Telefonica SA (TEF) 2007 Q2 法說會逐字稿

Good afternoon, ladies and gentlemen, and welcome to the Telefonica second quarter 2007 results conference call. At this time all participants are in listen-only mode until we conduct a question and answer session, and instructions will be given at that time. (OPERATOR INSTRUCTIONS). I would now like to hand over to the chairperson, Mr. Ezequiel Nieto, Head of Investor Relations. Please begin your meeting, sir, and I will be standing by.

Thank you. Good afternoon, ladies and gentlemen. Welcome to Telefonica's conference call to discuss 2007 second quarter [of the] year results.

Before proceeding, let me mention that this document contains financial information and 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, is subject to potential future modifications. 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 the presentation which you will find on our website. We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators.

If you do not have a copy of the relevant Press Release and the slides, please contact Telefonica's Investor Relations Team in Madrid by dialing 34 91 584 4713.

Now, let me turn the call over to our CFO, Mr. Fernandez Valbuena, who will be leading in this conference call.

Good afternoon, ladies and gentlemen, and thank you for attending Telefonica's conference call to discuss the first half of '07 financial results. During the Q&A you will have the opportunity to ask questions directly to our Executive Committee members, as I have today here with me Julio Linares, our General Manager for Coordination Business Development and Synergies, and Jose Maria Alvarez-Pallete, the Head of Telefonica Latin America. Antonio Viana, Head of Telefonica Espana and Peter Erskine, Head of Telefonica 02 Europe, are both connected via conference call.

Our 2007 first-half numbers show, again, our distinctive growth. Top line growth just exceeded 10.6% annually, pushing consolidated revenues to top EUR27.8b in this first half. In organic terms, total sales went up by over 7% year on year. January to June operating income before D&A totaled just over EUR11.3b, or close to 22% year on year.

Even more impressive is the organic growth in operating income before D&A, which stood at almost 7% year on year, accelerating more than 1 percentage point versus the first quarter of '07, thus, showing the benefits of scale and increased efficiency.

Operating income at the end of June exceeded the EUR6.5b mark. This is equivalent to an annual increase of 45% in nominal terms, which turned into almost 22% growth, which was purely organic and excludes Airwave capital gains.

Operating cash flow went up by almost 30% year on year to surpass EUR8b for the January to June period. Operating cash flow organic growth was just over 10% this first semester.

ForEx reduced revenues during this first half by only 1.4 percentage points, improving the trend versus the negative 2.6 percentage points of the first quarter.

Please turn to slide number four for the bottom line review. All the operating income growth flowed directly into a very solid net income increase; up by more than 66.4%. As such, net income for the first half amounted to more than EUR3.8b.

In slide number five we describe our sound progress in our most demanding commitment to double EPS by 2009, versus the EUR0.913 per share of 2005. First half EPS grew by more than 63% to reach almost EUR0.8 per share, and underlying EPS increased by 17.2%. That is after taking out capital gains and losses, of which Airwave is the most significant, and other non-recurring items like differences in headcount provisions in Spain and Telefonica 02 Europe, and the European Union EUR152m fine.

The combination of 2006 and first half of 2007 EPS growth performance is ahead of our target, if we compare it with CAGR distribution of the full-year's period, both at the reported and the underlying EPS levels.

Our [growth] plans to improve growth profile by regions, which is key for our very strong performance, is best outlined in slide number six. First, solid organic growth trends are taking place simultaneously in our three business lines, boosted by our successful customer expansion. Our client base grew by more than 11% to total 213m accesses, driven by broadband, Pay TV and Mobile expansion, with a significant contribution from our double and triple play commercial offerings across all markets. This explains the remarkable 7.4% organic revenue growth; well ahead of our peers.

Second, and from a regional perspective, we continue progressing well in the diversification of our asset base. European operations, including both Spain and Europe, represented more than 60% of the Group sales and continued to grow in the mid-single digit territory, despite servicing increasing in mature and competitive markets.

Latin America emerges for another quarter as the key differentiating factor of our performance, as the region's revenues grew by almost 13% in organic terms to account for 60% of Telefonica's top line expansion.

Turning to profitability in slide number 7, we show that the trend in annual growth in operating costs continues to decrease despite stronger commercial activity, to stand just below the 7% level in the first half.

Underlying margins stood at 35.8% at the end of June; almost flat against last year's figure. In nominal terms, margins for our key divisions range from the 25.5% posted by Telefonica 02 Europe, which is affected by increasing competition in Mobile and the launch of operations in Slovakia, to the very solid 46.3% achieved in Spain, excelling both in Fixed and Mobile.

This very positive evolution of both financial and operating metrics during this first half of the year is behind our 2007 guidance upgrade for the most relevant financial metrics of the Telefonica Group.

This means that, first, we will upgrade our 2007 revenue guidance from the 6% to 9% former range to a more ambitious 8% to 10% growth target. Secondly, we also upgrade 2007 OIBDA guidance from the initial 8% to 11% to a new range of 10% to 13%.

Consequently, operating income guidance moves up from 14% to 20%, into the 19% to 23% growth range. And finally, we will adjust CapEx from lower than EUR7.8b to lower than EUR8.1b.

And just to help you reconcile from our guidance into reported metrics, and with the information we have just released, please turn to slide number nine where we show that this page -- [you see that] it's an easy guide to calculate reported revenues and OIBDA from the guidance.

Let me now start the business line reviews with Telefonica Espana in slide number 10. First quarter trends on both Wireline and Wireless have been reinforced during the strong quarter in Spain, and results showed again our sustained growth profile.

Revenues grew by 5.4% to exceed EUR10b, backed by strong customer growth of 5.5% as a result of our successful commercial drive. OIBDA increased in excess of 10% to total EUR4.7b. And excluding specific effects, such as the redundancy program, the EU fine and the real estate plan among others, underlying OIBDA growth has stayed at a robust 6.3%. The OIBDA margin, despite high commercial activity, improved 2 percentage points year on year, to reach 46.3%.

The intense commercial activity by Telefonica Espana's Wireline business is paying off in the three main business areas, as you can see on slide number 11. In traditional access, line losses have been trimmed down to 14,000 in the second quarter, or less than 44,000 over this January through June period, posting the best six-month performance since the year 2001.

Retail Broadband connections grew by over 30%, adding almost half a million new accesses in the six months to June. Our Broadband market share remains at the 56% mark, although our quarterly result was even better with 60% of net adds captured during that period.

Finally, in the Pay TV market we have also gained most of the market net adds, lifting our total share to close to 12%. Net adds during the second quarter were over 80% year on year and our Pay TV client base reached 450,000.

