Telefonica SA (TEF) 2008 Q2 法說會逐字稿

Welcome to Telefonica's 2008 first-half results conference call. At this time all the participants are in a listen-only mode. Later we will conduct a question-and-answer session with instructions being given at that time. (OPERATOR INSTRUCTIONS). As a reminder, today's conference is being recorded. I would now like to turn the call over to Mrs. Maria Garcia-Legaz, Head of Investor Relations. Please go ahead, madam.

Good afternoon, ladies and gentlemen, and welcome to Telefonica's conference call to discuss 2008 first-half results. I am Maria Garcia-Legaz, Head of Investor Relations. Before proceeding let me mention that this document contains financial information that is reported under IFRS. The financial information contained in this document has been prepared under International Financial Reporting Standards. This financial information is [unaudited].

This presentation may contain announcements that constitute forward-looking statements which are not guarantees of future performance and involve risks and uncertainties and that certain 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 including 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 don't have a copy of the relevant press release and the slides, please contact Telefonica's investor relations team in Madrid by dialing the following telephone number -- [34914828700].

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

Thank you, Maria, and good afternoon, ladies and gentlemen, and thank you for attending Telefonica's first-half 2008 results conference call. During the Q&A session you will have the opportunity to ask questions directly to our executive committee as I have today here with me Julio Linares, our Chief Operating Officer; Guillermo Ansaldo, Head of Telefonica Espana; Jose Maria Pallete, Head of Telefonica Latin America; and Matthew Key, Head of Telefonica Europe.

During the first six months of the year we have posted a set of strong earnings and we are fully on track to fulfill our 2008 guidance. Our differentiated profile in the industry on the back of our unmatched diversification, our integrated business model and our proven track record of execution has allowed us to deliver these superior results. Organic year-on-year growth rates across the P&L not only remain robust, but have even picked up notably in the second quarter at OIBDA and operating income level showing our capacity to maximize efficiency.

In Europe we have recorded solid results, clearly outperforming our competitors in our major markets. Latin America delivered a very strong performance consolidating its position as the major growth engine of the Group. Group margin continued to expand with significant improvements in mobile in Latin America and an outstanding profitability in Spain.

The strong performance across regions is combined with the high financial flexibility which, along with limited M&A ambitions, allow us to further accelerate the execution of our 2008 share buyback program. As of mid-July we have already executed 68% of the program, showing our commitment to prioritize shareholder returns when deciding about the use of our high free cash flow.

On slide number 4 we show the summary of our first-half 2008 P&L. Reported year-on-year growth rates in nominal terms have been negatively impacted by changes in the perimeter of consolidation, ForEx and the capital gain on the sale of Airwave registered in Q2 of '07. However, focusing on organic growth rates and excluding the impact from capital gains, in Q2 we recorded a strong acceleration from Q1 figures broken out from topline to operating income and further strengthening our distinctive profile.

Organic revenue growth remained solid at 6.7% in the first half of the year while OIBDA year-on-year growth picked up in the second quarter standing at 12% in the first half of the year versus 8.2% after March. Operating income rose 24% in organic terms in the first six months of the year, up 7 percentage points compared to the first quarter. As a proxy to cash flow generation, operating cash flow in the first half of the year topped over EUR7.6 billion.

Moving to slide number 5, we show that the January to June 2008 net income almost reached EUR3.6 billion, below the 2007 reported figures, but up 29% on last year figures if we strip out the impacts from asset disposals, Airwave and Sogecable, in both periods. Reported earnings per share reached EUR0.767 per share posting a 32% underlying year-on-year growth. Excluding the impact from PPA EPS would have reached EUR0.843. Despite an unfavorable year-on-year comparison, reported free cash flow per share rose to EUR0.731 per share in the first half of 2008 versus EUR0.725 per share in the same period of 2007.

The strength and reliability of our operating and financial performance underlies the value of our high diversification as outlined in slide number 6. Managing a well diversified portfolio of assets as an integrated group is key to build a top-quality profile as it allows us to extract the full potential of businesses at different stages of development, to limit risks and volatility and at the Group level and to exploit synergies across operations and geographies.

Customer expansion remained strong in the first half across all growth levers, namely broadband, mobile and Pay TV, posting high double-digit growth rates. In Q2 of '08 we added close to 12 million customers, 8 million excluding the acquisition of Telemig, to end June with more than 245 million accesses at the Group level or 15% above last year's figure with an outstanding customer growth across regions.

In addition, our initiatives captured more value from our customers, are prospering with 38% of our total accesses having voice, broadband and TV bundles. Latin America has consolidated its position as the main growth engine of the Group. Our operations in the region already account for 37% of consolidated revenues versus 35% a year ago while they already represent 34% of the Group OIBDA.

Please turn now to slide number 7 for the review of the contributions to group growth rates by geographies. Latin America emerges once again as a key differentiating factor of our performance, recording outstanding results. This region's revenues and OIBDA increased by 12% and 16% year on year in organic terms.

In addition, the healthy topline expansion and efficiencies achieved both in Spain and the rest of Europe allowed to deliver best-in-class organic growth rates at the Group level. From a business perspective, mobile and fixed broadband are the main growth drivers with a 26% year-on-year organic increase in mobile broadband revenues and a 14% year-on-year organic growth in fixed broadband sales.

Turning to profitability and cash generation on slide number 8, we show our continuous focus on cost management along with the benefits of our scale in our integrated business models are driving the expansion of OIBDA margin at the Group level. Organic OIBDA margin stood at 38.2% in the first half of the year, 180 basis points above last year's figure. In nominal terms, margin for our key divisions range from 29% of Telefonica Europe to a solid 50% of Telefonica Espana.

We have a proven track record in managing both OpEx and CapEx preserving cash flow generation. In the first half of 2008 operating cash flow was up 13% year-on-year in organic terms. The high cash flow generation in the European region that topped EUR5.3 billion to June up 15% year-on-year organically came from the growing contribution of the Latin American operations which posted an operating cash flow of EUR2.3 billion, 7.7% higher in organic terms than a year ago.

Please turn now to slide number 9 for an update on guidance. The growth reported in the first half of the year for all metrics we have guided on are fully aligned with the year-end target, despite the headwinds from more challenging operating conditions in Europe as we leverage our diversified portfolio, our integrated business model and our strong execution skills.

Under guidance criteria consolidated year-on-year growth rates in revenues, OIBDA and operating income were 7.1%, 8.7% and 17.2% respectively, within the guidance ranges. CapEx up to June stood close to EUR3.5 million; however, mainly due to seasonality, this figure should not be annualized as an estimate for the full year.

Delivering on guidance is an objective the whole Group is committed to with all three regions across the Group being on track to meet their guidance as slide number 10 shows. We reiterate our 2008 guidance both for the Group and for the three regions.

In Spain we are better positioned versus our competitors to face the current environment, leveraging our strength. We are the market leader and this allows us to influence market performance. At the same time we reap the benefits of being an integrated player with a better quality customer base and a strong track record of executing successfully executing efficiency measures.

