give the financial result is outlined in the slide number eight. Spain produces well with our total sales to 38% to 44% at the OBIDA level. On the contrary, high growth, Latin America and more Europe are steadily increasing the weight of the consolidated financials. Both regions represented already close to 61% and 56% of Group sales in OIBDA at the end of December.

Turing to profitability in slide number nine. Growth in operating costs has been cut by over three percentage points in 12 months, standing just at 9%, despite the stronger commercial activity. OIBDA margin stood at 36% with the [inaudible] of [fixed] individual closing the year just below 41%. Mobile margin ended the quarter at a healthy 32%, affected by subscriber growth and commercial costs. Underlying margin remained mostly stable, year on year.

Please turn to slide number 10 for a review of major operations starting with the Spanish market, which has shown unparalleled growth and profitability. We have increased ERE in the Broadband market and captured market share in Pay TV while traditional line losses have been contained.

Revenue remained strong, based on the growing total ARPU with underlying OIBDA growth beating year end target. On the Mobile side, we have posted a strong commercial delivery throughout the year powered by churn control with a very sound Christmas campaign despite the competition. Revenue growth remains healthy with positive margins based on higher commercial efficiency.

Please turn to slide number 11 for a brief overview of the Spanish Broadband business. Business transformation. The developing new high growth revenue streams is proving to be very successful to beat Telefonica Espana unique growth profile. Total ARPU is up by more than 4% in 2006 driven by strong proven net additions, the success of Double and Triple Play products and progress on value added Services and solutions. Revenue growth reached the 1.7 mark at the top end of the 2006 guidance range.

As slide number 12 outlines, we have gained momentum in Broadband all along the year, clearly, leading the market. In the context of 34% growth on the Spanish Broadband market, we have captured 60% of total market net adds in 2006. Despite pressure at the premium, we have increased our market share to 56% overall based on better quality and customer experience.

We are keeping our strong momentum in the fourth quarter. With market total net add is still stable at 60% despite the competitors' new offerings.

In Pay TV market the Imaginenio client base grew by 85% year on year, capturing over 40% of the fourth quarter market net adds.

Please turn to slide number 13 -- sorry, to revise the traditional business where erosion is being contained. Telefonica line losses have been kept at 1.2% this year. Losing less lines on 2006 than 2005, despite the growing sales of our value in the local loop. It's worth mentioning that the OIBDA fixed traditional market is increasing by 2.3 annually. In addition, we are reducing our dependence on Voice while expanding Flat and Semi-Flat rates by 60% this year.

Let's finish the analysis of the Espana broadband moving to efficiency in slide number 14 and 15. Please be aware that we brought [inaudible] to join the 2007 senior resolution program forward which has led to an additional provision of close to EUR500m in the fourth quarter. Total provision for the year amounted to EUR980m. As clearly these provisions, operating expenses were flat year on year despite the stronger commercial activity.

Our unique profiles in terms of profitability, is shown in slide number 15. Adjusted OIBDA which excludes the EUR500m additional ERE provision, exceeded last year's figure by more than 6%, above, the guidance we already updated in the third quarter.

Let's continue with our Mobile operations in Spain in slide number 16. Telefonica Moviles Espana Christmas campaign this year has been a hit. Not only did we achieve a 21% increase in gross additions in the fourth quarter, but we also managed to push net adds up by 66% thanks to our top churn performance. All that churn was just incurred and in the quarter a 0.9%. This positive commercial result have allowed us to increase our market share of net adds to 35% during the quarter, 14 percentage points ahead of last year comparable figure. This performance achieved despite having three new players in the market and the re-launch of our third network competitor. Our strong Christmas campaigns underlines our very sound commercial performance last year. Focus on churn control and value growth.

On slide number 17 the same. Blended churn went down to just 1.7% per month helped by our renewed loyalty programs. The increase in long term contracts and improved customer satisfaction. As such, net adds were growing by an impressive 70% annually. Almost four times above the rate of growth in gross additions. 93% of clients that signed in were new contracts, leading to a 13% increase in Postpay. Those improvements carried the mix. In the last 12 months, number portability was a positive 175,000 clients. We achieved the market shares of over 45%.

On top of client growth we have continued to stimulate customer-driven revenues as slide number 18 shows. Outgoing Voice ARPU was up almost 1% year on year, driven by the close to 3% increase in minutes of use. Growth in that ARPU accelerated to almost 3% on the back of the strong 24% increase in our P2P SMS revenues driven by content and connectivity. 3G customer growth has been strong in the quarter, reaching over 1.1m clients including more than down 165,000 PC Cards. This positive evolution of Outgoing ARPU lead to maintain blended ARPU unchanged at EUR33 in 2006 despite the 8% reduction in incoming ARPU, forced by termination rate cuts.

