Telefonica SA (TEF) 2009 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Telefonica's January to June 2009 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session with instructions 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 Ms. 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 January-June 2009 results. I am Maria Garcia-Legaz, Head of Investor Relations. Before proceeding, let me mention that this document containing financial information that 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 uncertain 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 document 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 Investor Relations Team in Madrid by dialing the following telephone number, 34 91 482 8700.

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. Thanks for joining Telefonica's 2009 first half results conference call. Today with me I have Julio Linares, our Chief Operating Officer, Guillermo Ansaldo, the Head of Telefonica Espana, Jose Maria Alvarez-Pallete, the Head of Telefonica Latin America, and Matthew Key, Head of Telefonica Europe. During the Q&A session, you will have the opportunity to ask questions directly to any of them.

Telefonica has presented today a solid set of results, bringing forth our differentiated profile in the industry. A high diversification, our integrated business model, and our proven execution skills back our sound performance in a challenging economic environment.

We continue to deliver on management priorities for the year with the second quarter results showing similar underlying trends to those of the previous quarter. The strong growth captured in Latin America, the robust performance in Europe continue to push revenue up in organic terms, outstripping the lower contribution from Spain.

As embedded in our guidance, organic operating cash flow, year-on-year growth ramped up notably in the second quarter driven by our discipline in OpEx and CapEx management. As a result, we have delivered benchmark profitability levels. Solid operating results fully flow to the bottom line with underlying net income posting double-digit growth in the first half of the year.

Additionally, our balance sheet remains strong, driving our high financial flexibility. And let me stress that we are on track to meet our 2009 guidance. And our growing dividend policy is fully reaffirmed.

Please turn to slide number four for a quick review of group financial and operating performance. In the first half of the year, we continue to grow solidly in all major metrics in organic terms. Telefonica Latin America continues to be the main growth engine of the group, driving organic sales up more than 1% year on year despite notable drags from regulation and seasonality the second quarter of the year.

Operating income before D&A increased in organic terms by 3% and operating income by 4% on an annual basis, respectively. Strong cost containment in the current tight environment and higher efficiency from our scale allowed consolidated OIBDA margin to expand by close to one percentage point year on year in organic terms to 39.7%.

Please notice the negative contribution of Forex across the P&L, dragging between one to four percentage points from the underlying performance of revenues, OIBDA, and operating income, though improved FX in the second quarter of the year has reduced the negative impact recorded up to March. Operating cash flow generation in the first six months of the year achieving the EUR8 billion mark, growing nicely 12% year on year in organic terms, well ahead of revenue growth.

Overall, a solid performance on the back of our ability to maintain commercial momentum in slowing-down markets, capturing new customers, and extending their usage patterns to new services through bundled offers across markets. We ended June with close to 264 million accesses at the group level or 8% more than a year ago, with a strong push in mobile and good traction in mobile broadband services.

Turning to slide five, January through June 2009 net income topped EUR3.6 billion, posting an outstanding 11% underlying year-over-year growth. The reported figure was flat year on year due to the positive impacts derived from asset disposals, which were recorded in the first half of 2008.

Reported earnings per share reached EUR0.79 and continued to excel with an underlying year-on-year growth of 14%. Had we excluded the impact from purchase price allocation, EPS would've reached EUR0.86. And free cash flow per share totaled EUR0.78 in the first half of the year, recording a notable 7% annual growth.

Let me now quickly review our progress towards meeting our full-year guidance. Up to June, all metrics we have guided on are fully aligned with 2009 year-end targets. After adjustments for guidance calculation, growth in revenues, operating income before D&A, and operating cash flow were 1.7%, 3.2%, and 12.1%, respectively. CapEx up to June stood close to EUR3 billion. We maintain our target of CapEx below EUR7.5 billion for the whole year with a big part of the budget expected to be executed towards the end.

(Inaudible - technical difficulties) organic growth exceeding by more than ten percentage points the growth rate of sales at the group level. Trends up to June are similar to those recorded in the first quarter. Disciplined management of OpEx and CapEx allow to limit top line pressure and to post strong operating cash flow growth, both by Telefonica Latin America and Telefonica Europe, while maintaining flattish Telefonica Espana's strong cash generation. Group OIBDA margin continued to be backed by efficiencies underpinned by further market expansion in Latin America and Europe and Spain's robust margin.

Slide number eight, we show our steady focus to flexibly manage OpEx and CapEx in order to maximize cash flow generation without jeopardizing future growth. Group CapEx decreased 10% year on year in organic terms and excluding the licenses acquired by Vivo in the second quarter of '08. Most items showed reductions.

The high investments already made in past years across European markets drove down GSM CapEx, while lower commercial activity in the traditional fixed-line business also led to reduced CapEx. However, we continue to focus on capturing the broadband growth opportunities, both in fixed and mobile. As a result, CapEx supportive to these projects was up year on year, amounting to 28% of the total CapEx in the first half.

We are heavily pushing the deployment of 3G with 3G CapEx increasing 50% versus last year's figure. We do retain flexibility to manage CapEx. As of June, CapEx committed is roughly 50% of the annual target. We do also keep our flexibility in terms of cost, as shown by the 6% year-on-year drop in commercial costs driven by lower handset subsidies, advertising and commission costs in very competitive markets.

Interconnection costs are also going down, driven by MTR cuts across regions. The range of manageable OpEx partially offset high operating costs mainly in Latam derived from fast customer growth, high inflation in some countries, and the negative impact from the appreciation of the US dollar relative to local currencies.

Let's now review the performance in Spain, where we continue to focus on sustaining our reigning leadership in the market and maximizing operating cash flow generation -- and we are delivering. Operating cash flow reached close to EUR4.1 billion in the first half, remaining almost flat year on year on a comparable basis despite the 6.3% drop in revenues. Underlying trends were stable overall compared to the previous quarter.