Let me now walk you through the operating and financial performance by region starting with Spain. Telefonica Espana posted solid results in the first half of '08 with revenues to June up 2.1% on a comparable basis. Wireline revenues recorded a very robust performance increasing 2.5% in the second quarter and 2.2% in the first half on a comparable basis. Most of the businesses improved slightly quarter-on-quarter.

Internet and broadband revenue continued as the main growth driver with a steady year-on-year growth rate above 10% both in Q2 and for the first half. Wireless revenue growth decelerated versus the first quarter, strongly impacted by a significantly different year-on-year evolution of wholesale and handset sales revenue and the 0.7 percentage point slowdown in customer revenue growth which still continued to grow at a healthy 2.7% in the second quarter of '08.

Roaming and interconnection revenues were down mainly on top of reductions in volume discounts. Handset sales decreased year-on-year as we have now removed linear profile of handset upgrades. Whereas over the last years handset activity was greater in the second and fourth quarters of the year.

Let me remark that we have not noticed any significant change in the handset upgrades cycle. The combined picture of wireline and wireless shows a solid performance underscoring our more defensive profile and the fact that, although we're not immune to the current operating environment, being an integrated player has a significant value. Our top priority, maintaining our customer base to sustain future revenue growth, is reflected in the churn contention across mobile, broadband and TV services.

We are capitalizing our leading position in high-value segments where our share is significantly above our total market share. We are capturing changes in usage patterns in both fixed to wireless and wireless to fixed substitution. Corporate clients and public administrations are positively valuing our integrated approach and our integrated distribution channels are proving very successful, not just on cost efficiency terms, but on upselling and retention opportunities as well.

These differentiating factors are showing on the top line, but are even more clear further down the P&L, as you can see on slide number 12. Telefonica Expana's OIBDA is growing ahead of revenues, even stripping out factors affecting year-on-year comparisons. Our capabilities to manage the cost side are showing up in the margin evolution with an almost 4 percentage point improvement versus the first six months of '07 to reach a 50.1% of benchmark margin or 49.2% excluding one-offs.

This enhanced profitability shows the benefits of cost-cutting measures taken in 2007, a continued focus to enhance efficiency across businesses, and synergies derived from fixed and mobile integration. Noteworthy is the sequential margin improvement in our wireless business from 43.7% in Q1 of '08 to 45.4% in Q2 of 2008. But not only margins are benefiting from further efficiencies achieved. Operating cash flow in the first half of '08 grew at an almost 12% rate, already exceeding the EUR4 billion by midyear.

Slide number 13 reviews the wireline business evolution through its KPIs. The Spanish traditional access market keeps posting some growth rates close to 2%. However, the continued activity in unbundling with a changing unbundler approach towards the (inaudible) share model already seen in Q1 of '08 plus an increased pressure from direct access competitors have resulted in a line loss of 172,000 accesses in the quarter with total lines decreasing 1.6% year on year.

Though we expect this trend is -- despite this trends is to continue throughout the year, we are confident to remain within the long-term target of losing up to 2% on a [CDGR] basis from 2006 to 2010 placing the Company as a benchmark in terms of limited line losses.

In broadband the market keeps growing at a lower pace than previous years, though trends have improved over the last six months and we continue strengthening our leadership with an estimated share over 57% by the end of June. Broadband ARPU posted a solid performance with a year-on-year decline of 3%.

In Pay TV there are no major changes in terms of client growth and our efforts to drive double and triple play adoption are progressing steadily, pushing up total ARPU 3.5% year on year.

Please turn now to slide number 14 to review our wireless operations in Spain. In a highly competitive market with a 113% penetration rate our focus remains on high-value customers with over 61% of our customer base being contract. Contract net adds reached 311,000 in the quarter leveraging our benchmark churn rates which remain stable at 1.1%.

In spite of flat MOU versus the second quarter of '07 with a better performance versus the first quarter of '08 due to consumption (inaudible) initiatives, ARPU declined 6% in the quarter and 5% in the first half. Incoming voice ARPU was down 14% in both second quarter and first half of 2008 due to the 16% cut in mobile termination rates over the last 12 months.

Total outgoing ARPU decreased 4.8% in the second quarter and 3.6% in the first half impacted by several factors. One, the different profile of promotions; whereas in the second quarter of '07 there were no promotions, in Q2 of '08 we're having the effect of the Christmas promotion and of specific commercial actions to stimulate usage.

Two, the higher penetration of lower priced tariff schemes launched last year for the residential segment which are impacting ARPU but having a positive impact on churn levels.

Three, changes in usage patterns in some segments of the consumer market, optimizing their usage by shifting to cheaper voice and data options such as SMS. And on the contrary, data ARPU continues to record a very strong performance with outgoing data ARPU rising over 10% versus last year, both in the second quarter and in the first half of '08.

The healthy boost in connectivity revenue, up over 55% in the second quarter year-on-year, along with a strong push in content SMS due to the Superconcursos taking place over the second half of '08, drove the 16% year-on-year growth of data revenues while person-to-person SMS volume continues strong. For the fourth consecutive quarter we have led the growth in the 3G market and now more then one out of five customers have a 3G handset.

On slide number 15 we start the review for Latin America properties. We continue our focus to capture growth in the main fields, the mobile business and the two higher growth areas in the fixed business, namely broadband and Pay TV. Accesses expanded across markets and businesses reaching 148 million accesses were up 21% on June of '07.

Telefonica Latin America posted solid revenue growth exceeding the EUR10.5 billion mark in the first half of the year, up over 12% in organic terms, driven by the robust growth rates recorded in mobile, Internet and TV revenues. By countries Brazil, Mexico, Venezuela and Argentina contributed each with more than 2 percentage points to revenue growth.

I'd like to highlight the performance of our businesses in Argentina underpinned by a strong acceleration in revenues in the mobile division as well as in the wireline operation. OIBDA year-on-year growth rate in Q2 picked up significantly versus the first quarter of '08 leading to a close to 16% growth in organic terms in the first half or 4 percentage points higher than in the first quarter.

This performance was driven by the strong acceleration in mobile OIBDA and the better performance of the wireline operations. By country Venezuela and Mexico contributed over 4 percentage points to OIBDA growth each. The OIBDA margin expanded 120 basis points year on year to 36.4% despite the higher commercial activity across our businesses.

In slide number 16 we show a new review for Latin America wireless businesses. Please notice that -- this is from last April -- Telemig is included in our figures. The Company had close to 4 million customers at that date. In organic terms wireless net adds in Q2 reached 5.8 million, up 17% year on year driven by robust gross adds in most market which stood at over 14 million on the back of the successful commercial campaigns and churn containment in the region.

Growth in gross adds was especially remarkable in Brazil and Colombia. It is worth highlighting the strong growth recorded in the region despite the increased penetration versus year ago. Total wireless customer base surpassed 113 million, a 22% increase in organic terms with double-digit growth rates in most single markets and very strong performance in Brazil, Mexico and Peru. Customer growth in Argentina and Chile was outstanding despite the high penetration levels reached in these markets.