The next slide presents major drivers of domestic Mobile revenue performance and profitability. Total revenues increased by just above 4%, figure fully in line with guidance, led by the 4.5% growth of service revenues. Customer revenues went up 6.5% driven by solid performance of clients and -- we have reversed the 2004 negative trend and remained flat on an annual basis despite the 14% increase in commercial activity involving handsets. OIBDA margin reached 45% for the full year with fourth quarter margin being impacted by the very high commercial activity and handset upgrades.

Moving to Europe, where we have successfully managed the Mobile opportunity and extracted value for the turnaround of Fixed. Starting with our Mobile operations, we are leading the market in terms of service revenue performance in the U.K., driven by client expansion and ARPU or profit.

In Germany, the Company sustained well from a commercial perspective despite competition, focusing on contract.

Finally, we obtained the first positive result of our interest in the German ADSL market and expect to launch in the U.K. by the mid of this year.

Looking to the Czech Republic we are reporting solid financials with growth in revenues in OIBDA, based on the active push of Broadband and Mobile. In addition, margins keep improving despite re-branding and in Slovakia the start of '06.

O2 U.K. performance is summarized in slide number 21. Customer and ARPU growth were behind the almost 15% rise in service revenues, a performance fully in line with guidance. We have raised twice this year the guidance.

February to December, OIBDA margin stood above 28%, one percentage point down year on year as expected. [Inaudible] at some point total subscribers were up by 10% on an annual basis with 12 months rolling Postpay churn down by four percentage points year on year to end at 23%. In terms of usage, ARPU increased by just over 2%, thanks to a better mix and 9% pick up in MoU and growing data ARPUs.

In slide number 22, we present O2 Germany results. Service revenues for the period February to December increased by close to 7% year on year, with the highest subscriber base being partly offset by pressures on ARPU. 11-month margin was almost at 21%. Please notice that the OIBDA margin was impacted by a EUR32m provision for redundancies, accounted in the fourth quarter. Excluding this one-off charge, OIBDA margin will have reached close to 22%, table compares to the last year's figures.

Commercial performance was solid, particularly on contracts. Net additions totaled close to 400,000 new clients in the fourth quarter, 49% on Postpay, the highest level since the fourth quarter of 2005. Blended ARPU declined by close to 13% annually, affected by the change in mix, termination records in December '05 and November '06 and pricing pressure.

Moving to the Czech Republic in slide number 23 I'm happy to say that we have successfully gone through a very challenging year in the Czech Republic. Integration is on track. Re-branding in T.O2 has been completed. Broadband and Mobile offerings have been rejuvenated. And lately, we have extended more in operations into Slovakia. These efforts have paid off as the turnaround of the Company's financials show. The revenues ended the year flat in line with guidance with already the growth surpassing the 2% mark that we set as the year end target.

OIBDA margin was close to 46%, almost one percentage point above 2005 figure. Broadband and Mobile is still a key driver of financial turnaround on the back of a strong customer growth, thus compensating with the growth scene in the Fixed Telephony business.

In slide number 24 we start to reveal our Latin America operations where we have financial growth and profitability.

In the Fixed business, Broadband and Pay TV continues to grow strongly helping us introduce Double and Triple Play across countries to enhance our competitive position. The growth in Broadband and Value Added Services was leading to a positive revenue performance, while profitability remains high, driven by synergies. In the mobile space, cellular revenue outpaced the customer growth with margins improving despite opposing commercial activity. Improved profitability was behind cash generation which more than tripled in 2006.

Starting with the Fixed business in Latin America, in slide number 25. Fixed revenues went up 3.5% in constant currency terms, equivalent to a 14% nominal increase.

Revenue growth was driven by new services such as Broadband, and Data and IT Services. They jointly accounted for more than 85% of organic shares growth. Traditional sales were contributing consistently to underlying performance, despite pressures on Fixed Voice and our Fixed service.

Please turn to slide number 26 for an update of Broadband connectivity and Value Added Services which are the drivers of top line performance.

Total Broadband connections were growing at 40% year on year with all vehicles expanding their connections between 30 and 70%. Consolidated Broadband revenues raised above 30% annually in constant currency terms.

I would like to highlight the progress in launch of television services across the region, leading to the introduction of Triple Play offerings to enhance our competitive position in each country.

Satellite Pay TV services are already above level in Chile and Peru. We see Pay TV clients to top the 650,000 mark at the end of December. 40% above the last year figure. The rest of countries we offer TV services soon following the example of Columbia where satellite TV is in the market since February 2007.

Moving to slide number 27 for our revenue margins. They remained solid across the board in the last 12 months. In terms of efficiency, all operators kept improving margins despite challenging contest of operations with the exception of Telefonica Argentina, due to the higher activity and frozen relief tax.

But let me remind you that top line growth reached close to 14% in Argentina last year. In terms of our guidance, adjusted OIBDA went up by 3.7% in constant currency terms affected by the new management pension scheme accounted at the end of the year. Excluding this change, adjusted OIBDA would have grown by 4.6%, in line with the target.