[Reduces] that the second derivative for year-on-year comparable revenues is positive for both wireline and wireless businesses. Top-line deterioration slowed down in the second quarter. It's too soon to say this trend will continue. But despite the current macro conditions, we're already seeing consumer and business confidence as well as other consumer-related indicators starting to recover. On the other hand, an efficient management of OpEx and CapEx is allowing to sustain robust margins and to reduce CapEx without jeopardizing growing businesses' prospects.

Wireline margins are down just 0.4 percentage points on a comparable basis to stay at 47.3%, while wireless margin went down 0.5 percentage points to 43.9%. Going now to the operating metrics in slide number ten, in the second quarter of the year, we recorded sequential improvements in most businesses. Broadband operations are posting a solid growth with mobile broadband making up for lower wireline growth.

Wireless data flat rates exceeded 1.2 million or over two times those of June 2008, and 3G devices surpassed [7.5 million] or 1.5 times the figure of June 2008. This performance shows not only the Company's strategies bearing fruit but also on customers' willingness to get new services.

Wireline broadband, despite lower net adds, we are sustaining our market leadership with an estimated 56% market share. Moreover, effective retail broadband ARPUs performance was slightly better in the quarter, showing 6.6% year-on-year decline after June, compared with a 7.2% drop in the first quarter. In pay TV, we did also record add improvement versus the first quarter as we were back to positive net adds in the second quarter, where we maintained our market share.

The wireless business is also improving, as we have led the market growth with close to 101,000 net adds in the quarter, versus less than 10,000 net adds in the first quarter, driven by increased commercial efforts and churn remaining stable. This performance is even more impressive in the contract segment, where our share of net adds in Q2 of 2009 was close to 40%.

In mobile number portability, we also posted positive results in the contract segment in the quarter versus the negative one last quarter. Traffic and ARPU declines despite being slightly more negative than in the previous quarter due to seasonal effects, showed a significant improvement compared with the performance recorded between Q4 of '08 and Q1 of '09. Retail fixed line losses also showed a containment versus the previous quarter, and 55% of them were compensated by a net increase in wholesale, which generates revenue for the Company.

Let's now turn to slide number 11 to see the main drivers behind revenue performance, which is showing a similar trend to previous quarters. On the positive side, IT and data wireline services continue to post very healthy growth, both in the quarter and in the first half of 2009. Wireless data connectivity revenues are growing even faster in the second quarter, almost 57% year on year. Also, it is worth to mention that the stabilization of year-on-year decline of total wireless revenues.

On the down side, revenues related with customer consumption continue to go down due to the lower usage patterns across businesses, though excluding the negative impact from the Easter holiday, the performance in Q2 would be pretty similar to the one recorded in the previous quarter. (inaudible) revenue wireline was mainly explained by the 20% cut in ULL prices, reduction in the total access base. Wireless incoming revenues derived from roaming in and interconnection were impacted by lower usage and a significant run from mobile termination rate cuts.

With our core strategy, we remain focused on revenue share. Despite customers becoming more price sensitive and (inaudible), we are maintaining our revenue share leadership in the market, both in wireline and wireless.

Finishing with the review of Telefonica Espana on slide number 12, let me update you on the numbers of efficiency we shared with you last quarter. Total OpEx plus CapEx over revenues has gone down by 1.6 percentage points over the last 12 months, showing an improvement of 0.3 percentage points versus the figure reported in March of '09.

In the first half, CapEx went down 30% year on year, explained mainly by the same drivers as in the first quarter; lower investments in GSM, deployment of traditional loops that has mostly halted in line with construction sector, and broadband demand that remains lower versus 2008 with subsequent related investments being adjusted. And fiber rollout, it has also been limited due to the current economic environment.

This, together with per-unit cost reductions benefiting from good purchasing power and vendors adjusting prices to current economic conditions and other initiatives aimed at increasing CapEx efficiency are helping us to deliver CapEx cuts, while keeping investing in growth businesses, such as mobile broadband.

On the OpEx side, reductions came to 5.5% year on year on a comparable basis due to commercial costs down almost 8%, expenses on mobile handsets dropping by 17%, and interconnection down declining 12%. Finally, personnel expenses are also contributing to the decrease of costs on last year's headcount reduction together with low CPI levels.

In slide number 13, we start reviewing the robust performance of our Latin American businesses, where we continue to balance a growth in profitability. Our total customer base in the region expanded roughly across markets, reaching 161 million accesses in June of 2009.

Revenues grew a healthy 7% in organic terms in the January through June period, driven by the increase in mobile service revenue and internet and pay TV sales. OIBDA growth remains solid with a 14% year-over-year growth rate in organic terms in line with the previous quarter.

Our selective commercial approach focused on quality and efforts to enhance efficiency paved the way for OIBDA margin expansion both year on year and quarter on quarter to 38.9%. Sustained advances in margin across mobile businesses more than offset the impact of a different revenue mix in wireline.

Mobile OIBDA margin expanded by 670 basis points year on year in the first half of 2009. Improved profitability and lower CapEx drove the significant 32% organic year-on-year increase in operating cash flow, which exceeded the EUR3 billion mark in the first half of 2009.

Slide 14 outlines the evolution of our Latin American wireless businesses. Our customer base rose 11% year on year in a region where penetration rate continues to expand at a healthy rate to 85%, ten percentage points more than in June 2008. Q2 '09 net adds increased 7% versus the previous quarter with 29% of the net adds in contract, ten percentage points up year on year.

This reflects our selective customer acquisition policy, which is focused on revenue share rather than in accesses share. Solid net adds were driven by the sustained year-on-year churn reduction on the back of the higher penetration of GSM services that already reaches 85% of our customer base.