This outstanding operational delivery flows directly into financials, as you can see in the following slide. Top line performance has improved even more in the second quarter, with revenues growing 4% to post a 3.8% [cumulative] growth in the first six months of the year.

Broadband and data and IT remain as major growth contributors, and a [first] contribution of traditional access and Voice business in the second quarter, from a 2.8% revenue decrease in the first quarter, to a 2% in the January through June period, also contributed to the positive outcome.

Among the main growth drivers, just let me point out the most relevant. The expansion of Broadband customer base, and the increasing contribution of bundles, duos and trios; the rise of monthly fee and the increase of national traffic pricing, and the lower line losses and the higher international long distance traffic.

Moving now to the profitability of the Wireline business in slide number 13, we show that the almost 1 percentage point increase in the OIBDA margin excluding specific effects, mainly in the headcount reduction provision, shows the Company's firm progress and efficiency.

Margin growth is the result of underlying OIBDA expansion of almost 2 percentage points ahead of earnings. OIBDA improved its performance in the second quarter from the 4.7% mark in the first three months of the year. As a result, underlying OIBDA increased an impressive 5.6% in the January through June period.

Let's continue on slide 14 with our Mobile operations in Spain, which remain focused on value growth. During the second quarter of '07 a new set of innovative tariffs were launched to reinforce our outstandingly low churn, as well as sustaining a high level of commercial activity, which reached over 1.4m gross adds in the second quarter of '07.

We added close to 289,000 new customers during the period, ahead of our main competitor, and our total customer base grew by 7% year on year. Churn remained at second quarter of '06 level, posting a slight decline versus the first quarter for 2007, with the economic churn at a significantly lower mark.

Total number portability figures suffered from strong competition, although we kept a good and positive contribution in the contract segment, which remains our ultimate target. Contract base growth went up by more than 13% pushed by stronger gross adds than last year.

Let's review on slide 15, the ARPU [evolution], which remained almost flat in the second quarter year on year, but with customer revenues growing above 9%. Performance of outgoing ARPU was positive during this quarter, posting over a 1% increase, backed by both voice and data usage.

Outgoing gross ARPU gained strength from the small decline posted in the first quarter of '07; nearly 0.4% to achieve a plus 2% -- plus 0.2% increase during this second quarter. Even more relevant is the strong outgoing data ARPU growth that accelerated to close to 9% on the back of the new innovative pricing schemes introduced last April. Let me mention, as an example, the new tariff launched for occasional users; 10mbs download per day for EUR1.

Total data revenue growth accelerated from the 14% posted in the first quarter of '07 to 17%, with reinforced growth rates in all [their] categories. Non-person-to-person SMS revenues are also performing well, pushed by the connectivity revenues. Together, content and connectivity represented 47% of total data revenues; up 8 percentage points versus June '06.

Incoming ARPU declined by 11.5%, impacted by the second termination rate cut in the last 12 months, leading to a cumulative [target] decrease of 13.9%.

Let me continue with the financial review of our Mobile operation in Spain on slide number 16. Service revenues in the first semester of '07 increased by a healthy 6% over 2006 on a comparable basis, underpinned by the 8.1% advance in customer revenues, benefiting from the sound customer base growth and the outgoing ARPU increase.

Interconnection revenues went back to their usual declining trend after the second termination rate cut in the last 12 months took place last April. Roaming revenues, impacted by highly competitive wholesale prices, declined by almost 16% on a year-on-year cumulative basis.

In terms of profitability, OIBDA grew by 7% during the first half of the year, posting a healthy 44.5% margin; a slight decrease of just 0.2 percentage points versus the first half of '06, despite the higher commercial activity involving handsets.

To end up Telefonica Espana's review, let me share with you in slide number 17, the upgraded guidance of the Spanish operations for the year 2007, after a more than remarkable first half performance. For Telefonica Espana, top line review guide -- top line revenue guidance is more than doubled to the 3.5% to 4.5% range. OIBDA will now grow in the 9% to 11%; four points ahead of initial expectations, and CapEx remains unchanged.

Wireline business revenues will grow in the 2.5% to 3.5% range, and OIBDA in the 13.5% to 16% range. And Wireless business service revenues and OIBDA will both grow in the 4% to 5% range.

Let me recall that this guidance is not considering the EUR152m fine from the European Union, which is fully provisioned in the second quarter.

For the review of our Latin American properties, please turn now to slide number 18. During the second quarter of '07 Broadband and Pay TV continued growing slowly reinforced by the extension of our double and triple play portfolios in most of the countries where we operate.

Our Mobile operations took their strong momentum, even accelerating their customer growth rate from 15.6% at March '07 to almost 19% in June '07. Those strong operating trends are well reflected in the consolidated financials of the Group in Latin America.

The top line grew by 10.6% in euro terms; 2.1 percentage points ahead of March's growth trend, a growth rate that stood close to 13% in terms of operating income before D&A. And as a result, margin extended by 0.7 percentage points to pass the 35% mark.

Revenues in OIBDA performance across the difference countries are shown on slide 19. At the revenue level, all countries posted double-digit growth with the exception of Brazil and Ecuador, although both countries improved their performance versus the first quarter.

This top line growth, coupled with efficiencies emerging from the integrated and regional management, are behind the OIBDA growth posted by all countries, with the exception of Ecuador.

Let me now continue with the Broadband and Pay TV development on slide 20. During the second quarter, Broadband net adds grew ahead of first quarter adding close to 335,000 new connections in the second quarter; up 23% year on year. Total Retail Broadband connections reached EUR4.4m, a 37% increase on an annual basis.

Growth in Pay TV was even higher the second quarter, with accesses again [up] by over 55%, toping the 800,000 mark at the end of June, which is four times the number of accesses added in the second quarter of '06.

Pay TV [is set to] now maintain our market shares and to increase ARPU in Chile, Peru and Colombia thanks to fresh triple play offers. Triple play offers will be launched soon in Brazil, where we have recently obtained the final approval for the [TVA] acquisition.

Let's now comment on our Mobile operations in the region, starting with Brazil on slide number 21. Vivo's second quarter '07 results reflected the management measures implemented to turn around the operation and to look for profitable growth. Once the GSM network has -- was launched at the beginning of the year, commercial activity was re-integrated along this second quarter obtaining 65% of the gross adds in GSM.

Vivo has been benefiting from the large churn reduction achieved during the semester, posting a 23% gross adds increase, to more than double net adds versus the first semester of '06. As a result, Vivo had, at the end of June, 30.2m customers; up 6% against June '06, stopping the market share erosion that has been suffered in the past.