They weight of GSM continued to increase to 72% of our customer base, a 21 percentage point rise versus June of '07. ARPU performance in constant terms was impacted by the strong customer expansion, commercial promotions and lower mobile termination rates. Outgoing ARPU performance continued to be strong, posting a 2.7% year-on-year organic increase in constant currency boosted by the 23% advance in outgoing minutes of use and higher data usage.

Data revenue recorded strong growth rates, 41.5% year on year, increasing their contribution to total revenues to 14% in the first half of '08, up over 2 percentage points versus June of '07. Data revenue continues to show strong growth potential, leveraging the introduction of 3G services and the development of wireless broadband.

Over to the next slide, we show that our efforts to transform our wireline businesses are showing up, as noted in Brazil Argentina where (inaudible) traditional service performance and solid Internet and TV growth led to a notable topline acceleration versus the first quarter of '08. Total accesses in the region recorded in a fast expansion ranging from the 2% advance in fixed line accesses to the 69% growth in Pay TV with an outstanding 26% year-on-year growth in broadband accesses.

Let me highlight the strong broadband net adds posted in the second quarter in Argentina and Colombia which were up 23% and 46% quarter-on-quarter respectively. Contribution from Internet and TV revenues continue to rise on the back of the robust bundling offering uptake, shifting revenue mix of our wireline operations and reducing the exposure to regulated services.

Across the region these revenues weighed 18% of total wireline revenue in advance of over 3 percentage points versus the first half of '07. The higher penetration of bundles continues to drive the increase in average revenue per wireline access which was up 3.5% in constant currency versus the first half of '07 while at the same time proving to be a good retention tool. Total bundles are already over 55% of our fixed accesses, 7 percentage points higher than in June 2007 while double and triple play reached 42% of the DSO base in June of 2008 or 16 percentage points more than a year ago.

On the next slide, let me quickly review our main operations in the region. As I just mentioned, revenue growth in TASA posted an acceleration quarter on quarter with an increase of 190 basis points respectively from the first quarter of the year, reflecting the benefits of the business transformation.

In terms of profitability, OIBDA margin also improved versus the first quarter by over 300 basis points in the case of Telsp to reach 42.4% and by over 200 basis points in TASA to 35.7%. This performance shows our ability to contain costs and to leverage workforce restructuring measures.

In Brazil Vivo posted solid results. Gross adds in the first half of '08 increased by 47% in organic terms on the back of the strong campaigns on Mother's and Valentine's Days with gross adds in Q2 up 41% year on year. The strong customer expansion along with greater profit permissions in a very competitive environment and a higher proportion of (inaudible) only adds versus last year impacted ARPU performance. Minutes of use showed a robust growth in the second quarter, up 24% in organic terms, boosted by the commercial campaigns and an over 30% increase in comp (inaudible).

OIBDA grew at 13% on organic terms in the first half of the year. Excluding Telemig OIBDA margin in the second quarter showed a healthy year-on-year expansion of around 150 basis points despite the strong commercial activity. In Mexico we continue to record robust results. The customer base grew 38% year on year in the first half to 14.1 million leading to a market share of over 19%.

Churn continues to go down due to the better quality of the customers we are adding. As a result outgoing service revenue grew 53% year on year while economies of scale led to an over 22% margin in the first half of '08 or 13 percentage points higher than a year ago with a remarkable 25.7% in the second quarter. Operating cash flow improved significantly to reach EUR38 million in the first six months of 2008.

To sum up Latin American region, we are capturing the strong growth potential of Latin America, capitalizing on our unique integrated management model. The mobile business along with broadband and TV bagged a solid topline performance across markets. Broadband and TV revenues recorded outstanding year-on-year growth rates from 16% in Peru to over 100% in Colombia.

Mobile service revenue posted double-digit growth rates in most of our markets driven by the good performance in outgoing service revenues. Colombia's revenue performance was strongly impacted by sharp cuts in mobile termination rates. OIBDA growth was robust across region driven by higher margins across mobile businesses leading to an enhanced profitability at the regional level versus June of '07. Finally, let me remark the strong margin expansion in Colombia mobile, 8 percentage points higher versus January-June of 2007.

Moving now to slide number 20, Telefonica Europe delivered another quarter of very sound results. The exit of Airwave from the Group in April of 2007 and the weakening of sterling versus euro impacted the reported growth rates in the first half, but like for like revenue and OIBDA grew by 6% and 4%, respectively. The customer base growth was driven by stronger contract net adds along with a good performance on churn.

Telefonica (inaudible) UK now has the leading contract churn rate in the market. OIBDA growth slowed in the second quarter compared to the first, mainly due to customer growth at Telefonica O2 Germany which added 1.1 million customers in the first half, over double the figure of last year. O2 UK continues to outperform the market with strong revenue growth and a flat margin on a like for like basis year-over-year. ARPU growth of 3.7% year on year in local currency in the first half demonstrates the focus on quality customer growth.

In Germany we continue on track with a turnaround of the business with revenue growth accelerating to 3.8% in the quarter giving 2.7% for the first half. The business again posted strong net adds, especially on contract. In the Czech Republic line loss was reduced year on year and revenue growth of 1.1% in local currency in the first half was impacted by timing of revenues of ICT contracts which will come later in the year.

Slovakia diluted volume by under 3 points in the first half and during the second half the OIBDA loss in the Slavic business will begin to decline year on year. Ireland contract net adds in the second quarter were again one third higher than last year and we have regained momentum in the pre-pay market with positive net adds versus net losses last year. Revenue in OIBDA declined year on year due to the lower prepaid base and the investment in the customer. We expect to see a better performance in the second half reaping the benefits of the good customer growth in the first half.

Turning to slide 21, we show that O2 UK recorded another strong quarter of contract net adds on the back of the iPhone but also traditional handset connections and the increasing popularity of the SIM only tariffs. Total ARPU continued to grow reflecting the focus on quality customer growth, although contract ARPU did fall year on year in the second quarter driven by optimizing behavior of customers and the growing base of SIM only customers.

As previously mentioned, contract churn in the quarter fell to 1.4%; a market leading figure helping the net adds performance. Mobile service revenue growth did slow during the quarter but there was not a step change in the growth rate from Q1 two Q2 of '08. Minutes of use is performing well. There is strong demand for iPhone 3G on a good mix of high-end tariffs and bad debt levels remain stable. In broadband we launched our mobile proposition in April while our DSL service is delivering high-quality and satisfaction adding 124,000 customers in the first half.

In Germany we are on track with our turnaround strategy. The first quarter saw strong net adds with both O2 and partners such as [TiVo], [Phonig] and (inaudible) delivered a good performance especially on contract. Revenue growth accelerated from Q1 levels to 3.10% year on year in the second quarter with mobile service revenues still impacted from the migration of customers onto new better value tariffs.

61% of the total contract base are now with the new tariffs and as well from 1 million contract customers are expected to remain on their existing tariffs. This means that around 75% of expected migrations have already taken place. Therefore the impact of migrations in the second half of 2008 should be reduced, allowing for a new (inaudible) revenue trend during the second half of 2008.

Although OIBDA grew quarter on quarter it declined by 8.2% year on year like for like due to investments in growth evidenced by the increase of almost 200,000 in net adds in the second quarter of '08 versus the second quarter of '07. Margin expanded over the first quarter as we saw the benefits of restructuring, scale and a positive contribution from the ULL business.