Moving now to our Mobile operations in Latin America in slide number 28. First, I would like to highlight the 20% annual growth in service revenues excluding ForEx through pricing and customer growth by 2 percentage points. This strong result is supported by the excellent 28% rise in Outgoing service revenues year on year. OIBDA performed even better posting a 38% annual grow rate. The margin reached 26% improving almost 4 percentage points in the last four quarters.

OIBDA performance has dramatically changed the cash flow profiles of our Mobile operations in Latin America with operating cash flow totaling EUR900m in 2006, an increase of 3.5 times compared to our last year figure. OIBDA performance has given support to our investment efforts in the region, setting the example and the standard in all countries with the aim to further enhance our growth prospects.

Let me start with the overview of main projects with Brazil in slide number 29 where good progress has been made. New pricing plans for Prepay and Contract are driving an increase in minutes of use or 4 minutes from the third quarter levels. Usage growth combined with better retention of higher value clients and very strong reduction of fraud has led to a 4% increase in underlying ARPU quarter over quarter.

In addition, the GSM rollout is running as planned with service already available in many cities. And in total, 7,000 GSM customers at the end of January. Also a pretty small number due to the very limited retention. Even so, the migration to GSM has been a tremendous success in terms of time to market. Brazil has a much better position to effectively compete and improve our margins in the future.

In terms of financials I would like just to highlight the 2006 underlying OIBDA declined by almost 11%, a 13 percentage point improvement versus the nine month figure.

Let me now share with you the very positive performance in Mexico where we are combining operating momentum, revenue growth and turnaround of OIBDA for the third quarter in a row. First, we had more than 2m new customers in total in 2006 and more than 1m in the last quarter alone, or 2.8 times the fourth quarter 2005 figure.

A strong half, led by a refreshed commercial offering and more importantly the significant reduction in churn ended the year at 3.5, are the two factors behind the 34% rise in clients.

Second, outgoing service revenues were up by 45% in 2006. AS a 12% growth in ARPU, driven by higher usage was added to the very solid client expansion. As such, service revenue increased by 74% last year, totally in line with subscriber growth. Revenue performance was even more positive in the fourth quarter, in which the benefit of [inaudible] pace start to be reflected.

And third, a skills knowledge and churn reduction led to an OIBDA of EUR22m in the fourth quarter, driving 2006 losses to remain.

Please turn to slide number 31 for a brief review of all the major Mobile operations in the region, starting with Venezuela. Online customer growth, which continues to excel our 43% guidance with a 7% increase in ARPU, allowed total revenue to expand by 46%. OIBDA was 43% higher than last year with margins almost at 40% despite the very strong push in commercial activity.

In Columbia, the market has gone down due to higher entry values reducing client growth to 29% for the year. ARPU remained under pressure leading to a 11% increase in 2006 Outgoing Service revenues. Lower commercial activity, as well as further efficiencies, pushed OIBDA margin to almost 18% last year.

For a summary of the trends in the major markets in Argentina and Chile, please turn to slide number 32. In Argentina Customers and Service revenues were growing at a rate at above 30%. Commercial activity, which was down during the year, are reflected by the double digit growth in net adds increased in the fourth quarter as the Christmas campaign came together. OIBDA more than doubled in the last 12 months with margins expanding almost 12 percentage points to close to 27%.

Let's finally turn to Chile. Service revenues annual growth reached 18% in 2006, well ahead of the 8% increase in the customer base, proving the success of our value driven commercial strategy. The postpaid increased by close to 4 percentage points year on year boosted by handset upgrades reaching ARPU growth at 12%. OIBDA margin improved further, ending 2006 at almost 37%.

Before turning to financial expenses and debt, please move to slide number 33 for an update on the Group synergies. Our initiative to further integrate operations are running on track. Synergies are just more than EUR1b in 2006, 16% above our internal target. Almost 80% of the synergies are being generated in Latin America. Our original Imagenio operation started in 2004. The savings coming from product on integration, our integration in Spain and Europe will be back-end loaded. Please note the integration of O2 is adding EUR174m of synergies. That first year can be [taken forward], our expansion examples of our progress in working together and we billed more than 70% of roaming [inaudible] to manage it internally. And My Europe had more than 1.7m clients in Germany. We have been able to launch DSL in record time having 90,000 connections at year end in just two months.

In slide number 34 we present our target for synergies for 2007. We expect to have savings of around EUR1.25b next year, 20% above last year's figures. In addition, to keep our focus on ongoing initiatives we are working on new opportunities. We are starting to start [back from] in Europe, combining ADSL and Mobile, in Latin America exploiting the opportunity to provide TV services and growing and developing more data and exploiting digital in the turnover. And now I turn the call to Santiago for the review of financial expenses.

Thank you Cesar. Our expenses have increased by 56%, substantially below the 84% rise in debt following the O2 acquisition.