Pricing plans introduced in recent quarters have promoted usage, with the almost 17% annual increase in minutes of use, acting as a driver for the 11% growth in ARPU excluding Bill and Keep. As a consequence, service revenues increased by 3.5% on a comparable basis. Revenue improvements coupled with strict control measures resulted in OIBDA growth of 36%, on a like-for-like basis, expanding margins by 7 percentage points.

Let me continue with our Mexican operations in slide number 22. Operating results were even stronger than in the last quarter. During the first half of 2007 we managed to increase gross adds by close to 60%, and to surpass 3.3m. Churn continued the good trend and fell during the second quarter 0.1 percentage points versus the first quarter, another 1 percentage point on a euro basis to reach 2.8%, which is better than the market leader.

As a result of the strong commercial activity and churn reduction, net additions increased more than three-fold, adding almost 1.7m customers during this first semester. On a quarterly basis we gained over 900,000 new customers; a record 40% market share of net adds. This strong commercial performance led to a customer growth of close to 50%.

Turning to key financial metrics, service revenues accelerated to 70% on a cumulative basis, pushed by outgoing service revenues, up 91%, as minutes of use more than doubled versus the second quarter of '06, and ARPU grew by 22%.

Despite this strong commercial activity, OIBDA passed the EUR60m mark in the first semester, benefiting from the increased scale gained with more than 10.2m customers now.

In slide number 23 we'll review all the other Mobile operations. In the first stack, Argentina, Venezuela, Central America and Uruguay, all posted a strong customer growth, fully accompanied by outgoing service revenue growth and margin expansion.

Peru achieved a very strong growth in customers, almost doubling the net adds of the second quarter of '06, pushed by a very intense commercial activity in the period. Despite the strong revenue performance, outgoing service revenues outpaced customer growth by over 30 percentage points. OIBDA margin contracted and stood at 25%.

TEM Colombia performed well during the quarter, with outgoing service revenue growth accelerating by 4 percentage points versus the first quarter, and growing ahead of customer growth with margins expanding slightly at the same time.

TEM Ecuador is still working on its turnaround and, during this quarter, it managed to improve its numbers. The Company has launched a new set of refreshed tariffs to turnaround its financials.

Let me finish with Chile, the most mature market in the region, together with Argentina. Both customer base and ARPU grew at a 7% and 11% respectively and, therefore, service revenues grew by 20% -- at a 20% base. Despite higher commercial activity and retention efforts, the margins expanded by almost 4 percentage points.

To finish the Telefonica Latam review, let me go through the guidance upgrade of this business. You need to be in slide number 24. Both for revenues and OIBDA we have upgraded by 2 percentage points the bottom range previously provided, placing the new revenue range between 13% and 16%, while OIBDA will grow between 14% and 17%.

Let's now move to Europe, in slide number 25. Operating revenues went up by 21.3% year on year in the first half, to surpass the EUR7b mark. The U.K. is the main growth engine, driven by simultaneous customer and ARPU growth, with a positive contribution from [both] online in the Czech Republic.

OIBDA reached just over EUR1.8b, excluding the gain from the disposal of Airwave, and including restructuring charges largely related to 02 Germany. These charges, along with the increased retention activities in mature markets and the costs of the Slovak operation, meant OIBDA margin was capped by close to 5 percentage points on an annual basis.

In Germany we are proactively tackling competition and pricing pressure, revamping the operations with a new management team and new tariffs. And in Eastern Europe, Broadband plus ICT revenues are offsetting the decline in the traditional Fixed businesses in the Czech Republic, while Mobile growth remained healthy focused on Postpaid. And the launch of operations in Slovakia has shown solid progress servicing more than 450,000 clients at the end of June.

Please turn to slide number 26 for a summary of 02 U.K. performance. Both customer and ARPU growth were, once again, behind the healthy 10.4% rise in total revenues in the first half, in an increasingly mature marketplace.

02 U.K. end of June is leading the market with 17.8m mobile subscribers; up 5.8% on an annual basis. Focus on client retention and contract customer growth has been at the forefront of the commercial strategy, pushing the Postpaid customer base to grow by 8.5%. Contract now accounts for 35.8% of the total base.

Blended ARPU went up by 2.8% in the second quarter, reflecting the success of the customer value proposition, with positive evolution of both usage and data services, growing by 11.7% and 8.6% respectively.

January to June OIBDA margin stood at 24.8%, recovering from the 24% flat first-quarter level. Underlying OIBDA margin, excluding the EUR14.8m one-off headcount restructuring cost, was 25.2% in the first half.

In slide number 27 we present 02 Germany's results. From an operating standpoint, 02 Germany ended June with almost 11.6m customers; up 11.8% versus June '06. The quarter showed some improvement versus the first quarter, with 374,000 net adds versus 159,000.

Client growth was balanced towards the Prepaid segment, which posted a 12.6% annual increase. This weaker client mix coupled with pricing pressure, and a 22% termination rate cut, lead to a 13.5% annual reduction in ARPU this second quarter.

A million SML tariffs continued to progress well, with more than 1m customers already signed up, delivering higher minutes of use and ARPU. OIBDA margin stood at 15.2% during the first half, impacted by the restructuring charge of EUR96.5m. Excluding this charge, OIBDA margin was 20.9%.

Reducing headcount by around 700, mainly from simple support functions, will enable the business to be more flexible and position it to better capture future growth opportunities aided by the new management.

We have also recently launched new Postpay tariffs, re-launched our TSA product with further new propositions to come in the second half.

Please move now to slide number 28 to complete the review of our European operations with the Czech Republic. Local currency revenues grew by 3.1% year on year, while OIBDA margin was broadly flat after excluding Slovakia's start-up costs. The business has gained more than 450,000 customers in just four months of operations.

On the Wireline, revenues have reached a (inaudible) point to show a positive performance, the first time since Telefonica took the Company over. Line loss improved its performance, while Retail Broadband connections increased by just above 41%, helped by the recently introduced bundles including double and triple play. Retail Broadband sales went up by more than 48%.

In the Wireless side, revenues accelerated during the second quarter with contract customers up by more than 20%, with positive evolution on both ARPU and minutes of use up 3.4% and 17% respectively.

Let's turn now to slide 29 to visit Telefonica 02 Europe's guidance. First of all, and most important, we reiterate all our growth guidance figures at Telefonica 02 Europe level. We also reiterate all our target for both 02 U.K. and Telefonica 02 Czech Republic.

Due to the challenging conditions in the Germany mobile market, revenue growth is still expected to be in the 7% to 10%, with positive service revenue growth year on year expected by the end of this year. To better position the business for the future, additional investment in our [growth plans] will be brought forward into the second half of 2007 and, consequently, OIBDA growth is now expected to be in the range of 21% to 25%.