The positive customer growth drove traffic up 9.3% in the first half, which together with the outstanding evolution of mobile data usage, allowed outgoing ARPU to remain pretty flattish versus last year in organic terms. Blended organic ARPU dropped 2.9%, impacted by lower mobile termination rates. Mobile service revenues grew more than 14% organically, underpinned by the remarkable 37% year-on-year increase in mobile data revenues, which already account for 17% of service revenues. The mobile data growth opportunity will be further exploited along the year with a push in our 3G networks and mobile broadband offerings.

Let me now share with you how we are advancing in the transformation of the Latin American wireline operations. We continue to record an outstanding growth in broadband accesses, leveraging our bundling strategy. During the first half, broadband net adds reached 285,000 to reach over 6.3 million customers. Bundles already represent 51% of our broadband connections and 61% of our fixed line accesses. Moreover, bundles have allowed to limit the decline of our fixed line accesses in the region.

Pay TV customers went up by more than 24% annually to achieve 1.7 million at the end of June. As a result, new revenue sources, like internet and pay TV, increased their contribution to total revenues with an average rate of 21% in the region, up 2.4 percentage points on last year's figure.

Then to conclude with Latin America, let me highlight the performance in our key markets. Mexico's second quarter commercial results were strong on the back of the new initiatives launched. Gross adds in the second quarter increased 10% compared with Q1 '09, and churn went down sequentially 0.2 percentage points. More importantly, service revenue growth posted an acceleration versus Q1 with an increase of 240 basis points to over 19% year on year. But OIBDA margin expansion continued to reach close to 34% in the second quarter, while operating cash flow more than quadrupled last year's figure.

In Brazil, Vivo continued to outperform in a very competitive market. After adding 1.2 million net adds in the quarter, outgoing ARPU performed better than in Q1 of '09 with flattish ARPU quarter on quarter in local currency. In addition, OIBDA margin expanded by four percentage points in organic terms annually to reach a healthy 30%.

Telesp's performance was weak, impacted by service quality and network issues in a market where competition is stiff. Nevertheless, we have already executed an initial plan to enhance network operations. And in the coming months, we will be anticipating CapEx to enhance our network and to improve service quality.

Peru recorded a good growth across businesses with a notable expansion in margins. And finally, results in Argentina and Venezuela continue to be outstanding on the back of strong customer growth, increased usage, and lower subsidies.

Turning to slide 17, Telefonica Europe has maintained its market momentum and delivered a strong financial performance in the first six months of the year against a challenging economic backdrop reflected in ongoing optimization of usage of traditional voice and data, as well as rollover roaming activity overall.

Total number of customers reached close to 48 million at the end of June '09 and made 8.3% year-on-year growth. I would highlight that mobile contract customers made up 85% of total mobile net additions in the first half of the year. Revenue continues to show a healthy foreign exchange growth of 2.2% in the first half. It is worth highlighting non-SMS mobile data performance was an outstanding 34% year-on-year growth in constant currency.

On the other side, mobile termination rates dragged 0.8 percentage points to growth up [to here]. Further impacts will come from MTR reductions in the UK from the third quarter. There is clear evidence that the rebalancing of our European business portfolio is continuing to be afoot, especially with the performance of Telefonica O2 Germany, which has been the main contributor to our OIBDA and operating cash flow growth in the year today.

Operating cash flow saw a significant increase of 17% in organic terms in the first six months of the year, leveraging P&L whilst driving long-term value by satisfying customer demand. In the UK, we continued outperforming competitors in a flat-to-declining mobile market by ongoing record low levels of churn in contract and best ever customer satisfaction scores. The recently awarded best network operator for the second year in a row is again confirming that strategic consistency is key for Telefonica O2 UK.

Mobile contract segment was again driving customer growth in the second quarter with a year-on-year increase of 73% in net adds. Now 44% of total customers are contract customers. Simplicity, mobile broadband high-end devices, and new customer propositions around families are sustaining growth in this segment.

As anticipated, Telefonica O2 UK saw a slowdown in the year-on-year growth with ongoing voice and traditional SMS usage optimization being partially compensated on a full customer basis by strong growth in data fueled by mobile broadband and the usage of smartphones.

As a result of the increased commercial activity and the ongoing efficiencies in managing noncommercial cost, OIBDA margin remains stable year on year at 25% for the first half of 2009. Operating cash flow growth in the first six months of the year was strong at 20% year on year in local currency, reflecting the above-mentioned profitability of the business, coupled with 18% year-on-year reduction in CapEx.

Turning to slide 19, Telefonica O2 Germany's commercial and financial performance in the second quarter continued to gain traction. New and simpler core product portfolio, combined with further churn reduction quarter on quarter, pushed total net adds to 427,000 in the second quarter compared to 307,000 in the January through March period with a steady increase in contract net adds.

[O2 o] was launched last May, changing the rules in the mobile voice market, showing an initial good level of acceptance. And Fonic has as of today achieved the 1 million customers milestone.

From a financial standpoint, we have delivered a significant improvement versus our competitors. Excluding the drag from MTRs since April, year-on-year mobile service revenue growth improved sequentially to 1.2% in Q2. Moreover, data revenues increased the positive contribution to mobile service revenue growth, ramping up in the second quarter to over 8%, underpinned by our mobile broadband offering, which is backed by the fastest UMTS network of the market.

Enhanced commercial efficiencies and higher proportion of gross adds through direct channels are paying off in terms of profitability with a good acceleration in OIBDA growth in the second quarter and sustained margin expansion to close to 26%. As a result, operating cash flow is growing nicely with a positive contribution to group figures, reversing last year's trend.

On slide 20, we show that our financial profile remains strong. Our net financial debt stood at two times OIBDA at the end of the first half or at 2.1 times when adding our cash commitment, just slightly above the first quarter's level. This has been mainly due to the appreciation of several currencies, increasing the value of our debt by [EUR1 million] due to translation effects. Please also note that we paid our last dividend in May.