We have succeeded in keeping the effective service cost at 5.1% and that without compromising our hedging policy. As a matter of fact we have increased the debt in Latin American currencies by EUR1.8b in 2006 reaching EUR7.2b at year end, which is equivalent to a 14% size share of our total debt.

At year end another 21% was denominated in Sterling, 4% in Czech Kroner, 3% in U.S. Dollars and 58% in Euros. The Euro value of our liabilities is EUR511m lower through 2006 as a consequence of our foreign exchange hedging policy. As we apply hedge accounting wherever possible, only EUR61m of those 511 have been shown passing through the P&L.

Turning to cash flow on the next slide, slide number 36, we can see that in the last quarter of the year we have reduced net financial debt by EUR94m. We have been able to devote EUR316m of cash flows to debt reduction by balancing record cash flow generation with strong shareholder remuneration of about EUR1.8b and limited acquisitions. However, the leverage ratio increased slightly as a consequence of changes in consolidation, foreign exchange movements and the EUR500m additional redundancy provisions that we took in the fourth quarter of '06 at the Telefonica Espana level. Excluding this last effect, net debt and commitments to OIBDA would have stood at 2.75. As such, we are half through our leverage path and target at this stage, coming from the 3.2 times OIBDA pro forma with O2, as of September '05, and moving towards the 2.5 target that we have already made public.

I would like to highlight the success of the major debt refinancing that we have gone through in 2006 and that we were able to achieve in a record time. The average financial debt maturity has been lifted to 6.5 years, plus we refinanced the GBP18b that we took to acquire O2, and that were originally maturing in 2007 and 2008.

Refinancing has been done mainly through the issuance of EUR13b worth of bonds with an average maturity of close to 10 years. The use of cash generation and proceeds from the TPI sale and the exchange of the GPB7b remaining from the original loan by -- to 5 years on average. Average credit spreads of refinancing instruments was close to 53 basis points.

Now I would like to hand over the call back to Cesar for his final comments on 2006 and the remuneration and broadband.

Thank you very much. Slide number 37 presents what I think is a very attractive shareholder remuneration for a growth Company such as Telefonica is. In 2006 we have distributed to shareholders close to EUR3.7b combining dividends and buyback, equivalent to a 4.7 cash yield. Please remember that we have set a target which is to double and especially in dividends per share, by 2009. And that we will complete the EUR2.7b buyback program by the end of the year.

And now I would like you to run through our 2007 guidelines as presented in slide number 38. We are setting benchmark targets again for 2007. Top line growth will be between 6 and 9%. We anticipate operating income before depreciation and amortization to go up by 8 to 11%. Growth in operating income is expected to reach between 14 and 20%. And CapEx will fall below the 2006 figure.

Group [inaudible] will leverage very solid expectations for the Spanish operations in a sound macroeconomic environment. We estimate Telefonica Espana will grow a revenue base in the 0.5 to 2% range. OIBDA will expand by 5 to 7% and we are targeting a CapEx level below the EUR2.4b mark for the year.

Moving to fixed, mobile operating units in Spain, Spanish fixed revenues are expected to increase by 0.5 to 2% with this year, OIBDA exceeding the 2006 figure by 9 to 12%. Service revenue of the Spanish Mobile will be up by 2 to 4%. We are estimating that the OIBDA of the Spanish Mobile business will increase this year in the naught to 1% range.

We are expecting continuous outperformance of the European business led by O2. We are predicting sales of Telefonica to Europe to grow between 11 and 14% in 2007. We foresee OIBDA growth during 2007 in the 7 to 10% range with a commitment to spend less than EUR2.2b in CapEx this year.

Talking now about the three major operating subsidiaries. In the U.K. revenues are set to grow between 15 and 18% with OIBDA growth reaching the 9 to 12% range. In Germany total sales will expand by 40% to 70% whereas OIBDA growth will expand between 24 and 27%.

I will skip estimates for Telefonica T.02 Czech Republic as all numbers were provided by the company themselves last week.

And finally, we promise that we continue to express our distinctive growth profile in the Latin American region. We estimate that our revenue for Fixed and Mobile services combined will increase by 11 to 14% in Latin America this year. OIBDA will grow between 12 and 15% for the same period and we anticipate that we will arrive at this grow rate by investing less than EUR3b.

I would like to tell you a guide to how the 2007 targets are being calculated is included on slide number 42, as a reference.

Our results that I have just served with you were derived from a number of key management initiatives that we will pushing all priorities as slide number 43 outlines.

Four basic priorities have been set at the Group level, first to keep developing our markets reducing the penetration gap. Second, promote higher usage and strengthen our competitive position by pushing more Internet services and exploit the [broadband] as it develops. Third, continue to invest in growth and transformation. And fourth, reinforce integration and convergence across the Group to generate higher efficiencies.

These basic guidelines translate into a set of common operating levers for the Fixed business develop Broadband and TV. Extend models according to market conditions and widen the portfolio of Value Added Services and IT services. On the Mobile field we will work around the customer experience. We will play elasticity to promote voice ARPU and we will develop data offerings farther, based on the speed of 2G and 3G networks rollouts.