And just before turning to financial expenses [in debt], please move to slide 30 for an update on Group synergies. We have generated close to EUR655m of synergies during this first half of 2007; a figure which is totally in line with the EUR1.25b we have committed for the whole fiscal year.

Let me remind you that close to half of our 2007 target will come from convergence and integration mainly related to technology, operations and systems. The benefits of our enhanced scale, best practices and management of resources will be responsible for 50% of synergies, while regionalization will account for 23% of expected economies.

Now will be a brief (inaudible) from financial risk management in the first half of the year. [This] is focused on reducing our cost of debt, adjusting foreign exchange hedges and strengthening our debt profile. We have succeeded in decreasing our cost of debt in the semester to 5.45% of the total net debt [last] commitments. This cost is more than 20 basis points below the first quarter level, when it stood at 5.68%, due to mark to market savings in the present value of the commitments, as [the] long-term rates have gone up. So, our first half 2007 interest expense was close to EUR1.4b.

On the foreign exchange front, following the Airwave divestment we reduced accordingly the amount of sterling-denominated debt. We also slightly reduced the amount of U.S. dollar liabilities by swapping a portion into Argentinean pesos just before the recent foreign exchange moves.

And in the first half of the year, Telefonica issued more than EUR4b worth of bonds through fully guaranteed vehicles at spread plus 41 basis points, with 6.4 years average life to repaying debt with shorter maturity.

This fact, coupled with the net debt reduction with cash from operations, has led to an increase in the average maturity of our debt to reach 6.7 years.

Slide number 32 shows that in the first half of the year both debt reduction and shareholder remuneration approached EUR3b. This has been possible, thanks to cash flow generation exceeding EUR3.4b and to the EUR2.8b net divestment coming mainly from the Airwave sale.

So, we are delivering on our financial commitments. First, net financial debt moved below EUR50b to reach [2.45] times annualized OIBDA, excluding the Airwave sale result, while debt plus commitments stood above EUR52b, or 2.61 times annualized OIBDA, which is very close to the 2.5 limit targeted after the 02 acquisition.

Second, and this (inaudible) favorable for last (inaudible) filing the last [time], July 23, we had already executed more than 92% of the amount of our buyback program planned for 2007; slightly below the EUR1.7b mark. And finally, we have been [respectful] of the -- our acquisition [we made] with divestments coming significantly ahead of investments.

To sum up first -- once again, we delivered growth and returns well ahead of our peers in the second quarter of '07. [We are currently down] at the twelfth consecutive quarter with simultaneously revenues, OIBDA, operating income and net income growth.

Second, we are retaining benchmark organic growth. And third we are benefiting from diversification and we are successfully boosting our client base. And fourth, we have a better outlook with the guidance upgrade.

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 Ricardo Seara. Please go ahead with your question, announcing your company and location.

Yes hello, good afternoon, Ricardo Seara from BPI. I've got a couple of questions on Spanish operations. The first one is what is your expected impact from -- on Imagenio from the recent agreement announced with Sogecable?

Then if -- given the relatively low level of line losses in the first half 44,000, if you expect a linear evolution for the full year?

And then regarding Mobile, I would like to know if you have any indication of the market share of Broadband Internet through mobiles? And what is the relative position of Telefonica on this market segment? Thank you.

Hello, this is Antonio Viana. Can you hear me, Ricardo?

Yes.

Okay. So, let me touch upon the three issues that you mentioned related to Spain. The first one, or I think that the last one, on data on Mobiles, we do not have more data than the one that we are publishing in terms of market share.

What I can tell you is that what we follow is kind of approach of what is our share in terms of data simulating devices. They can be either email devices (inaudible) like others, or they can be [PDSA] data cards for the PC.

In both of them we have a market share that is clearly above our average market share, not only these but the prices we are pushing strongly on that front, but also due to the fact that we have a higher than average market share on solos, on professionals and on corporate [markets].

On the low line losses, obviously the second quarter by specific campaigns that we have addressed, we are optimistic on the way it is progressing but also it leads to the evolution of the Spanish economy. But we do not have the clear view for what will happen for the rest of the year. So we expect this number to be clearly ahead of our competitors in the European market.

On the expected impact of Imagenio and Sogecable, let me just start by stressing the fact that part of the agreement is joint authorization of GeoPlus, which is a mix of ADSL plus and CANAL+, will only be enforced after November 30, so for the ECA to have limited impact.

What this means for us is that we will be able to offer ADSL to a broader range of customers that today may be customers of CANAL+, mainly in areas where for us we have not yet [forged a mark in]. That does not mean that we will abdicate from the growth in terms of the deployment of Imagenio, but it means that where we can take advantage of this product for we think most of these customers and providing them from now on immediately an adequate service. As Imagenio will keep on growing, obviously we will keep on also deploying our own service for most of these customers.

On the purchase cost contents obviously that by assuming that with Sogecable that we will also be helpful for us in the extent that acquiring contents jointly, will most likely put us in a better position for content acquisitions related to the major content providers. Thank you.

Sorry, Antonio.

Thank you, next question please.

Sorry, just a follow up. Regarding workforce reduction provision the EUR94m in Q2 first half, do you have an estimate for the full year? Thank you.

We maintain the same target that we had. If you recall, the final year was a lengthy more than two-year program that was aiming at more than -- roughly 15,000 people. We are now north of 13,000. We maintain our objective of trying to finalize the program this year. That would mean that for the whole of the year we would need to reach roughly 2,200 for this year. As you've seen, we have already accounted for 350.

Obviously, I think this is the final stretch of a long program that was more Brazilian in the implementation of the program. But for time being, we maintain the same objectives and where the guidance has been provided according to that objective.

Okay, thank you.

Thank you. Next question, please.

Our next question comes from the line of David Wright. Pease go ahead with your question, announcing your company and location.

Yes, it's David Wright at JPMorgan in London. Just on Mexico, just keen to understand what is driving the momentum there, the very strong momentum. The ARPU trends suggest it's not so much the pricing. The margins look to be holding up on a per-gross basis. I am just wondering is this, to some extent, American dealer perhaps opening the door a little to you guys? They're, obviously, under a lot of regulatory pressure. Or is there just something genuinely new that you are doing?

And then onto Brazil to Vivo, I think previously you had indicated within your plan to acquire the other half of Vivo. You were very frustrated with the operational performance and management. I wonder now, with the strong momentum the new momentum, whether you are willing to wait a little more with that acquisition. Or alternatively, does it make you want to move faster, given that I would imagine pretty well 99% of external valuations of Vivo would have gone upwards over the last two to three months. Thank you.