This quarter, we have seen--we have been able to strengthen our debt maturity profile while reducing our financial expenses. During the second quarter, we have issued close to EUR3.5 billion in bonds with more than seven years average maturity in order to pre-finance debt maturing in 2009 and 2010. This has helped us to extend again our debt average life from 5.9 years in December '08 to 6.6 years as of June 30th.

To be highlighted also, our undrawn bank credit lines have increased more than EUR800 million from the EUR7.4 billion total in December '08 to EUR 8.2 billion total as of June 30th. Our total financial expenses were close to EUR1.3 billion, equivalent to 5.7% of our average total debt of EUR45.1 billion without annualizing the foreign exchange results. This is an improvement versus the first quarter when interest expense reached 5.95% of our total debt.

To recap, we have delivered another set of strong results, posting solid organic growth rates as we do leverage our diversification by geographies and businesses. In the current environment, the performance recorded in the second quarter shows similar underlying trends sequentially.

We continue to post best-in-class profitability levels with the strong acceleration in organic cash flow generation, double-digit growth in underlying net income. We maintain a robust balance sheet. And finally, we fully reiterate our 2009 guidance and confirm our growing dividend policy.

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

(Operator Instructions)

The first question comes from Tim Boddy from Goldman Sachs. Please go ahead.

Yes, thanks for taking my question. You haven't reiterated your 2010 guidance in the presentation. Could you comment on that? And then my second question would really just be about the trends you're seeing within Spain. Obviously, you've mentioned sequential stability. At the same time, there's obviously been quite a change in the dynamics of the market with more focus on prepaid and more success of unbundlers.

Can you hear me? Yes, I guess so. So if you could comment on whether those changes you see as being cyclical or structural, that would be helpful. Thank you.

Could you please repeat your question because there was (inaudible) with the line, and we couldn't listen properly. Thank you.

Okay. So there were two questions. The first one is really around your guidance for 2010, which you haven't reiterated in the presentation if you could comment on that. And then secondly, in Spain, the increased focus, for example, on prepaid in the mobile market or the success of the unbundlers, are these structural changes in the market where people have become more price sensitive? Or, do you think these are cyclical factors that can improve with the economy at some point? Thank you.

This is Santiago. Let me take the guidance question first. Well, the right time to think medium to long term will probably be when we meet for the Investor Day in early October. So far, we thought it'd be a good idea to reiterate the year we are talking about, which is 2009. And we have fully confirmed both our numbers guidance for this year and the dividend policy, and the growing dividend policy.

Just to update on the impressions, what I can tell you is that the last time we spoke, we have put a stress case that has received not insignificant attention by the analyst community. All of it has been mainly critical as to how did we get there. And when we produced it, we said that two things were behind it. One was the continuation of a rather severe economic downturn and, second, the currency effect.

I think it's fair to say that despite the fact that we're only one semester down the four semesters remaining through the end of 2010, the economy is no better than it was, although there are signs that it is improving or stabilizing, and that currencies, especially those that interest most to us, like the real in the Brazil and the sterling, have improved to our benefit.

So I think we could say that looking into 2010, first, we will update you in October. And second, beyond the fact that one quarter down and three more quarters of the period into 2010 still have to go, we think that the economy is doing no better and that some currencies are doing slightly better than before.

This Guillermo Ansaldo. Regarding your question on Spain, we believe these are cyclical trends. We are seeing, as we comment before, more price sensitivity in some customers, some customers seeking predictability in their expenditure, and some others looking for simplicity. On the other side, on the large corporates and the mid corporates are more willing to outsource. So that's some things that are positive to us and some things that we need to adapt our offer.

So far, we're doing fine. We're defending our leadership. And again, we do believe that these are cyclical, typical cyclical change in behaviors that will revert one day when the economy reverts.

Okay. Thanks.

Next question, please?

The next question comes from Mitchell Collett from Cazenove. Please go ahead.

Hello. Two questions, please -- firstly, I'd just like to know what the shape of the quarter was like in Spain. For example, was June better than May, which I think there's been some commentary that May was similar to April, which had in turn been better than March? And then secondly, I just wondered if you could talk through the issues in Colombia. I think there was a pick up in bad debt this quarter. Thanks.

Hi. This is Guillermo Ansaldo again. Regarding the shape of the quarter, when we looked, some of the variables, we tend to look very closely at the traffic revenues in mobile, for example, that gives a good indicator of the health of the consumption. And when you take away the seasonality effects, meaning in April the Easter effect and also the number of labor days or weekends and so on, the trend is pretty stable between April without these effects, June, and May. July is almost the same again.

What we are seeing that is improving is the commercial activity in terms of number of new customer adds in the mobile business, for example. And July is a pretty strong month. So across the quarter is pretty stable, July a little bit better on commercial activity.

Taking your question on Colombia, on the wireline side, we have suffered our line drop of 7% and a significant traffic drop, jointly with decreasing growth on ARPU. But we have been increasing our growth on access by 45%. That has drove us to have a decrease in revenues of 3.4% on the wireline side. Mainly reasons behind the poor performance of the level are high level of down-selling from our customer base, high cannibalization for mobile. We have also had some impact of bad debt. Let me stress that this a highly competitive market.

Actions that we are taking to reverse those trends -- first, we are upgrading our broadband offer. We keep pushing on the bundles and will be more aggressive on that side. We are repositioning our offer. And for sure, we are reviewing our cost structure. That's on the wireline side.

On the wireless side, the [OIBDA] performance is very weak with a decrease of 28.7%. But we have a significant nonrecurring impact, namely on a provision on (inaudible) that went down and the impact of some of the process -- the legal process that we are suing and that we are having against [ETV]. Were we to correct those impacts, OIBDA margin has been significantly improved.