To sum up, first, stimulating growth, extracting synergies by restructuring the debt and yielding attractive returns has been four management priorities this year which translated into a 43% earnings per share growth.

Second, we have posted the strong results in 2006, totally in line with guidance and head of the peer group.

Third, organic growth reached high single-digits leveraging our drive on subscriber acquisition and retention.

Fourth, we are proving our capacity to extract value from a deeper integration of operations, saving EUR1b this year.

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

Thank you. [OPERATOR INSTRUCTIONS]. Our first question comes from the line of Luis Prota. Please go ahead with your question announcing you company name and location.

Hello. It's Luis Prota from Morgan Stanley in Madrid. I have to questions. The first one is whether you can clarify what are the options during expansions in Italy, and whether -- whatever it happens is linked, somehow, to the result of the Semicom and Portugal Telecom offer?

And the second question is if you could give us some light on your expectations on roaming impact for both Telefonica Moviles and O2? Whether you are including something or maybe nothing for 2007 from the new legislation? Thank you.

Thank you Luis. In regards to Telecom Italia, I have to say that we have the higher respect for Telecom Italia in management and we are convinced that it would be a fruitful idea for Telecom Italia and Telefonica to work together. However, at this point, we feel that the current circumstances make it difficult for us to proceed along the lines of a favorable statement. We have decided to put the conversations on hold and we will keep you informed about any changes. And I will remind that in regard to Telecom Italia there are already two statements that has been made by Telefonica. The statement we make on the February 12th and the statement that I am making today, and that is all.

It has nothing to do with Portugal. Telefonica has already stated clearly it's position, the proposal that they are making and the present situation arises as a result of the offer presented by Semicom. And we clearly believe all the shareholders will be able to decide individually whether to tender the shares or not. As a consequence, Telefonica will vote in favor of lifting any limitations so that all shareholders may decide what to do when facing this offer.

This [inaudible] like to answer the question regarding international roam. As you know this idea is under discussion today both in the Council and European Parliament and it is not clear yet what is going to be the final decision, though it seems that they are going to regulate both retail '07.

From the point of view of Telefonica we believe that the regulation should be taken in such a way that there is not discussion on the market, that there is not reaction in the completion and there is no any disadvantage from the point of view from any customer group.

And finally, what I can tell you is that paids, percentage paids, this question it is very difficult to anticipate now what is going to be the impact for our business, though we are very proactive in trying to decrease paying tariffs by ourselves like to others like. Thank you.

Sorry, if I can follow up on this question on raw minutes, is not completely clear to me. I am not sure whether you are telling me that you have not included in your guidance anything from the new legislation for raw, maybe because it's not clear yet or whether you don't want to give us the figure?

Luis, this is Santiago Valbuena. What I can tell you for Spain is that obviously we are already incorporating in the overall guidance that we provide, a severe decrease in roaming tariffs. That is already incorporated here.

And the same for O2. We're already as Julio said, bringing our prices down to very competitive levels and we are seeing some elasticity as well. So although we cannot forecast what Brussels will say, we are very confident that we are allowing for likely affects in our forecast and forecast for this year.

Okay. Thanks very much.

Our next question comes from the line of Jesus Romero. Please go ahead with your question announcing your company name and location.

Jesus Romero from Merrill Lynch in London. I wanted to know if you could give us a little detail on Airwave, revenue a bit, and if you could confirm the evaluation that the financial press has been talking about? And a little bit on the timeline of that potential sale? And then, if it's possible, to get a bit more detail on the Latin American guidance, if you could give us some details on Fixed and Wireless? Thank you.

On Airwave it's not in the guidance. It's worth being very clear about that. There are several points on the guidance which are made clear. They're obviously 12 months based on 11 months, but also the guidance does not include Airwave. We just started the sale process and there is a number of interested parties. We haven't yet firmly concluded we will sell it but I think that's a very possible outcome. And we're working with the government through this year, the government being the major customer, to go through that route.

So far as valuation, obviously I'm not going to comment. You've seen in the press, suggestions of GPB2b. That's their assessments. But obviously we will learn as we go in terms of what somebody is willing to pay.

Can you give us the details for revenue and EBITDA for '06?

I think slide 40 will give you that answer. You can see '06 reported and there the Airwave revenue with and without Airwave revenue. So you can see the revenue is about a couple of hundred million Euros and the OIBDA, accordingly, is reported there also on slide 40. Okay?

Yes. Thank you.

I take your second question. Jose Maria Alvarez-Pallete speaking. We are not providing with a statement of the guidance because we want to keep commercial flexibility to try to increase the terms and therefore not providing with any additional clues to our competitor in the region. But let me tell you that globally, it's a very ambitious guidance. We are pretty confident on that guidance and that all the things that Latin America is committed to it.