David, thanks for the question. Jose Maria Alvarez-Pallete speaking. On the Mexican issue, we have always said for a long while that in Mexico would be rather walking than running, so that we [are] just pursuing the effort that were started years ago to restructure the operations.

First, very sound commercial distribution network in terms of deploying new points of sales, [and] including the quality of net adds, including the quality of the distribution network [per sale].

Now, we have also been able to set up new systems that allow us to get more knowledge of the client data we have and to track ARPUs and to track trends and, therefore, be more able to detect [other] issues and, therefore, reducing churn.

And third, we have been deploying the new network, the new GSM network, that have been allowing us to fully deploy our efforts in terms of quality of the networks, and really very focused on quality. And, therefore, we are very proud of having a lower churn than our more direct competitor in Mexico.

So on those fronts, nothing new. We keep pursing through the same trend. We have not been detecting any change of behavior from our competitor, nor have we had any change in the regulatory side. So we are working exactly with the same scheme that we were working a year ago, a few yeas ago. But yes, pursuing the following our aim even more intense support, commercial and technically.

And in terms of Brazil, well, we -- those are two different issues. First of all from an operational standpoint, we always had the very good commercial distribution network. And the only fabric that we have been able to deploy in a very fast track, thanks to the joint efforts of Portugal Telecom and Telefonica, of the new GSM network deployment. We have been able to do that in a very good time, and at the same time at a very competitive cost.

And, therefore, the most significant competitive disadvantage that we used to have in the Brazilian market was the handset, the price difference in terms of handsets has been eroded. As a result, we were able to be very efficient and very intense on the commercial side, beginning the month of May and June. And we have been able to reverse the trend in terms of our loss of market share. But it's nothing -- there is nothing apart from that.

And on the other issue, well, we keep our channels of conversation open with Portugal Telecom, and we will keep you posted on any advance on that front.

Okay. And just finally a comment on Bill and Keep in Mexico, your view on that please?

Well, it would help to improve the penetration on the Mexican market and, therefore, it would foster the penetration and we have to accelerate that. We are positive on that side.

Okay, thanks very much.

Thank you. Next question, please.

Our next question comes from the line of Christian Kern. Please go ahead with your question, announcing your company and location.

Hello there, it's Christian Kern from Lehman in London. Two or three questions, if I may? The first one would be on the competition in the Spanish mobile market, can you just give us a little bit of a feeling what you see some from [Oido] and what you are seeing from Vodafone Spain? Vodafone indicated that the market intensity on the competitive front is increasing.

Second point would be on the Fixed Line operations. We've seen recently a decision on CMT for a further increase in the access beyond all [nine], and we've also seen the [new fine]. Just any color around what that means for the future would be great.

And finally, any update on the TI situation? Thanks.

This is Antonio Viana. I will answer the first few issues that are related to Spain on the competition. On the Spanish Mobile, clearly, our objective remains to drive for the [most] high value. We maintain our strategy in terms of migration of customers from Prepaid to contract and are being quite aggressive on the contract front. If you look on number portability, our numbers on the contract side are quite positive.

We got a great number in terms of share of net adds on the contract side. If you run our numbers versus Vodafone, you see that the gap is increasing that we are gaining more customers in terms of [Prepaid from] contract, so I am very happy with that performance on that front.

I see, clearly, other competitors maybe more aggressive on Prepaid. Orange keeps on having the stronger subsidy in terms of handsets. I would say that, on average, that maybe from EUR25 to EUR30 range for handsets in terms of [extra] subsidy that they are putting in.

On the smaller operators, like [Oido], honestly the impact has been quite limited. And I believe that the main [comment] that we have there, namely us and Vodafone, is the fact that a lot of [entities] on the community effect, and on the On-Net tariffs. So if you take our On-Net tariffs that is where we [stress], basically, our strategy and where Vodafone also follows us. And also they've had a very strong strategy in terms of On-Net tariff.

That puts the drop in On-Net tariff of a year ago as quite an unattractive tariff. As a consequence, we don't see the small players again tracking us in the kind of pinnacle for that sort of story for them here. And, therefore, also Mobile operators, some of them may have -- starting to gain some traction in terms of capturing customers' impact on the market -- on the market (inaudible).

On the Fixed Line comments that you made in terms of the valuation, all that the Regulator has announced at this moment was that he would see no increase on the monthly fee for the year of 2009. That does not mean that it is beyond 2009, it means that for only 2009 that will occur. But we will remind you that the monthly fee has not been increased also in the year of 2006 and we had an increase of 2% in 2007, and we expect to have an increase in 2008. So we will analyze the decision of the Regulator but that is specific for the year 2009 so it should not expect it beyond 2009 to be that.

On the European Union side, the only thing that I can tell you is that obviously we are conservative in terms of accounting so we provisioned the full analysis, we are not paying it we're finding a bank guarantee for it. We are appealing it to the European Court. And we are confident that our arguments will be heard and that we will have a positive result out of this.

Okay then, Christian. In terms of the Telecom Italia closing that you were asking, we have nothing new to report. You know that this is a complex deal involving multiple regulatory authorities. We have already secured a number of those authorizations but we're still pending one of the most complicated ones which is in Brazil. We have no reason to expect any complications there, other than those that the regulatory authorities will think is sensible. Of course, by the time full clearance is given we will complete and execute as fast as we can.

Very clear, thank you.

Thank you. Next question, please.

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

Good afternoon, Mathieu Robilliard, Exane BNP Paribas calling from Paris. Two questions please. First in terms of the CapEx, you have increased the CapEx guidance for this year and you done the same thing last year, and I understand that you have to grow your revenue and EBITDA faster you probably need to put a bit more CapEx in the jam. And my question is there beyond that extra growth, something more going on and should we also expect CapEx to probably be a bit higher in the following years, or is it just running ahead and then we should expect a decline in CapEx?

The second question has to do with debt; I have two questions, actually. Could you just update us on the percentage of your debt that is in fixed rate and the percentage of your debt that is in variable debt and whether (inaudible). And also what are the major refinancing events in the next 12 months? Thank you.

Thanks for the question, Mathieu. In terms of CapEx there's nothing mysterious. We're witnessing an acceleration of the extension of growth of Broadband and IPTV and Internet TV base, so we're trying to keep pace with that.

And we're also expanding significantly the networking capacity in Mexico, in order to accommodate the fast growing number of clients and of traffic. So those are among the very many factors that underlie a modest increase in 2007 CapEx guidance that we have just provided. We will have the opportunity to tell you in much more detail when we meet at the Investor Presentation in October when the longer-term range numbers will be given.