There are also some positive trends on the wireless side in terms of we have been able to reverse the trend of decreasing on the contract number of customers. And we have been slightly gaining customers on the contract side. And that's going to be paying off in future quarters. So still mixed signs and improving on the wireless side in Colombia.

Okay. Thanks.

Next question, please?

The next question comes from Terry Sinclair from Citigroup. Please go ahead.

Yes, thank you. Two questions from me -- first of all, if I can go back to the 2010 guidance, which you've abandoned, are you also uncomfortable with the stress test? I mean, you've mentioned that the market was uncomfortable with the black box of assumptions behind it. But are you actually uncomfortable with the example, the 2.1 EPS that you've put out there as the stress test for 2010?

Secondly, I wonder if we could just dig a bit deeper into the CapEx, the 10% for CapEx year on year. To what extent is that a seasonal adjustment into the second half? To what extent is that an adjustment into 2010? And to what extent have you actually reduced CapEx expectations since the beginning of the year?

Terry, this is Santiago. Let me elaborate a little bit more on the 2010 numbers. We do reconfirm that the stress test 2.1 EPS number is still below us. And we think it's still doable, despite the challenging conditions that we will be above that number. But because things have not improved from the economic front, although marginally, as I said, they have on the currency front, we thought it'd be a good time to talk at length about all those things when we meet with a lot of time ahead of us.

Let me also say that, as you're probably aware, we've been trying to put the case forward to investors and with limited credibility. And we think that the purpose of guidance is to anchor expectations for the future and have not particularly been successful at that. And so, we've decided to target down, but it is not an abandonment of the stress case. Let me stress that clearly.

This is Julio Linares. Regarding your second question about our CapEx, in the first half of the year, our investment slowdown mainly because last year we had very significant invested money in 2G. And this year, it was not necessarily a big one as the last year. Also, because the commercial activity in the fixed business was smaller than last year. And in addition to that, we were able to continue doing a significant effort in all the cross opportunities we see in front of us, like mobile broadband, ADSL, basically TV.

In the second half of the year, as we see our projects today, the CapEx is going to be higher than in the first half of the year. And because of that, we will be very close to the guidance that we provided initially for the whole year.

Regarding CapEx for next year and the following year, we will provide you more information in our conference in October.

That's very helpful, both answers very helpful. Thank you very much, gentlemen.

Next question, please?

The next question comes from Brian Rusling from Cazenove. Please go ahead.

I was just hoping that, Santiago, you could update us on remittance of cash from Latam to Spain. And where are we in terms of cash balances in Venezuela at the moment?

Sure, Brian. We've bought from the region slightly more than EUR500 million if my memory doesn't fail me, not from Venezuela, where as you know we have not been denied. But we have been delayed in getting the cash out. We have filed -- we had filed in 2008 for an additional dividend repatriation that is still pending. We continue to do our best efforts and continue to keep the slot open. To put it in the upward light terms, a drop in the case is not an option for us. We don't think that's the right thing to do. But we have no news to report.

Elsewhere in the region, there is no particular issue, other than those you are already familiar of being watchful with taxes and not repatriating more cash than absolutely needed if there is any friction or cost on those.

Next question, please?

The next question comes from David Wright from Deutsche Bank. Please go ahead.

Yes, good afternoon. Just on Spain, I think Vodafone has said they're now pushing quite hard on the wireline side and taking share. I know you guys announced a DSL price cut to try and control some of the churn. What is the next step to try and arrest this line loss that you have? And also, are your prices trending down? Are you purposefully lowering prices in mobile as well?

And maybe a question for Matthew as well on the UK business just about iPhone exclusivity if we could get an update of whether we still have good visibility on both the 2G and 3G iPhones and to what extent that can be sustained with the exclusive access to the Palm Pre. Thank you.

Well, this is Guillermo. Let me try to answer your question in Spain. Regarding competition in wireline in Vodafone, for example, we had a better quarter than the first one with more net gain market share. We acknowledge that Vodafone is doing very well in this market. It's a new entrant here. And we have continued adapting our offer, adding some features on the entry level, but also improving our quality on the top line.

ARPU in broadband--in our case, affected ARPU is down 6.6% I believe, which is almost the same number we have in the first quarter. So we are not in a different trend in terms of prices.

Regarding the product that you mentioned -- and it has some coverage in the press -- this is a specific product for specific needs and is below the 0.5% of our plan. So it's roughly 30,000 clients. It's a very, very specific niche product. So we are not into a price war. We continue with the approach of having an offer for each type of segment and providing the best quality as possible.

Regarding line loss, as you've seen, it has been very stable across the year, almost the same number in the second quarter as in the first quarter. There, roughly 50%, 55% of those losses are compensated by wholesale lines. And this is more due to regulatory changes. And the rest has to do with a market that is not growing, as you know, and in some cases some competition from direct accesses, like cable operators.

Regarding price in mobile, if you see our ARPU, our voice ARPU, outgoing voice ARPU is pretty stable. So we are not into a price war. I think all the operators, what we're trying to do is to find elasticity in our customer base. That's the main value lever in order to promote revenues. Also, we acknowledge that we have some customers looking for predictability, as I mentioned before.

So we are, all the operators, trying to foster these bundles with minutes so we can get some predictability on the bills and also some simplicity in some cases with prepaid or SIM only. But again, our other rate per minute is pretty stable. And our voice outgoing ARPU is pretty stable. As you know, [we've coming], we suffer with MTR cuts.

So, Guillermo, can I just double check on the fixed side? I mean, for a long time, you've been sustaining a premium share of additions with superior service, superior products in fixed. But that does seem to have significantly deteriorated over the last, say, three to four quarters. Are we still not at a stage where we're looking to lower prices? Are you still pursuing a strategy of quality of service rather than lowering prices?