If we now turn to our financial profile I would like to highlight how we continue improving. First, we have devoted EUR3 billion to shareholder remuneration in the first half. Second, we have been able to make a comparable (inaudible) remuneration with another reduction in our leverage ratio by moving net financial debt to two times OIBDA in June. This has been the result of close to EUR1.3 billion debt reduction in 2008 coupled with OIBDA ongoing increases. When adding or commitments to the financial debt the ratio stands at 2.15 in the lower part which is in the lower part of the range that we set in our last investors conference.

Third, we have been able to reduced 25 basis points the effective interest cost of our debt reaching our 6% target for 2008. Fourth, our liability mix keeps on benefiting from the depreciation of sterling in the semester, more than offsetting the (inaudible) strength and leading to a nearly EUR285 million savings in the euro value of our debt.

Finally, we have smoothed our maturity profile for the coming years with cash exceeding debt maturing in 2008. And on top of that, we have close to EUR9.5 billion undrawn credit lines, more than two thirds of which are long term. Despite current credit market conditions we were able to price a prudent and opportunistic EUR1.25 billion seven-year deal in May which allows us to keep an average debt life around six years which is a term we estimate long enough to be fully repaid out of cash flow if we wished.

In conclusion, in this first half of 2008 we have posted strong earnings clearly ahead of the pack. We are fully exploiting our differentiated profile, leveraging our highly diversified asset portfolio, our integrated business model and our strong execution capabilities. We have delivered solid organic growth rates across regions and businesses and ramping OIBDA and operating income year-on-year growth rates in Q2 show our focus to preserve our high cash flow generation profile, leveraging cost initiatives and disciplined CapEx management.

Our unique footprint in Latin America is boosting our growth while in Europe our solid results, well above our competitors, outline our business strengths. On the other hand, under current credit market conditions we maintain a robust financial position with leverage ratios down year on year and in line with our targets.

We continue to prioritize shareholder's remuneration as shown by the accelerated execution of our share buyback program. Close to 90% of the total free cash flow generated in the first half of '08 has been used to pay dividends and buy back our own shares.

Finally, I'd like to reiterate our confidence to deliver once more on our commitments. We are well on track to meet 2008 guidance. Ladies and gentlemen, thanks very much and now we are ready to take your questions.

(OPERATOR INSTRUCTIONS). David Wright.

It's David Wright here from Deutsche Bank in London. Three parts to my question, please. Firstly in Spain, I'm looking for the revenue boosters I guess in the second half revenues in Spain are trending towards the low end of guidance and I guess we would expect some ongoing pressure from the GDP slowdown. So in terms of the boosters to offset that, could you give us some idea of the (inaudible) materiality, the roaming contract to come on in H2? And also maybe some indication of roaming elasticity so we can clean out our Q4 number as the year-on-year roaming reduction cleans out?

Secondly, on Latin America, is the telephony margin trend something we should be comfortable with now? Can that be sustained, that reduced margin pressure? And maybe also a question for Matthew on O2. If you could give us some indication of how you plan to address a very tough operating performance I guess we could call it in Ireland? Thank you.

This is Guillermo Ansaldo and the question regarding Spain revenues in the second half -- we see several factors, at least seven factors that we should consider as positives for the revenue in the rest of the year. First of all, as you remember, the deceleration started after the summer and we started feeling after the summer. So the performance especially in the first Q of this year will be compared to performance of an already slowed down first Q of last year. So year-over-year we expect the daily growth rate would improve assuming the same slowdown situation in the economy.

Second, as you mentioned, there was a sharp roaming [tariff] cuts in September last year. So the revenues in the rest of this period from September to December will be -- in this revenue stream will be favorable comparing to tariffs that were already cut last year, so this is the second effect.

The third one, you mentioned it also in your question. (inaudible), we finished switching the traffic in the (inaudible) contract last June. So in the rest of the year we'll see an additional revenue stream coming from this contract. Unfortunately we cannot disclose the numbers of this contract, but, as you can assume, (inaudible) year ago (inaudible) traffic in this contract will (inaudible) additional revenue stream.

A fourth factor is related to wireless data. Wireless data, we are, as you've seen in the numbers, showing a very good growth in data ARPU and in data revenues. And we will continue pushing this initiative in the rest of the year. And also obviously in this arena the iPhone will be (inaudible). Remember we launched the iPhone in Spain last July 11th, so -- and we can the summer in the middle. So the effect of the iPhone will be very positive from September to December.

A fifth factor that we mentioned in the last call is that in the first part of the year, the first quarter we saw a small slowdown in IT revenues which is already recovering in the second quarter. Especially all the IT contracts related to the public sector, once the general elections are over we are starting to see a lot of decision-making and a lot of projects coming in. So we expect that in the rest of the year we will have a positive effect coming from this (inaudible).

A sixth factor is regarding to the universal service fund. We expect -- we hope that 2003, 2004 and 2005 universal service fund will be issued in the rest of the year. And as you know, we will be net receivers, the mobile piece we are a net payer and the wireline business will be a receiver as any other universal service fund. This will be an additional revenue stream.

And a seventh one is the fiber. We expect to have -- we hope to have a positive green light from the regulator and so we expect to start selling fiber, high definition and other value added services over the fiber in the rest of the year. Obviously this will start in September and will go higher in 2009. So we see several factors (inaudible) differential vis-a-vis the first half and they will be obviously much more concentrated in the last quarter of the year, but that will help us to meet the guidance that we are already projecting.

Can I just follow up on that? That's a very comprehensive answer. Obviously the EBITDA is running way ahead of guidance if we clean out all the property and retiree affects. Would we be looking to invest some incremental margin in the second half to drive commercial activity to see that EBITDA trend more towards the guidance range rather than ahead of it?

As you mentioned, we have in the last part of the year (inaudible), we will have a push on our OIBDA because last year we had a very strong provision of the redundancy program, this year we don't have any expected. As you see in the numbers in the first half, profitability and even netting out all the one-offs the margin is improving. And we will keep on focusing on capturing synergies from the integration of the mobile and the wireline business.

We are also profiting from the industrial alliance with Telecom Italia. We are doing a lot of efficiency programs started a few years ago. So efficiency will continue to be a priority and that will help significantly on the OIBDA front. We will maintain our commercial activity as long as we see opportunities to grow. So we will not step down on that front.

On the Telsp margin evolution question, the evolution of this quarter is the result of several actions. First, we have been able to contain the line loss (inaudible) of 60,000 negative net adds figure and that has helped to stabilize the average number of accesses.

Second, on that front also we have been able to slightly increase ARPU the traditional line a little bit below 1% increasing ARPU (inaudible).

Third, broadband expansion, massive broadband expansion and I would say greatly appreciate the value market in terms of increasing speed of access and bundling with traditional lines and with Pay TV. And on that front we have also been able to improve the ARPU on the broadband side by roughly 5% year on year.