Your next question comes from the line of David Wright. Please go ahead with your question, announcing your company name and location.

Yes, it's David Wright from JP Morgan in London. I have a couple of questions. Firstly, a very strong performance in Mexico. That's quite clear. I would like to know if you could give us some more detail of your expectations for 2007 and how exactly they play out within the wider Latam guidance? So, maybe some kind of EBITDA expectation would be very useful, or whether perhaps you are a little more cautious given that Mexico has been volatile historically?

And then, on domestic Fixed, a couple of questions please. Firstly, the pre-retiring provision seems to have declined fairly substantially, down to around EUR280,000 or so per head. That was running at 320, so I'm just keen to understand why that is reduced.

And then very finally, wireline guidance of 9 to 12%, if I adjust to the pre-retirees and the property gains, I get 9% growth. Obviously there is some revenue growth and some of that will drop straight through with the line rental and tariff increases. You're also more efficient on your employee base. Does that guidance not look a little cautious? Thank you.

Yes, on the Mexican question I am afraid that we are not able to concrete much more in numbers, but let me tell you something for the prospectus. We foresee -- what we are seeing as of what is transpiring 2007, is that the trend continues. We want to be very cautious on the churn levels because after a very intense commercial business campaign we need to now control that the quality of the net adds has been as good as they were before.

And on top of that, after changing the distribution network, we are pretty confident that the specific growth can be sustained. In terms of net adds, I think that the 500,000 benchmark is a cautious -- is a prospect, so it's a cautious benchmark. And also, I would like to say that in terms of all the operational levels of the year that we have, as of 2007, are going in the right direction. So we keep under the same philosophy, walking rather than running and trying to keep all the financials in good shape in Mexico.

David, this is Antonio. On the domestic Wireline, two comments. The first one on your calculation on a per capita cost of early retirement, your calculation is probably correct, or is very close to the correct figures. Just bear in mind one thing, the cost is a function of the average age of the people that are retiring each year. This is the last year of this [edit] program. And as a consequence, comparing the population that will retire this year, to the population that retired back in 2006 you have a higher percentage of people above 52 years old and as a consequence of that, that has a lower cost. That is the only reason for the difference in cost that you very well pointed out.

It's curious to hear someone claiming that the guidance of 9 to 12% growth in EBITDA is poor when we look at our peers in Europe. But we stick to that and we will do our best to achieve that result.

Thanks.

Our next question comes from the line of Terry Sinclair. Please go ahead with your question announcing your company name and location.

Good morning. Terry Sinclair from Citigroup. German margins, low in the fourth quarter, is that fair? And to what extent is the margin expansion that you are guiding for 2007 a function of not repeating that kind of fourth quarter performance?

And second question, can you give us some color on where the CapEx will go next year? Are there any changes in where you intend to invest?

On the German margins, Terry, it's Peter here, effectively the last quarter's margin was a little low, two reasons really. One, as we've said there was provision for some restructuring of EUR32m. So that's about 1 point of margin over the year and clearly quite a lot in the last quarter. And we have put together some new Indian tariffs and we were effectively, at the end of November, relaunching the [Indian] and bundling it with DSL. So we were starting some more aggressive activity in the markets. So those two did give us a lower margin in the last quarter.

I think we're looking in '07 at a very challenging market. I mean we're still -- although we're not getting the kind of stellar rates of growth we've had in previous years, our business is still growing this year, in the year a complete 6 to 7%. And in the year coming at a similar sort of level. And I contrast that with the big guys like T-Mobile, going back with 8% revenue and Voda, backwards 4%. And that is in a very competitive market. Eplus is also doing all sorts of things on the price front. But no, we see steady margin progression, not just padded, if you will, by that last quarter. It will be a modest increase but we can still see ourselves slowly increasing the margins in the German business.

Now, I wasn't sure if your CapEx question was on Germany or on Telefonica. Which was it?

Telefonica as a whole.

I'll leave that to one of my colleagues then.

Yes thanks Peter let me answer that. This is Santiago. On page 38 of our presentation you have the full numbers. We are guiding for CapEx, adjusted without the inclusion of both Endemol and Airwave, to be no higher than it was last year. You may recall that we had made a special effort in Q4 in anticipating some of the CapEx expenditures that otherwise should have happened in '07. And as a consequence we are pretty confident that the total number this year, again, without Endemol or Airwave and without taking into account FX changes, is not going to be higher in '07 than in '06.

Can you just give us some more color on which businesses will see CapEx fall particularly or rise particularly? Where is that investment going?

On that particular business line you have the CapEx guidance. So you may want to look again at the slides and then we will be more than happy to help you out if obviously you cannot find the right numbers.

Our next question comes from the line of Andrew Hogley. Please go ahead with your question, announcing your company name and location.

Hello. It's Andrew Hogley from Lehman in London. Just some clarification on the guidance for U.K. and Germany, if I may? Could you say what that including or is it including anything for the DSL launch in those markets? So is that an overall growth rate for Germany or is it just a [inaudible -- technical difficulties]? Thank you.