Yes, let me clarify that. Obviously, what's going on in Spain in the fixed broadband side, the market is not growing. So basically, we are taking share of a smaller market. That's due to two things in my opinion. One is the overall economic environment, which is tougher, and also the surge of the mobile broadband, which is exploding and from which we are taking a very good share of that market. As an integrated operator, that gain is a positive gain.

One thing that we're tracking very closely is our churn. Our churn is pretty stable, very stable in fixed broadband. So we are not much concerned -- we are concerned that the market is not growing that much. That means that we have to continue adapting our offer with promotions, like the one we have right now in the summer, where you can buy a 6-megabit Duo for EUR19.90 for one year. So it's a specific promotional offer for new customers. But we will continue along those lines. And we're attracting our overall ARPU just not to deteriorate our profitability.

That's great, Guillermo. And, Matthew?

Yes, hi, David. Let me pick up your smart phone question. So just let me remind for a start that our exclusivity on the iPhone is Spain, UK, and Ireland. And we range in Czech as well. I always answer the same on the iPhone, which is we've got a multi-year exclusive deal in each of those countries with Apple. They're extremely happy with us. And we're extremely happy with them. To talk about specific terms, we've never gone towards and nor have Apple.

The other thing I would say--in the UK, we recognize that our net connections in the quarter on postpay is also significantly driven by our record ever--lowest ever churn again.

On the Palm Pre, yes, you're right. We signed an exclusive on that as well, which we're really pleased about, across all of our territories in Europe again. We just think it gives a fantastic customer experience. We'll sell it before Christmas. And fundamentally for us, we'll give customers the choice of the best devices on the market. So if they come into an O2 store or a Movistar store in Spain, they can choose between the iPhone or the Palm Pre.

Do you expect to be challenged on the exclusivity of both handsets from a competitive perspective?

I think virtually every operator in the world would like to have both the iPhone and the Palm Pre. The good news is that we are the only ones that have got both devices at this moment.

Okay. Thanks, guys.

Next question, please?

The next question comes from James Ratzer from New Street Research. Please go ahead.

Yes, two questions please -- first one possible back to Matthew again. I was wondering if you could give us some indication on when you plan to put through the termination rate cut in the UK. I understand you have a bit of discretion about when you implement that. So if you could give us the timing on that and then impact on revenues from that, that would be much appreciated.

And second question is just regarding EBITDA performance in Brazil. I've been led to believe in the past that EBITDA trends might improve as we've gone through peak losses from rolling out some of your TV products. It looks at the moment that that's not happening. So I wonder if you could give us an indication of how EBITDA will trend from here on. Thank you.

Yes, hi, James. It's Matthew. Let me pick up your question on UK termination rates. We'll put it through during Q3. And as a very rough guide, it will deflate our half two revenue by about 4%, which will be about 2% full year impact for the UK. Recognize also that the flip side in terms of our cost coming down from our competitors also taking down the termination rates, which will happen in second half as well.

Taking the question on the OIBDA margin on the -- Telesp, on the wireline business in Brazil, let me stress the fact that during this first half of the year, we have suffered several impacts in terms of quality impacts, IP network interruptions, and also we have had some incidents on some data centers and some hackers' attacks. So we have been impacted by several processes that have been impacting both our revenues in terms of slowing down some commercial offers and also our cost in terms of getting back some revenues to customers and also some fines from (inaudible).

Excluding all the nonrecurring items, we do see some stabilization on the margins. But it is too soon to say how much time are we going to be taking to reverse the trend during this year because remember that also Anatel imposed restriction to sell broadband in Sao Paolo. Until those problems are fixed, we submitted the proposal to Anatel a week ago. And we are waiting for their response.

So let me remind you that some unexpected events happened at the end of last year and the beginning of that. We are reversing those trends. We do have positive expectation on the recent trends, both in claims from customers and in terms of five claiming Anatel in the Consumers' Defense Association. So we are working on that, and we keep being committed on reversing the situation.

Thank you. And could I just ask you a quick follow-up question on the previous answer you mentioned in Spain that you were beginning to see a bit of impact from mobile broadband on the fixed business. I was wondering could you quantify that, please?

Let me -- I think that we did some analysis a few months ago. And basically, we are trying to identify which cases are cannibalizations and which cases are complementary. And basically, two-thirds were complementary cases, meaning customers that are getting both. In the other two-thirds are split in two, one of customers that are dropping the fixed broadband and the other one fixed of the total are customers that instead of buying fixed broadband in our opinion are buying the mobile one. So it's two-thirds complementary and one-third you can say not complementary.

Our overall numbers show that this positive value creation for integrated operator [customer]. And we are combining offers in all segments in order to get customers to buy and test and use both products, which in our view are for different uses. And so they are complementary.

Thank you very much indeed.

Next question, please?

The next question comes from Robin Bienenstock from Sanford Bernstein. Please go ahead.

Yes, thanks very much. Two questions -- I guess first question is really --at what point do you think that prudence is going to require you to take write downs on Venezuela, where the growth is really driven by inflation and supported by an artificially pegged currency?

And the second question is -- with TIM Brasil [oil] being much more aggressive, can you expect to see mobile revenues to revive? Or should we expect the same pace of slowdown in revenue growth or indeed an accelerated slowdown in revenue growth going forward in your Brazilian mobile assets?

[Robin] this is Santiago, let me take the write down on Venezuelan assets questions. We know that write downs must be taken for one of two reasons or maybe a combination. One is that the business is not performing well. And so its future value is lower than its accounted book value. This is by far not the case in Venezuela, where our business is performing wonderfully, where growth rates are unheard of elsewhere in our regions and probably in many, many other places.

So the second reason that might apply is in realignment of the exchange rate, as you've rightly mentioned. To the extent that we continue to be able to show that repatriation is possible, this is the one question that everyone has in mind. We see no reason, nor do our accountants or auditors, to change our view or certainly not to take a write down. It's easy to make the math of what the impact, overall impact, would be of any currency realignment. But we would not be certain willing or forced to do so unless there is a change in the accounting regime of the country or we have clear indications by the local authorities that the currency might or is going to be realigned.