Fourth, I would say that the bundling strategy is paying off and the fact that we do have now a competitive product bundled with our broadband in the most intensive competition zone in Sao Paulo helped us recuperate market share gain in terms of net adds in those regions. I would say on top of that that we have been able to run and accelerate the efficiency program in terms of reducing the [workforce] level of Telsp in the second quarter and that's going to be starting to pay off in terms of a more efficient cost structure.

Also the fact that we are setting up a significant effort in the region -- all around the region in terms of boosting further efficiency regionally from the wireline businesses. And finally, I would say that the two effects that are going to be helping us in the second part of this year to sustain or even increase this level of margins in terms of the tariff increase that had been approved in July in the neighborhood of 3% and also the comparison year on year because of the ongoing comparative effect of bad debt cleanup that we have all around last year.

So the answer is, yes, we feel comfortable with this evolution and we keep fighting to even improve this position.

Okay.

Hi, David, it's Matthew. I guess a two-pronged approach in Ireland. First, we have to regain customer relevancy and I think if you look at some of the propositions that we've launched in the first half, they're certainly cutting through in the marketplace in new prepay proposition in O2 Clear which is a little bit like Simplicity in the UK. What that's shown actually in our first-half numbers is that we've grown by 42,000 customers in the first half, 25,000 in the second quarter. And if you compare that to last year we actually didn't grow at all for the first three quarters.

So first is customer relevancy, get some customer momentum and then get the top line going and the second is clearly the cost base. We've got a lot of operations going on there. You may have seen that we outsourced our IT function to IBM during the first half and we're now really starting to leverage the scale from the Group but particularly from the UK. So as an example, we're now running our MMS platform and our visual voicemail platform for the iPhone from the UK for Ireland. So customer relevancy to get the top line going and driving down the cost base.

That's all very clear. Thank you.

Christian Kern.

It's Christian Kern from Lehman Brothers. I was wondering if you could quantify the positive impact Easter had this year by having two more trading days this quarter versus last quarter? Second question is I'm trying to find or to close the gap between your 6% ARPU decline in domestic Spain and the service revenue which is up half a percent with about 217,000 net adds; I think there's a little bit of a gap.

And if I understand you, your (inaudible) initial roaming contract only kicks in in July. And the final one, if you could help here with regard to the roaming; there's been a steep decline in the roaming in revenue growth in domestic. It was I think 12% up in Q1, 17% down in Q2. What are your thoughts there on the Q2? Thank you.

Let me start by the second question. If I understand correctly you're trying to reconcile the ARPU decline in Spain with the revenue growth. Is that right?

That's correct, yes.

Okay. We have the increasing customer base as one clear effect on the side and also we have, as you mentioned, some of the wholesale income coming in. The (inaudible) contract started in the beginning of June so we have only one month of revenue coming in in the semester. Also we have the -- well, that ARPU is already in there, but it's basically planned and some of the wholesale income like the (inaudible). I think that was your question, not why the 6%, but to reconcile the gap, no?

That's correct.

The other question I think you were asking about the domestic roaming, what happened with the roaming in (inaudible) change quarter to quarter?

From your presentation I see there's been a big swing in the revenue growth from plus 12 to negative 17.

Two things. First, these roaming contract with the international operators are very volatile in the sense that our (inaudible) contracts and the discounts are applied depending on the traffic that is coming in and coming out with this operator. So the relevant measure for us and (inaudible) for us is to (inaudible) the margin between a roaming income and expenses of roaming out with the same operators.

In that sense we also have a decrease on the roaming and expenses so the margin is basically the same. Unfortunately it [places phony] numbers in the income and in the expenses. But the margin of these operations is quite sound and it's going in line with expected. And regarding the first question, I didn't get it. Can you repeat it?

On the Easter effect, this Q2 will have for any operator positive Easter effect because last year Easter was in Q2 whereas this year Easter was in Q1. I was wondering if that's something you can quantify and have looked at?

I don't have that number right here. You're right there is a positive affect on Easter because it was in different quarters. And we can provide you with information with the investor relations team. But unfortunately I don't have the number here, but if you're right it's a positive effect in the second quarter.

Thank you.

Jesus Romero.

Jesus Romero from Merrill Lynch in London. Guillermo, I had a question on the line loss in the second quarter. You mentioned in the release that the market was growing 2%, but in spite of that we saw a decline in your line of 1.6%. When you talk about that 2% decline over the next three years through 2010 what assumptions are you making for market share loss and what do you think the market will be doing?

According to our estimations the market has grown close to 2%, the actual number is 1.9%. Basically what has happened in our access space is two things. First, an effect that we saw in the first quarter which is this change of nature of -- this new feature of naked share unbundling which, to give you a flavor, the net gain of this type of unbundling was close to EUR160,000 in the first half of the year. That was something that was not existing in the previous year. And that explains a good part of the loss.

There is a second factor and especially in this quarter which we saw more commercial activity on direct access, meaning some cable operators and some other competitors that have direct access to customers. So we lost some lines to some direct access also in the year. It's a smaller effect, but (inaudible) has an effect. We don't see yet an effect on the market so far. So basically the first quarter was basically 100% due to this new shared unbundling and the second quarter is maybe two thirds due to the shared naked unbundling and one third to more activity on the hands of some competitors' indirect access.

What is the possibility in the second half you see the market slowing down or declining and on top of that you continue to lose market share?

We will see some -- this trend of the naked share will continue. I'm not sure about the pace it will continue because we've seen both migration from planned (inaudible) share to naked share. And obviously some players are technically going into this feature instead of going into wholesale ADSL or to shared unbundling, so that trend will continue. The pace will depend on seasonality and on the strategy of these customers.

Regarding the market we'll see, so far we haven't seen a change in the market but it's something that we have to be -- honestly we have to be very cautious and see what will happen in the future. So far we haven't seen any change.

And you also asked before about the long term. We still believe that 2% is doable. Obviously we see -- we have last year a very good number in terms of line loss, so that helps in the arithmetic. This year, well, I don't have a number, but obviously we'll be above 2. And once this naked share effect starts to ease up because the migration will finish and we'll have only the new adds we see that will help to get into the 2% number that we share with in O2 in London.

Thank you.

Jonathan Dann.

Jonathan Dann from JPMorgan. Two questions. The first one is to better understand naked share access -- so which of your competitors are using it and what should we expect? Is it the EUR0.5 million wholesale DSL that you would expect to migrate? So perhaps line losses above worse than the trend for a year but then returns below 2%?

Secondly, could you provide a number for mobile data cards that you've sold over the last year? I think in the release you said you sold 2.1 million 3G handsets, if you have any figure? And then finally, I think in the press yesterday one of the other shareholders in telco in Italy was talking about a capital increase. What's Telefonica latest thoughts there?

Jonathan, this is Guillermo. Naked share is basically used by (inaudible), so basically several players but basically it's Orange and the Orange Group. And also we have to see that we depend on the strategy that we'll follow in the future and the (inaudible) that they put in the market to see what's happening.