Yes it's a -- we are moving from reporting Mobile service revenue to -- in '07, the guidance refers to total revenue. This is a like for like. The reason being one, an awful lot of our competition do the same and two, it's as we move into the DSL space and offer our customers a converged offering. So that growth incorporates all factors within the business and the same for OIBDA as well.

Thank you.

The next question comes from the line of Mathieu Robilliard. Please go ahead with your question, announcing your company name and location.

Good afternoon Mathieu Robilliard, Exane BNP Paribas, Paris. I have two questions. First, in terms of the CapEx for 2006 you indicated a few weeks ago that CapEx was going to be around EUR8b which it is. At the time you mentioned that it was due to a number of things. That is Fixed in Spain and in Latam and also Mobile in Europe. Now, I don't know if I am doing this correctly but it seems that most of the variant actually comes from O2. So I just wanted to confirm that and if that is the case why is more geared to O2 than to any other business line?

The second question again, on O2, you are getting some very strong growth in revenues in the U.K. which comes with some margin dilution. Is the margin dilution due to some expenses, commercial expense that will then disappear, or is it because physically you think that structurally your revenue mix there is going to bear lower margins?

And the final question on Vivo. A few weeks ago you voted against the offer of Semicom at EUR9.5, or at least your representatives at the Board did that. Now, I just want to understand why you did that at the time because probably you are not going to get a bit more out of it, but still that could have threatened the deal, that potentially if it goes through, and I am talking about Semi getting Portugal Telecom. It threatens the fact that Vivo could then be sold to you. And that's possibly generating a lot of synergies. So I was wondering why you were happy to threaten -- to put that at jeopardy? Is it because you are quite confident that whatever the outcome of the Semicom bid is you will take Vivo? Thank you.

Our next question comes from the line of Robert --.

Excuse me, excuse me operator, We have to answer it, yes.

I think I am [inaudible] about response in general meetings of Portugal. Telefonica is very clear. What we want is to be able to offer the shareholders to vote -- what they say what they want to do with the offer of Semicom or not, which has nothing to do with Vivo.

With regards to Vivo, you know Telefonica, the position is always very clear because we have been committed to improve the Vivo market position, the margin, in the interest of all the Vivo shareholders. And we have said also this too on several occasions that we are buyers of the stakes of the others at the right price. And we are in pole position. But this is two different things.

Peter here. I'll answer the U.K. margin point. I think the question was in '07 there looks to be a margin reduction in the U.K. I think the straightforward answer is as follows. First of all, launching B, which we plan to do in the summer into the broadband, space hits the margin by about 1 point in '07 over '06.

Yes, the second point is I don't think there will be margins going up in the U.K. in '07 generally. We're seeing very strong price pressure. Our business is growing much faster than the competition. But I think there's very, very tough margin challenges in the U.K. And I think all operators are seeing their margins heading down. And ours has been modestly challenged accordingly. But the good news is that we're getting the revenue growth.

I think the final point I would make is that we've got our guidance here and of course we plan to deliver on that. But it will come out in a large pattern. I would remind the audience that our first quarter, this first calendar quarter of '07 will be being effectively compared to an operation which, in the first quarter of last year we were still behaving as though it was the last quarter of our financial year.

So things like in January to March of '06 we were not advertising heavily, all those kinds of things that one does in a last quarter. Whereas because of the financial year end, what I'm trying to put over is that it is very possible our first quarter won't perform in the U.K. and Germany in line with our guidance for the year. But we remain very confident that we can and will deliver our guidance for the year.

In terms of -- this is Santiago again. In terms of the color on the CapEx development, it is indeed true that we have revised upwards the expected number for the end of '06. But it did not have anything to do with our U.K. business and development.

On the contrary, we then pointed out that they were related to GSM deployment in Latin America, especially in Brazil and Venezuela. Some efforts on the 3G department in Germany, and further servicing of the Broadband and market in Spain which has surprised a little bit on the upside, but required us to step up our CapEx effort. So three very widely different sources, but the U.K. was not on that line.

Is it fair to say that essential U2 -- 02, I mean, sorry, because the CapEx and domestic fix is EUR1.5b which is not very different from what you guided last year?

You are right in one thing which is that we set up EUR1.5b and the final number has been EUR1.55b. So just has been a minor slide.

Thank you.

Thank you. Next question please.

The next question comes from the line of Robert Grindle. Please go ahead with your question, announcing your company name and location.

Yes, hi there. It's Robert from Dresdner Kleinwort in London. What are the Spain roaming in revenue growth adjustments that you refer to on page 19 of the presentation? Was there an accounting change? And if there was, did it have an impact on service revenues in the quarter?

And secondly, I wonder whether you could give a brief comment on Venezuela. Are you worried at all about what's going on with CANTV. Have you baked in any sort of change in that competitive environment into your guidance? Thanks very much.