Until that happens, we see no reason, nor do our auditors to change that significantly. And what we have been doing so far is warn the investment community that, as you very rightly point out, the sustainability and very long term of the exchange rate is not an easy thing to hold.

And with regard to mobile in Brazil?

Yes, taking the question on Vivo, let me remind you that Vivo year on year has been increasing its customer base by roughly 16%. I think, the second quarter, we have been accelerating our commercial effort, and we have been able to capture more than 1.2 million customers.

The share of [Medata] is close to 20%. Our market share is pretty stable above 29%. Churn rate is slightly increased but pretty stable at 2.7%. Outgoing ARPU has increased in the second quarter by 5.9%, revenues up 8%, service revenue close to 10%. And OIBDA margin is 30% in a very, very competitive market with a significant competitive pressure, namely in Sao Paolo, so basically a strong quarter, a strong first half of the year, very sound commercial positioning, very highly focused on revenue market share and being leader in efficiency and profitability.

We do recognize it's a highly competitive market. But we also recognize that we have a significant challenge and a significant opportunity on data revenues that are deemed to be significantly expanded in Brazil, so not many changes, I mean, solid performance, very high level of commercial activity. And Vivo is serving the best quality of network and the best offer. That doesn't mean that we don't need to update our offer. And we are doing that. But so far, it has been a good first half of the year.

You didn't really answer my question, though.

Excuse me?

You didn't really answer my question, though, which was should I expect revenue slowdown to continue as this market gets more competitive?

It's very tough to answer that question today. It's depending--limited to commercial campaigns that are the most important in Vivo. One is (inaudible) campaign, already happened. And on that front, we have not been decelerating that much. And in fact, we have been increasing our share of the market. And Christmas campaign is too soon to say. So, I cannot really answer. It is too soon to say.

So the Anatel numbers that said that you had less share were wrong?

Excuse me?

Anatel reported that your share was decreasing.

Our share is decreasing? No, it's pretty stable. We have 29.3% of the market share.

That's not what Anatel said. But that's okay. Thanks.

Thank you.

Next question, please?

Your next question comes from Luis Prota. Please go ahead.

Yes, hello. I have two questions, please. First on domestic mobile, the regulator has just approved the (inaudible) for termination rates to get to EUR0.04 by April 2012. And that is going to provide further room for the smaller players to cut retail prices further and ultimately to reduce the on-net benefit for the last-year players. So the question really is whether you see a faster migration to flat rates and bundles strategy to face this. And how could this affect ARPUs and returns going forward?

And the second question is on UK termination rates, a kind of clarification. I might have got it wrong. But I think I understood that the impact from termination rates in the second half is going to be four percentage points. With a 10% cut in termination rates this could imply that 40% of the revenues are incoming revenues, which looks too high to me. So if you could clarify that, it would be great.

Hi, Luis. This is Guillermo. Regarding the guide path that was issued yesterday by the Spanish regulator, well, you know this is converging to--from EUR0.07 right now to EUR0.04 in October '11. This is a little bit worse than the path that I was expecting, but not much. One thing to note also is that the difference between the guide path that the major operator has and the [fourth] operators is reducing from 48 [symmetry, 88 symmetry] to 24. So we are all starting to converge.

And among the fourth operator, we are the one that is less dependent on MTR provided that we are integrated operator. So we get savings from the fixed business as well. So we do prefer to have higher [measure] than lower. But we are the one that are -- that is less exposed to this strength when you take into account also the fixed business.

And we will continue using the on-net strategy selectively because it's, as you well mentioned, it's [relevant] with the changes. But it still is very -- it's very strong. And we will continue working on, as I said before, to acknowledge the changing customer behavior and try to sustain our leadership.

Luis, hi. It's Matthew here. The cut we've actually got to take is 16% to GBP0.044 a minute by the end of the period. So I'm not sure -- I think you said you thought the cut was more like 40%, which isn't a number I recognize. The cut we think is 16% to GBP0.044.

So if I can follow up, so what's the percentage of (inaudible)?

It's something just below 20%.

Okay. Thank you.

Okay.

Next question, please?

The next question comes from Jesus Romero from Merrill Lynch. Please go ahead.

Hi. Thank you. I had a question for Guillermo regarding your key strategy. [Matino] is almost not growing. And the 1 million target you had for 2010 seems pretty far. So if you look at some of the other companies in the sector, some of them are doing really well with TV. Can you link that with your fiber rollout as well?

And then a question with respect to auctions in Mexico and some of the other countries--can you give us an update on what you expect to have to invest in the next 12 months and tie that up with the buyback so far? Thank you.

Thank you, (inaudible). This is Guillermo. We're going to be, as you have seen the numbers, we are roughly 600,000 customers. We are back in positive net adds this quarter. But that is small positive in that. So the market, the TV market is decreasing in Spain a little bit according to our estimations. So we are getting more share back since the crisis started. This is the market that is not behaving very well.

So despite the fact that 2010 is not yet tomorrow, it will be tough to get those numbers, as you mentioned. We will continue improving our market share. But we will depend a lot on how the overall market consumption conditions evolves.

Regarding fiber, we have, as we have mentioned in the past, we have adapted the rollout to the specific with the new market conditions. So we are still passing homes. We are connecting new customers. We are testing services. And we have focused a lot on larger clients, rather than smaller clients. So we are investing less than we previously thought when we--before the overall economic crisis. But we continue working to develop our product base and offering and improving quality. So we have adapted to the cycle.

Hi, Jesus. Taking your question on the spectrum, let's say that the most important process that we are monitoring right now is the Mexican one, in which we are interested in acquiring further spectrum. The rules of the process of the auction has been already been issued. But no major news on that in terms of timing. We don't know when that's going to happen. But we are ready to bid for that. And the price for that is always going to be compared to the alternative of investing or reinforcing or reintensifying our network. But yes, we are interested in spectrum in Mexico. But we don't have a clear picture of what the timing is.