You know, to switch a customer from shared to naked share, you have to call the customer and basically tell the customer that he will not have any more commuted voice and that he or she will have voice over IP. And of course they will save money because they will save part of the monthly fee depending on the offer that, in this case Orange for example, will make. So it depends on contacting the customer, convincing the customer to drop the traditional voice lines which is very normal, maybe very affected by some segments and not very affected by other segments. And third of course that they will agree to the new offer.

So the trend will continue, but it's not also possible to get 100% of the customer base -- to convince 100% of the customer base. So we have (inaudible) but to be honest it will depend on the strategy that, for example, Orange will fallow. (inaudible) for example is much more on the full unbundled. So they have a different strategy, they are improving in market share, they're doing very well but they are full unbundling and that also hurts us or (inaudible) in terms of market share of (inaudible) which has not been an issue so far.

Regarding your second question, let me give you a couple of numbers. First, the total number of (inaudible) or cards and so on that we have so far is 300,000, a little over 300,000. Additionally if you add all other type of Blackberry's and other type of (inaudible) type of smart phones, and type the terminals, we have almost three quarters of 1 million, 750,000 roughly.

I don't know if that was your question, but basically that's a gross figure. Then you mentioned also before the 3G, that's in general, that doesn't mean that a 3G terminal has a data contract and so on. But basically to give you a number, you have like 300,000, 300,000 people with either cards or (inaudible).

This is Julio Linares. Regarding your first question on Telecom Italia capital increase. As Telefonica, we have anything to say here and I think Telecom Italia is much better positioned to answer any questions regarding it's own capital structure.

James McKenzie.

I'm calling from Fidentis. I've got two questions, one on Spain. I wonder if you'd give us an idea of where bad debt stands currently as a percentage of sales and whether you've seen any significant increase in the second quarter or recent months. And then on Latin America, I was very pleasantly surprised by the EBITDA margins. That's been done in an environment, as you said, of very strong growth. And I think your main competitor actually saw a small fall in EBITDA margins. What's behind this? Is this operating leverage, i.e. is your EBITDA excluding [SAX], has that increased 400 basis points?

Regarding the bad debt question, our numbers are still below the 1% over sales and in the provision over sales. To give you an idea, the first quarter, if you correct the effect of the sale of the loan portfolio we show a positive affect on the provision. If we correct that it will be 0.8 and second quarter is 0.9. So it is increasing a little bit, but not significantly and obviously it's below the 1%, so they are still good numbers.

Is that a big increase on last year for example?

Last year, to give you a flavor I have the figures here for the third quarter it was 0.7. So it looks like it's increasing a little bit, but it's not very relevant. Obviously when you put in the first quarter the sale of the bad debt portfolio the number is 0.3, but when you correct that it's a little bit more. But claim numbers we've seen maybe a 0.1 percentage point decrease. If you look back in the whole of our operation, our margin is (inaudible) but it's minor.

Okay, fantastic.

Taking your second question on the evolution of margins, I understand that you are addressing the question on the wireline side. Am I correct?

Exactly, sorry.

On that front I think that for says what is playing in our favor is scale is first part of the answer. The increasing size, the increasing volume, if our customer base is helping us to boost operating leverage in a highly controlled base of fixed costs. Also the fact that we run the region as a unit in terms of not only a unified brand, but also unified systems, unified asset purchasing and a significant amount of initiatives help us to have better margins than all of our competitors.

But probably the most significant affect when compared to previous years is the fact that we are having more and more clients on our GSM networks and we will be progressively switching off the other networks, and that's also helping to boost efficiency. Also the fact that we have control of bad debt and the fact that we have been able to have a highly segmented subscriber acquisition cost approach is helping us to highly control I would say the net adds of our customer base.

So we are fairly positive about the future evolution of our wireless margin. We have been also working significantly on the wireline side, but I'm talking specifically on the wireless side. I think that the 20 is solid.

If I could follow-up. If I was to look at SACs and (inaudible) as a percentage of sales, would she be able to give me a figure as to how that's evolved over the last year?

I'm afraid that we do not disclose that figure, but those figures have trended down and we would think that will continue to be the fact. Remember also that we are running best practice approach and we are really effectively transferring successful products from one corner to the other of the region.

So I think that I can tell you that as we are speaking we have been reducing subscriber acquisition cost in the double digit arena and we will keep trying to do that same in the future. So I think that the trend is solid, as I was saying at the beginning.

Fantastic, thank you.

Luis Prota.

It's Luis Prota from Morgan Stanley in Madrid. Two questions if I may. First of all on shareholder remuneration, now that you have [20]% of the buyback done what are the chances of increasing the buyback before year-end? The second question is really a follow-up on the question on Telecom Italian, but the speculation on the capital increase was also on the telco level requiring a capital increase because the [covenant] could be reached if the Telecom Italia share price comes down around 1, 1.05. If you could elaborate a bit on that it would be helpful. Thank you.

On your first question on the shareholder remuneration, we have spent more than 90% of the free cash flow that the Company has generated on shareholder remuneration on the first half. And on the second half we still have the second leg of the dividend coming up and we shall have one-third of the 100 million share buyback pending execution.

As you recall, we have always said that share buybacks will be determined depending on free cash flow generation and the share price. (inaudible) continue this year and the share price is very attractive. And to the extent that we think almost a certainty that the cash flow generation ability of the Company will continue, we will complete that and we'll update you and the market on future increases in remuneration later on in the year. As for now we think that remuneration is high enough and attractive and we still have one-third of the program pending execution.

Regarding telco, we do not see right now any need for any additional increase of capital based on the covenants and based on the financial opinion -- standard financial opinion we have of the Company.

Okay, thank you.

Terry Sinclair.

It's Terry Sinclair from Citi. Three very quick questions. First of all on Spain, the top end of your guidance implies that you still think it possible that you may grow sales at 5% in the second half. And I'd just like some reassurance that there were no trends within the quarter that diminished your confidence in that, specifically has there been any deterioration across the second quarter?

Secondly, you mentioned a number of issues in Spain which had helped (inaudible) before, and one of them was trending spin down towards SMS instead of voice. There are some SMS promotions (inaudible) at the moment and I wondered how long you expect to have special promotions around SMS and perhaps data growth? And third and very quickly, I just wondered when you are expecting unbundling in Sao Paulo is to have an impact on Telsp?

Let me try to answer the first question. Obviously the environment is challenging, but the facts I mentioned at the beginning, the seven effects are positives that will help in any case. Obviously if the environment changed dramatically we will have to think about new things to compensate. But basically we are assuming that the operating environment is similar to the one we have seen in the second quarter going on. Also let me stress that many of the factors that I mentioned before are more loaded on the fourth quarter by definition because of the seasonality of the Spanish market.

Regarding the second question, I don't know if I got it right, but I think you were asking about the SMS promotion, the [premium] SMS, no? Yes, that was a very relevant factor in the first quarter and part of the second quarter. We don't have any premium SMS promotion right now in December and for the rest of the year, and sorry, we cannot disclose our strategy due to competitive reasons. But data growth is one of our priorities and we do have access to continue bidding on that.

Okay. Guillermo, I meant to work this out for myself, but what would the like-for-like boost be from -- the seven factors you mentioned in answer to David's question, a number of them involve an arithmetic list because the comparative number for 4Q '07 is going to be easier than, for example, 2Q '07. Can you just help us to quantify that?