In terms of the composition of the debt, roughly speaking, we have 50% fixed scenario, all services taken together. 25% is floating rate and 25% is what we call range bound, and therefore it is structured, embedded in using caps and floors so that we move freely within a bound, but we are fully protected outside of those bounds. We have zero maturities -- zero net maturities in the remainder of 2007, so we concentrate the future especially given the current agitated state of the credit markets, a lot of peace of mind.

Thank you very much.

Thank you, next question please.

Our next question comes from the line of Will Milner. Please go ahead with your question, announcing your company and your location.

Hello, it's Will Milner, [Arete Research]. Couple of questions on Latin America. You grew EBITDA about 13% in the first half, so you're also implying a big pick up in margins in the second half to meet the full-year guidance, at least some pick up. Which operations that will you see the biggest pick up in the second half margins?

And secondly, I think there are still exchange controls in Venezuela. Given the increasing importance of that business, do you see any problems going forward of cash repatriation and how do you mitigate that risk? Thanks.

Yes, thanks for the questions. First on the margins Latin America, the improvement in margins is mainly focused on the Mobile business, especially taking into account expansion in time base and the fact that they are, especially in Mexico, we have been turning around significantly the Company in the last months, in the last quarters. And that has a very significant impact in the global position in terms of margin consolidation.

So, margin expansion is basically centered around the Mobile business, jointly with a significantly low [harbor] and, therefore, the scale is providing us with an additional also growth in terms of OIBDA margin expansion.

In terms of Venezuela, for the time being, to be correct to your question we have not been extremely significant changes both in the competitive scenario. It is true that the new owners of [country], the government has been launching some special targets but those are very focused on some segments where we are already very competitive. So for the time being we have not experienced a significant change in the competitive environment in Venezuela.

Thank you. Next question, please.

Our next question comes from the line of John Pearce. Please go ahead with your question, announcing your Company and your location.

Hello, this is John Pearce from Dresdner Kleinwort Credit Research in London. You've nearly reached the 3.5 times target ratio for your net debt and commitments to OIBDA. What should we expect to happen to this ratio going forward? Should we think it will be roughly stable at around 2.5 times, or should we expect you to keep on slowly de-leveraging? Thanks.

Well, thanks for the question. We, first, have to meet the target before we can think of what the next step should be. But remember that this is a simplification, or an indicator of our strong commitment which is to keep the Company as close as possible to a BBB+ BAA1 rating animal as we can. So 2.5 times total B+ commitments ratio was a convenient way of expressing that in the exact same form where we set it.

Of course, credit conditions and rating conditions may change and we'll have to update that after we have the regulatory -- I'm sorry, the rating review. So far we think we are very well on track to meet that target, and we think we are in a comparable position and so seem to think the agencies, which have now both major agencies rate us now as stable in the rating outlook.

Okay. Thank you.

Thank you, next question please.

Our next question comes from the line of Robert Grindle. Please go ahead with your question, announcing your Company and your location.

Hello there, it's Robert Grindle from Dresdner Klienwort as well. Just on the U.K., what was the impact, if any, on the loss of revenue from roaming deal in Q2, or is that something that is coming later on?

And then just on the financial charges, you mentioned some marking to market benefit, but what were the positive impacts on the financial charges in H1? Thanks very much.

It's Peter Erskine here, can you hear me Robert?

I can, yes.

Yes, the impact, the roaming that we were getting from 3 has pretty much gone now. So any impact has been taken. We didn't ever declare what we got from me but, frankly, by March of this year any benefit was gone; they'd switched over to their other supplier. I think the financial charges question wasn't for me, is that right?

Yes, that's right. Thanks for that.

I'm sure Peter could have answered that, but let me try and give my best on that Robert. The marking to market thing is related to the present value of our personnel commitments. You know that we have a redundancy effort as the ones we have had in the past couple of years. We have to fully charge the accounts on the net present value of those commitments.

Now that net present value has changed in magnitude as interest rates have changed and fluctuate. The higher the interest rates go the lower the present value is and that is the bulk of what's recorded in Q2, as a marking to market gain because of the lower value of that commitment. Certainly, the opposite also holds true and that's exactly what's been happening throughout 2005 and early 2006.

Okay. Is it possible for you to quantify the impact at all for the first half or Q2?

It's about 80.

80.

EUR80m.

EUR80m. Thank you very much indeed.

Thank you, next question please.

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

Hello, it's Terry Sinclair, (inaudible). Two questions. Am I right in thinking that Chile is the only place in Latin America where on the Fixed side, margins are going up? And I wonder if that was true, what the prospects are for margin improvement elsewhere, for example, Argentina, Peru, even Brazil?

And quite separately, I wonder if Peter would comment on the plans for improving the situation in Germany? There's obviously a new manager in place and I wonder what the steps that have been taken. I'm interested to know, of the 800 redundancies that I believe are being made, in what kind of functions those positions are.

Well, thanks for the question. I will take the first one about the margins in Latin America on the Wireline side. First of all, it's true, Chile is improving margins but it is also true that Chile is a little bit ahead of the others in terms of the transformation of the Wireline businesses in case of planting enough packets and in terms of advancing on that one.

On the other side, we are working severely in Peru, Argentina and Brazil, are advancing in that, bundling Voices product, Voices plus Broadband and Voices plus Broadband plus TV and, therefore, also adapting the workforce and other in the course of structure of the different businesses. But basically in the others margin is strictly stable also, so we have not seen significant deterioration in margins in the other Wireline businesses.

So we are working severely in terms of advancing the transformation of the Wireline business; we are doing very well on that front. And we feel confident that we can sustain this latest revenue in the next --

Jose, whilst you're on the line can I just ask, is the GSM transition in Brazil and Columbia something that at the moment is suppressing margins by driving transition costs up? Or is it already something that is already benefiting margins?

Yes, the fact that is in the first part of the year we have in fact been getting accelerating the client base -- trying to accelerate the migration of the client base from CDMA to GSM and that has affected our margins there. And therefore we think in Columbia in the next quarters that situation could be affecting positively the OIBDA margin in the next quarters.

Terry, its Peter here. Let me now talk to your German question. Let's start on the costs side of the equation. You're quite right; we've a new CEO in [Hyme Smith] is running our Czech business. And Hyme is quite an expert at convergence, given the Czech business sold Broadband, Mobile and Television etc. And he's also an ex-CFO before he ran the business in the Czech Republic.

On the cost side, we've announced a little over 700 redundancies and, in answer to your question where are they from; more the central functions. We want to lean down the central functions but leave the firepower in sales and customer service and marketing, although there's some small overlaps there as well.