Yes. Jose Alvarez-Pallete speaking. On the Venezuelan issue, I would like to tell you that we are waiting on -- with regard to our financial stake in CANTV. We are waiting for what is the outcome for the other ones. The Venezuelan government has reached an agreement with Verizon. So we are waiting for that.

And in terms of the market, we have not seen any changes. The market -- and we have no reason to believe that is going to happen. Competitive pressure is already there. And we will integrate what is going -- the government, how they will define CANTV. For the time being, we have no reason to be worried about our mobile operation there.

Okay, Robert. This is Antonio regarding the roaming revenues and their evolution. As you said, on page 19 there is a footnote there that explains that we have incorporated some adjustments there. And those adjustments is just accounting from some discounts that will benefit on the negotiation with other operators due to the Group size that have not been accounted for on previous quarters. And that is included on this quarter. And that's why the performance of the roaming in revenues, what that you see on that slide, and that explains the footnote.

Okay. Thanks very much.

Thank you. Next question please.

The next question comes from the line of Javier Borrachero. Please go ahead with your question, announcing your company name and location.

Yes. Good afternoon. Javier Borrachero from ING. Now that we have two months of 2007, could you maybe comment on the dynamics of the Spanish market in both wireline and wireless? Have you seen any identification of competition, a bit more of pricing pressure? Maybe you can comment on what you have see in these first months of the year. Thank you.

Javier, this is Antonio. Obviously the kind of intensity of discount at Christmas campaign on the side of others, well, it continues slightly through January because you have [Reyes] as a period of high sales, but then they did not maintain.

We can reaffirm the same thing. Our strength is on the loyalty programs and on the way we are able to bring churn to a world-class level and to retain customers. And our strength is on having an exclusive distribution network. And you just go to the outlets of others and you see what's going on. You see prices of our competitors in terms of handset subsidies competing versus each other.

Fortunately we have and we keep developing our own distribution network. And that is a great point of strength. And we see that as a -- not a significant change compared to previous situations.

Thank you. Next question please.

The next question comes from the line of James McKenzie. Please go ahead with your question, announcing your company name and location.

Yes. I'm calling from Fidentiis in Madrid. I've got two questions. Firstly following on from the operating environment in Spanish mobile, I was wondering, just seeing the extent of commercial activity in the fourth quarter of the year, is this something that we should be looking for in terms to be at a constant level now with four operators, or was it more of a one-off -- a commercial exercise a little bit like the re-branding that we saw in the second quarter of 2005?

And then secondly, on page 33, when you look at the synergies that you've got, I wonder, could we get a breakdown of those between OpEx and CapEx?

And just anticipating my follow up question, if there is a substantial amount of CapEx in there, how does that square with the fact that you've actually increased your CapEx guidance during the year?

James, this is Antonio. Regarding your first question, I think that I already answered partially before. But what we see is that it has proven as a good result what we are doing from the commercial standpoint. We are more than acquiring new customers. We are being able to retain the best customers to bring the best customers into contracts, to increase the rate of contracts. And that, in terms of value churn, is even better than the number that we see in terms of customer churn. So we're very happy with the result that that is producing.

Obviously, the intensity of our effort depends also on the intensity of what our competitors are doing. I would be surprised if some of that would maintain the level of handset subsidies that they had increased was for the whole of the year, especially some new entrants in the market.

So I think that we cannot extrapolate the level of results that we have there into the rest of the year. Also bearing to account that there is an extra cost that is included in the cost of the fourth quarter, which is the issue regarding pensions. And that is a one-off. So we cannot extrapolate that margin into the rest of the year.

This is Julio Linares. Regarding your question on synergies in 2006 more or less the number of 60 or 65% were not based around 35% on CapEx. I don't think this is inconsistent with the changes in CapEx. You must take into account that some of the increases on CapEx are because of the new investments for new services and new market demands. And because of that we don't see any inconsistency to the same service on the CapEx side or the synergies too.

Okay. Thank you very much.

Thank you. We have time for the last question please.

Our very last question comes from the line of Ricardo Seara. Please go ahead with your question, announcing your company name and location.

Yes. Hi. Good afternoon. It's Ricardo Seara from BPI. Regarding a follow up question on Vivo, if and when you acquire Vivo, will you be willing and what kind of restrictions could you be facing putting together Vivo with Telesp

Another thing is that in case, of course, you buy Vivo from Portugal Telecom, do you intend to use PT as currency for this acquisition, your stake in PT, or would you be looking at PT as a potential M&A target? Thank you.

It's Jose Alvarez-Pallete speaking. Listen, I don't think that we should comment on or speculate about that issue. Remember that there is a shareholders' meeting tomorrow and therefore we need to respect that. Therefore I don't think we should speculate on that. We won't comment on that.

Okay. Well thank you very much from all of us, the Executive Committee of Telefonica for attending our investor conference. Thank you very much.

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