Sorry, I don't have the quantification one by one. We're trying to do some estimates and some of these factors will depend on third parties. For example, the (inaudible), we do have the contract, but it depends on what [Diego] does. We do have a hypothesis but we cannot disclose that. The two factors that are related to the regulator like the universal service and the fiber, we are positive, we are optimistic, but of course it depends on the regulator and it will depend on how it is issued by the regulator. So we prefer at this point (inaudible) not to quantify it one by one and as soon as we have more (inaudible) we will share this information with you for sure.

Terry, taking your question about unbundling in Sao Paulo -- first, there is already an offer of an unbundled (inaudible) offer in Sao Paulo which has not been successful or attractive for new entrants, but probably because of the fact that most of our major competitors have their own infrastructure in Sao Paulo. I don't remember exactly the number of operational networks right now, but it's something close to seven in probably the most intensive competition sells in Sao Paulo, not only in terms of cable operators like [Net], but in telecom already have also their own infrastructure in Sao Paulo.

It is also true that the current environment, the regulatory changes in Brazil, because of the creation of the national champion, is fostering some additional changes in the regulation. But in terms of having a more intense competition environment in Sao Paulo, it's already highly intensive based on infrastructure-based competitors. So we do not expect any major changes in that regard.

Guy Peddy.

Good afternoon, everyone, it's Guy Peddy from MacQuarie. A couple of quick questions. During the quarter Orange announced a significant plan to roll out a lot more distribution shops in Spain and a planned to increase the distribution network in the UK. Just wondering how you're going to respond to that.

Secondly, as you Orange UK clearly have performed very well in Q2 and they sort of cross up with O2 UK from a revenue growth perspective I was just wondering whether you feared that actually Vodafone and T-Mobile who are clearly under performers (inaudible) be a bit more aggressive in H2.

And then finally, you've got comments saying that you're on track in Germany, but if I was going to be really critical your service revenue growth rate has actually gone backwards in Q2. So where can we find that confidence that you are on track and when do think you will be able to get to a more neutral service revenue growth position in Germany? Thank you very much.

Matthew here. I'll pick up the two Orange questions and then talk about Germany. As far as our distribution network is concerned in the UK we've got circa 450 stores, are very happy at that level, we think that's the optimum amount. And clearly also trade mainly through car phone warehouse, but a bit through phones for you. So do I see a need to respond to or Orange expanding their distribution network in the UK? Absolutely not.

As far as their revenue growth is concerned, yes, they've had a couple of quarters of about 9%, but I would just encourage you to look at the numbers they're lapping from last year which were actually pretty low in terms of that 1% and 4% where actually we're lapping numbers of double digit with double-digit growth. So yes, they're increasing against last year's number but from a lower base.

On Germany I think the key thing to understand about Germany is there are effectively two compensating factors happening at the moment. The first is that we're increasing our base by circa EUR0.5 million a quarter and have done for the last four quarters which is clearly driving service revenue up. What's pushing service revenue the other way is migrating our existing customers onto the higher value or the better value tariffs that are in the market at the moment.

Now I think we've declared that actually of the base that will migrate onto the better value tariffs, we've now already done 75%. We'll complete that during this year. So as those two items move into a different level of balance, because they're broadly imbalanced at the moment, you'll see us start to go into service revenue growth during the second half of 2008.

Just to complement the Spanish part of this division question, you know we have a very (inaudible) or large exclusive distribution network in Spain. The two initiatives that we are pushing last year and this year are twofold. First is to have as much (inaudible) selling both wireless and wireline products is going very well. And it is one of our synergies that we are bringing into the revenue side.

We do have a program to improve locations, meaning we're trying in large cities to realizing which ones, which locations, premium location we should cover so we are changing locations or we are covering some holes. We call this time distribution network that it is not the significant increase in the number of stores, it's mostly an increase on the quality and the profile of the stores.

Thank you very much.

Mitchell Collett.

It's Mitchell Collett from Cazenove here. Three questions if I may. Firstly, can you quantify the effect of termination rate reductions in Spain on both revenue and EBITDA? And secondly, you mentioned in the presentation that the handset sales had flattened across the quarters. Can you give us a feel for why that's happened? And thirdly, you say in the presentation that GSM handsets in (inaudible) are now 72% of the total. What can we expect that to trend towards? Thanks.

Regarding the handset sales, this is another volatile component of our income because it depends on the amount of terminals that we provision into the channels and the needs of stock of the channels, and also depends on the value of the terminals we provide. So it goes up and down quarter by quarter and month by month. But there's no change in trend behind those numbers. So that's something that I know -- I know it's because it changed month by month, but it is no change in trend. And it depends on how the wholesalers are (inaudible) and what type of terminals they are demanding.

Regarding termination rates, basically is -- on the revenue side it's 16% of our -- a decrease, sorry, you have a decrease of 16% on our income side semester over semester, if that was the question. And obviously, when you look at the whole of Telefonica Espana you have to take into account that on the fixed side we have savings because we pay less in the traffic that is originated on the fixed side and on the mobile side and also on the mobile operation in the originated traffic we pay less. So as you know, they impact the margin. I don't have the number right now, we can try to calculate it, but it's neutralized by the wireless and as particularly by the wireline business as a whole.

Okay, thanks.

Taking your question about the GSM handset evolution as a percentage of total handsets in Latin America, it's been a very natural trend. We are not forcing these or accelerating these (inaudible). We are just having a little bit like -- something like close to 90% of our gross adds based on GSM and therefore it's (inaudible) of handset which is helping us to decrease the CDMA-based effort.

And therefore we will provision the switching off the CDMA network. So probably you will see that in the next two years. We will have evolving this space to close to 100% and the full country by country will be switching off all the different networks and therefore that will boost those efficiency in terms of having one single network with all of our clients. You should expect that to happen in the next two years.

Okay, great. Thank you.

Andrew Hogley.

Good afternoon. It's Andrew Hogley at Execution. A question about mobile broadband if I may. Can you outline your strategy and particularly how it varies between the UK and Germany where you're in a challenging position and can take share from the DSL providers versus the Spanish market? Thank you.

Mobile broadband from our perspective is clearly a growing market in both Germany and the UK and in Ireland. I think the first thing, as your question implies, is you need to look at the status of the fixed broadband market. And in Ireland, for example, with a relatively undeveloped fixed broadband market we see a lot more potential to grow mobile broadband than in the other countries.

If you look at our approach in the UK where clearly we've got a mobile broadband offer as well as a fixed broadband offer, actually today we've announced that we've got a proposition that's going to combine the two. So you effectively get a home broadband with a mobile broadband subscription which is GBP20 a month. So very much depends on market by market as far as how far the market is developed and the relevant pricing in the market place.

David Strauch.

This is David Strauch from Oddo. I've got two questions. First is on Spain who you mentioned from the impact of outgoing revenues (inaudible), impact of the promotional effect and also the economic slowdown with the optimization of tariffs. Could you give a little bit of a breakdown between the two effects?