And we're in good shape on the cost programs. We started these earlier in the year and we're comfortable that we will deliver the -- I think we said high double-digit million of euros savings this year and low triple-digit millions of euros of savings next year. So we're going to have a more efficient, leaner business and that's work in progress.

In terms of the top line, we re-launched [Beanian] with simpler tariffs, the small, medium and large bundle effectively, November 1 last year. I'm encouraged that in the second quarter we actually had the best quarter in terms of net adds; the best second quarter we've had for, I think, pretty much ever. We put on 374,000 net adds, and it was mixed as well; 191,000 of those were post paying, nearly all of them the new [Beanian] product. And that volume of net adds, 374,000 was up on the same time last year by about 58%.

Probably the most encouraging statistic to me on the Mobile front is that the minutes of use of the new Beanian product, and by now given we launched it November 1, we've got just over 1.2m customers, the minutes of use are actually up 90% compared to our average Postpay customers. So we're really driving up and at last, perhaps, though it's early signs the elasticity is there. And we're getting also compared to our average Postpay ARPU an uplift of 19%.

So clearly, whereas today we've got in total about half of our 11.75m base is Postpay, we've got within that Postpay base 1.2m now on Beanian and the elasticity and ARPU benefits coming through. And that's also one of the reasons why the second quarter the ARPU is flat compared to first quarter. Yes, it's down on the same time last year by 13%, but its flat and we do feel by the end of the year we can exit growing again.

I think the final piece of the jigsaw, when you say what are the plans to grow given that costs are coming along well, the Beanian re-launch is looking to be giving us good ARPU uplift, I think is the DSL launch. We launched ADSL to our retail base December time, to test the systems, there were things we needed to improve. We just started in June to re-launch effectively and, therefore, as we go into the second half of the year we will be truly starting to look like a converged Company, so not only relying on big Mobile movement to get the revenues growing again, but also the success with ADSL.

I think it's too early obviously and seriously nave to say we're home, but I ought to say the plans are coming together well and I'm encouraged that under Hyme we can exit this year with growth and start to get back the kind of growth this business has been used to.

Thank you both very much.

Thank you, next question please.

Our next question comes from the line of Javier Borranchero. Please go ahead with your question, announcing your Company and your location.

Yes, hello, Javier Borranchero from ING in Madrid. A couple of questions on Latin America. First on Venezuela, --

(Technical difficulty).

-- and it seems like the sequential progression of roaming revenues has improved quite a lot in the second quarter. And I was wondering if you're seeing the elasticity effect in Spain from the reduction of inbound revenue tariffs that you've been charging.

And then, just on Broadband, it looks like just doing a simple calculation dividing revenues by number of users, it looks like your Broadband ARPU has taken a bit of a hit in this quarter having remained fairly stable over the last 18 months. I wonder if you could give an explanation for that.

Hello, Vince, thank you for your comments. On the roaming elasticity, I think that the summer will probably be the acid test for it. until now, yes, we've seen some good elasticity but we will have to see the consumer behavior on this front, especially now in the summer season, if we're talking roaming power to that extent, okay.

As you know, the regulation on roaming from the European Union has been established and the calendars are known to everybody. What I can tell you is that on the upgraded guidance that we have provided, it is already incorporated the potential impact that roaming will have, okay.

So that is the first point. On the ARPU on Broadband, honestly, I don't see any significant news, or any different sign. We keep on quoting for selling more and more value-added together on a Broadband. We keep on quoting for selling more and more duos and trios that these triple play offerings that arguably also help in terms of retention of customers and in terms of quality of ARPU on that front.

We are on the process of launching a new entry product at a lower level, at 1 megabit, which is supposed to be launched as soon as it is publicly known these decisions on [T&D] on that one. And also to launch a higher speed product and do that for the next campaign. As you know, the back to school campaign is very important for us and we're very optimistic on that.

It is a crucial campaign for the year, so I think you have to be aware of the seasonality of the ADSL sales. And that, obviously, there are quarters that are a lower; people are not that keen to Broadband before they go on holidays. They will be much more keen to buy when there will be the back to school campaign in September. But we see no major change in terms of growing on ARPU from that front.

Okay. Thank you very much.

Thank you.

Thank you, next question please.

Our next question comes from the line of Luis Prota. Please go ahead with your question, announcing your Company and your location.

Yes, hello, it's Luis Prota, Morgan Stanley, Madrid. I have two questions. First is on [Telesp] and the revenue profile that we've seen sequentially, second quarter '07 against the first quarter '07, and the especially on the local service revenues where we've seen revenues coming down sequentially 20% against the first quarter '07.

What I've seen in the KPIs is that minutes per line have come down 20% sequentially as well, but in the first quarter '07 this decline was 10%. So I wonder whether there is something that I'm missing, or something that has happened in the second quarter. So I would like to understand what's driving these trends and whether it will recover in the future quarters or not? And what would be the implication on EBITDA as well?

And the second question is on the deal that you have recently signed with Sogecable. And I have a question on the conflict of interest that whenever you have your own [Imagenio] network in areas where you have already, or you are in the future going to offer this Sogecable product, what happens when you are having your own network? Are you trying to migrate Sogecable customers to the Imagenio network, taking some [3G], or if you can help me understand the deal would be nice. Thank you.

Okay, Luis, I will take the question on Telesp. First, in the revenue evolution of Telesp you have three main effects affecting this slight decline year-on-year revenues. First in the negative tariff adjustment that we suffer in July 2006, was especially roughly 0.4% negative on the local basket and roughly 3% is on [distant] services. As well for Interconnection referrals at the beginning of 2007, we have 20% reduction in January. So we don't think that's [extrapolatable].

Second, we have had 2.5% loss in traditional line that has been migrated recently and that we think going to be fight for every single license and we are improving our efforts in that front.

Third, you know that last we had the resolution from (inaudible) to the solution that was for the answering machine On-Net and, therefore, we started to provide with some advice to the client in order to tell that they will be charged [1 minute from zero] on that front. [The impact on us] we have been able mitigate those by launching a significant effort on the growth of the new business and the bundles of products.

First, Broadband is growing and Broadband revenues are roughly 14.5%. And Data (inaudible) is also growing fine. And third on the evolution of traffic, remember that we are launching a significant effort in terms of bundling of the Voice product and therefore we have flat fees and that's affecting the revenues; local revenues because we are bundling those revenues on the price of the bundle. So those are the main estimations that I can provide you with Telesp.

On top of that, in terms of OIBDA remember that we have on non-extraordinary bad debt effect coming from commercial policy that we have been following last year that we raised the level of (inaudible) quality of the client last year and that have proven to be not a wise decision and we have reconsidered that at the beginning of this year.

And, therefore, the clients that were having (inaudible) during this year. We think that is still on our accounts for the second and third quarter of this year but, apart from that, -- starting from that and taking into consideration the new commercial policy that Telesp has been putting into place, we think that should be over by the last quarter of this year.

Luis, this is Antonio Viana. On the deal with Sogecable, let me try to reassess again the rationale for it. There are -- whenever we launch an Imagenio campaign there is roughly, coming to our call centers, say, 30% of the calls are coming from customers that may be interested in having a triple play offer but that are in areas where at the present moment we do have enough annual covers.

So I believe that whenever we will be allowed to launch it from a legal standpoint, that will be after November 30. That will be a good opportunity for us to deal with the amount of customers that are in areas where we have to say, sorry, for the time being we cannot offer you a triple play offer; we can offer them an alternative triple play offer.

That is not only useful in terms of optimizing our CapEx, but also in terms of fostering the deployment of Broadband and increasing the penetration of Broadband throughout Spain at a faster pace. Obviously, there will be situations that you may mention where there will be situations in areas where we already have Imagenio coverage and customers may say, but I prefer having the other one. Well, that will have to be discussed from the prospective of which offer has a better attractive for the customer.

We hope to keep on differentiating Imagenio on the grounds of the merits of our platform and we will keep on fostering it and we'll keep on making all the efforts for it to be a differentiated alternative. But I would not lose a Broadband customer in any other situation. And that is the fundamental thing for us, is to maximize any growth opportunity there. Will there be situations where there may be some friction? Well maybe, we'll have to deal with that, that's normal process of business, I would say.

Yes, thank you. If I can come back to the question on Telesp. Jose Maria, the three aspects that you were mentioning were more referring to the year-on-year trends that was seeing in the second quarter, or first quarter even. But the question was more on a sequential basis. I think 20% decline on minutes per line, sequentially, in the second quarter '07 against the first quarter '07. And that looks very high. I don't know if I'm missing something that you can explain to me.

It is nothing special that I can comment to you, Luis, apart from the three-year issue that we just commented on those. Therefore, we are not able to comment anything special from that, so if you want me to get back with more detail I can refer you to our Investor Relations and try to cover the numbers in detail.

Okay. Thanks very much.

Thank you, next question please.

Our next question comes from the line of Jonathan Dann. Please go ahead with your question, announcing your Company and your location.

Hello, it's Jonathan Dann from Bear Stearns and I'm in London. Three questions, all around the U.K. The first one, are you still planning to launch DSL Broadband in the U.K?

Secondly, can you remind us what the existing U.K. management incentive program is and is there something still out there for October?

And finally, I guess any talk of the U.K. wouldn't be right without some mention of the iPhone.

Right, it's Peter, and thank you for the questions, Jonathan. Yes, of course, we're planning to launch DSL. I think we always said we'd be launching it round about autumn and we are. That's all on plan; we'll have by then about 50% population coverage. It will be a soft steady launch, by that I mean we won't be going all guns blazing all over the country. But we look forward to exiting the year we some sort of base in DSL and building on it next year.

I don't really want to talk about existing U.K. management incentives, but I would say that all the team are pretty much the same as when we spun-off from being a private -- a separate Company and led by Matthew Key, highly motivated, and I think that's showing in the results. They've got serious momentums still.

They've, as you've seen, got revenue growth of over 10% for the first half in the second quarter. Their margin in the second quarter is, indeed, back to the sort of levels we indicated. Without the one-off restructuring, it's over 26%. And the net adds were slightly lower than Voda who've reported, but the good news is that they were 74,000 positive Postpay. So I think all of the ingredients are good. Probably the best bit in the U.K. was that the ARPU is up. ARPU was up 2.8% on the same time last year and, indeed, 5% on the quarter.

The iPhone; I appreciate you asking. Apple don't seek that there's any announcements on this front. We think it's a very exciting product and we hope we can be involved. But more of that later and we'll make announcements when it's appropriate for ourselves and the rest of the Group.

Thank you.

Thank you, next question please.

Our next question comes from the line of Laurent Sierra. Please go ahead with your question, announcing your company and your location.

Good afternoon, Laurent Sierra from Redburn in London. The first question on Germany, do you think, state KPN this morning, do you think that the regulator is unfair to O2 in Germany? And I would like to know would have selected Alcatel-Lucent to outsource your management of your network, do you think you would have reached higher margins and, if not, why?

My second question is on O2 and Telefonica. What sort of synergies have you already reached in terms of amount and where, in order to extrapolate these kind of assumptions with your partnerships and with Telecom Italia going forward? Thank you.

I'll take the first part and then I'm sure Julio will talk much better to the synergies. I think it's always difficult to say regulators are unfair; you have to work with them. I think we thought the cut in termination rate towards the end of last year was harsh. As I think you all know, that was 20% and takes about 4% out of our service revenues and we're still in debate on that. And I'm sure we're going to work that one to the finish.

I think so far as the Alcatel-Lucent thing, as you know we've had a network share with T-Mobile for some three or four years now that's worked really quite well for us. We look at outsourcing; as ever, there's pluses and minuses. I think the short term gives you pluses and you basically look to somebody, you say, what are the savings over five years and would you upfront them.

So always look at the long run on a deal, but I wouldn't want to comment on Alcatel-Lucent as a specific supplier. We're talking more about the whole question of outsourcing; we'll looking at it across the business but I think the real trick is to the efficiencies in-house first. And that's the path we're on and then pursue the outsourcing appropriately.

But we are, as you will have heard earlier in the call, attacking all areas of costs in our German business and we've got a good deal of comfort that the cost saving program is delivering. As I said earlier, will be delivering in the high double-digit of millions of euros cost saving this year and low triple-digits next year. I'll hand over to Julio on the synergy question.

Thank you, Peter. Well, according to our accounting, last year we recognized around EUR200m synergies because of the O2 integration in Telefonica. In the first half of this year the number is around EUR166m. For the total year we are expecting around EUR300m. It means that in 2006 and 2007 will be roughly around EUR500m, which is approximately half of the total commitment for the four years.

Regarding the kind of areas that mainly contributed to synergies are basically the Voice procurement, technology procurement, roaming from an international point of view, wholesales, retail and some other cooperations regarding the -- cooperation around corporate activities.

Thank you very much.

Okay, ladies and gentlemen, thanks a lot. This brings our conference call to an end. I hope that before we meet again for the third quarter results you will all find the time to join us on October 11 in London for our Investor Presentation. Until then, we wish you the best and thank you for having stayed on the line for this hour and a half. Thank you.

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