And secondly is on Latin America, because in Q1 concerning our (inaudible) fixed you mentioned that the negative impact in the EBITDA margin was partly coming from the inflation. In Q2 we see a very good performance in EBITDA. So since you are able to manage (inaudible). And do you think you will be able to do that [durably] or do you see any risk from (inaudible)?

Regarding the evolution of our wireless revenues, there are several factors to take into account. First is a regulatory factor which is the incoming voice ARPU which is down because of the rate mobile (inaudible) rate cuts. As you know, we have (inaudible) another cap twice a years. So when you compare year over year we are almost 14% in voice ARPU terms, voice ARPU terms down year over year because of this regulatory change.

When you look at the outgoing ARPU, we have (inaudible) a lower drop than the total -- a total drop is basically 3.6 in the first half and 4.8 in the second quarter. And here we have different effects. One has to do with the nature of the promotions that we use in the second quarter, vis-a-vis the second quarter of last year. As you remember, I think we explained in the last conference call, increased (inaudible) the campaign, there was much more focus on churn, on improving churn which basically we give in to the customer that signed to the promotion one week free of on-net traffic at the end of each month.

And the number of months (inaudible) depends on the number of years they have been with us with mobiles. So we have a significant base of clients with four, five, or six years of age with us to put it in some way. We have a lot of traffic, a significant part of traffic that is implied in a promotion. That's why you see also an improvement in minutes of use and some decrease in the average rate per minute. So this has to do with the promotion and not with the market.

Second, we launched in the second quarter of last year several pricing schemes that basically were reducing price in order to improve also churn. This impacted on ARPU in the rest of 2007 and is impacting on this year since these (inaudible) are doing very well in terms of net adds.

The third is a change in use patterns and it has to do with the change in the operating environment, meaning that we are seeing that some segments of customers, especially what we call consumer market or residential market, they're moving the shift in traffic from more expensive traffic to less expensive. For example, shifting from mobile to SMS, we're doing very well in SMS and also this shift in traffic mobile to mobile to fixed to fixed.

In fact, if you look at our numbers, in voice traffic revenues in the fixed business you will see that our evolution is only a 1% decrease which is much better than before and obviously which is unexpected. So here you have a factor that is related with the overall market condition. Basically overall the outgoing traffic of clients in Spain grew 3.6% in the first half and there are some factors that are related with the market level.

I mentioned some factors that are related with previous decisions that were focused on improving churn. Churn is very stable and this is part of our core strategy. We will try to protect our customer base. We may suffer a little bit on other rate per minute or on ARPU, but we believe that we have to maintain our customer base and then we will elaborate when the markets and the products are the right ones.

Taking your question about Latin America and inflation picking up in the region -- first it is not homogeneous, there are some countries that are more exposed to that fact than others. But globally speaking, on the wireless side, as we have more commercial flexibility in terms of moving targets and playing with the different campaigns, we have been able to transfer part of that effect.

Also the cost structure of -- the wireless business of our companies (inaudible) exposed in terms to inflation movements. And therefore we have also been able to be more agile in terms of restructuring, in terms of producing that exposure. So basically speaking on the wireless side we think that we have been able and we should be able -- we will be able to keep going on that trend and absorb and increase efficiency in spite of inflation.

On the wireline side there are different environments and we have been able to increase margins in Brazil on the wireline side or in Argentina in spite of the fact that in Argentina we have a significant pickup in inflation. The only program that we have in Argentina that is roughly 50% of our revenue has been with the [tourists] frozen for the last six years. So we have been doing a significant effort of reducing the exposure to the tariff freeze in our products and that's why have been evolving to roughly 50% of revenues exposed.

And also, we have been running globally in all the wireline business a significant efficiency program. We have been reducing the labor force of the wireline business in Latin America of roughly 3,000 people in this first half of the year and we keep boosting efficiency through regional products. So, so far we have been able to absorb inflation and to increase margins in the second quarter and we feel that regionally speaking we should be able to manage the process.

Will Milner.

It's Will Milner, Arete Research. Firstly, just thinking about Spanish line loss. Of the 600,000 new homes that used to be built in Spain every year, do you have any idea what proportion ended up coming a new line for Telefonica? And then secondly in Latin America, your year-over-year organic EBITDA growth jumped from 12% in the first quarter to 20% in Q2, which I guess looks -- well, it's a great result, it doesn't look wholly sustainable.

Do you think and do you agree perhaps that some of the commercial activity has been held back and in the second quarter that would increase? And perhaps you could maybe talk about some of the promotions you've already launched in the some of the key Latin markets?

Regarding your question about new lines linked to new houses or new buildings, I have a figure which is slightly different but tried to explain that effect. What we have seen in the past -- in the past, for example, two years -- is like, depending on the quarter, 30% to 40% of the new lines that we were adding to our plan in terms of fixed lines were linked to new buildings, the rest were linked to existing buildings.

There are still many people in many units or families without fixed lines and basically are shouldering their needs with mobile for example, but they are joining the growth of fixed lines due to broadband maybe. But the figure that we do attract in the past is that 30% to 40% depending on the quarter of our gross adds in fixed lines were linked to new houses. That's basically the exposure that we may have in the future.

I'm taking your question about Latin America and growth in the second quarter. In terms of commercial activity the second quarter is always more intense than the first one because of the [modest] campaign which is the second most intensive commercial campaign of the year immediately after Christmas campaign. So yes, we have been having more commercial intensity, but in terms of the growth that we have been having in revenues, this is based on several factors.

First of all, the fact that we have been significantly increasing the average number of customers and, as a result, year on year the impact of the other number of customers is paying off and is reflected on the revenue side. Also because of the fact that we have been able to do that with stable ARPUs. And it's true that in the second quarter, because of the commercial intensity it has been ticking down a little bit, but the fact is that our (inaudible) around a year, having broadly stable on the wireless side.

And on the wireline side we have been able to contain line loss. We have also been able to expand broadband massively in the region and have been able to increase the ARPU on the broadband side. We have been able to bundle and to increase the bundle effect. And on top of that we have been able to combine all those effects with further efficiency. So I think that it is not a quarterly effect. We have commercial intensity because of that campaign. But globally speaking (inaudible) in terms of our revenue growth is pretty recurrent I would say. It's not a seasonal effect.

Yes, I think it points more that you have EBITDA growth guidance in Telefonica Latin America of 12%, 16% -- And as you say, the most heavily intensive commercial activity quarter, the second-quarter, you've done 20% organic growth. So EBITDA expansion in Latin America much better than you've expected across the full year? Should we be thinking 12% to 16% is actually too low?

It's too soon to say. (inaudible) the fact that during this quarter we have (inaudible) in Telemig and Telemig was according to the guidance calculation. So let's wait for the remaining part of the year and see how the (inaudible) effect is progressively diluting in importance in the next quarter. But yes, we are happy with the evolution, but it is too soon to say.

All right, with this, ladies and gentlemen, we have to bring this conference call to an end. We appreciate and thank you for being here with us and we hope you will be able to join us for the Q3. Thanks a lot and, for those of you who have been on holiday, may you enjoy them as much as we have enjoyed your company today. Thank you.

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