Okay. Thank you. On the buyback, Santiago, perhaps?

Not much news to report on that front, Jesus. When we meet in October, we will update on the Company's shareholder remuneration policy. Let me just reemphasize once more that we continue to think of ourselves as a shareholder-oriented, shareholder-friendly company and that the rules that we try and apply are first to get the cash flow, once the cash flow's there to take its uses.

Our current policy is one of increasing dividends. You've just heard that cash flow has been online with expectations and with our plans for the first half of the year. But there is not much room to do much, especially now that debt has increased a little bit for all the right reasons, which is that currencies have appreciated relative to euro. And that has a beneficial effect on our P&L but has a small detrimental effect on the size of our debt. More on that and about the Company's financial policy on the Investor Day.

Okay. Thank you.

Next question, please?

The next question comes from David George from Credit Suisse. Please go ahead.

Yes, thank you. A couple of questions on Germany -- firstly, obviously, you're still getting some good margin trends in Germany. Last time, you hit 25%. I think you cautioned a bit on the sustainability of that. I wonder how you feel about the margin outlook this time going into the second half.

And secondly, on service revenues in Germany, obviously, you went negative in Q2. And there were some comments from one of your competitors pointing perhaps to a little bit more competition and macro pressures in recent months. So I wondered if we can still see positive revenue for the full year or if you think we'll remain negative in the second half.

So, Dave, hi. It's Matthew. When I got asked that question last time, I said there were four key drivers of profitability in Germany, which was largely off the foundation that we built last year -- Telefonica Deutschland, number one, with more throughput moving into profit, high proportion of direct sales versus indirect sales, lower reliance on T-Mobile as far as their roaming contract is concerned with them, and fourthly, the new propositions that we're starting to launch around things like O2 o.

We're obviously really pleased with our performance from a profitability and a commercial momentum perspective in Q2. What I would say not on margin percentage but in terms of OIBDA growth, recognize that in quarter four last year I think we delivered about a 40% year-on-year OIBDA growth. So to maintain the pace of OIBDA growth year on year is going to become extremely difficult.

On our negative revenue growth in the quarter, recognize there was significant mobile termination rate cut that impacted in the quarter. And once you back that out, actually, our underlying growth was better than Q1. So in Q1, we reported 0.6. In Q2, our underlying is 1.2. So actually, we're moving in a positive accelerating trend.

We won't take anymore or any additional termination rate cuts for the back end of the year and obviously hope to increase our commercial momentum off the back of our new propositions. But as whether we're going to be positive or negative, I wouldn't want to get drawn on that specifically.

Next question, please?

The next question comes from Mathieu Robilliard from Exane BNP Paribas. Please go ahead.

Yes, good afternoon. Two questions on Latin America, first with regard to Telesp -- as you mentioned earlier, the regulator is preventing you at this stage to sell broadband products to new customers. So how much of an impact do you think that could have on your top line trends in Q3?

And second and more general question on that, when we look at the CapEx at Telesp, you've been extremely efficient in past few years. But isn't there a case now that broadband is growing significantly and given what is happened in terms of quality that you may have to increase more than you thought and substantially more than you thought CapEx at Telesp?

And the second question has to do with trends in the quarter in Latin America. Maybe you could give us a sense if towards the back end of the quarter and July you've seen an improvement versus the beginning of the quarter. Thank you.

Well, thanks for the question. Taking the first one on the Anatel restriction of selling broadband in Sao Paolo, of course, we will have an impact because we have not -- we are not going to be able to add new customers until this restriction is over. And therefore, it will have an impact.

But most of the impact we have also been suffering because of these quality concerns because in fact we have been reducing commercial activity. And that is why the level of broadband connection has been slower because of those of quality issue. So we have been preparing the network. And we are preparing the network for when this restriction is over to be back on the market with strength. And therefore, I mean, it's hard to quantify. It's going to be highly dependent on how long this restriction is going to last.

They asked us for a plan. And they gave us 30 days. We present that in 20 days. And we are awaiting for the response to the auditor or [to our action]. So it's going to be directly linked to how long this restriction is going to last.

In terms of the CapEx, in fact, we have been investing significantly in Telesp in the last years. CapEx 2007 increased more than 11% compared with 2006. And 2008 increased by more than 20% compared with 2007 figures. So we have been investing significantly in Telesp in the last years. And in fact, most of the issues, most of the incidents that we have been having have been precisely being produced when we were upgrading our network.

So yes, we will be putting additional efforts on Telesp's networks. But the impact in terms of CapEx is not going to be highly significant because most of the effort was already been done. So you should not expect significant pickups in CapEx in Telesp.

And in terms of recent trends, as I was telling before in Brazil, it's too soon to say in the second quarter in Brazil, has been on the mobile side weaker than the first one. But in terms of commercial activity on the wireline side, from our -- from the market as a whole, from the sector as a whole has been pretty strong.

In the other parts of the region, it highly depends. I mean, Mexico has been weaker. And the other parts of the region have been stronger. So it's mixed. It's too soon to say what the trend is going to be for the second half of the year. And it is too soon in July to really tell you what the direction's going to take.

But in terms of macroeconomic trends, what we can tell you is that expectation for growth for 2010 has been revised upwards and that some of the trends from the macroeconomic point of view have been improving recurrently in the last months. So we do expect a better outlook for the region in the next quarters.

If I could just follow up on the Telesp CapEx, should we then expect CapEx levels to come down as you fix these issues? I'm talking as a percentage of revenue, obviously. Or do you think you still have to continue to invest to have good quality and see your broadband customer grow?

We'll keep investing. But again, you should not expect significant pickups with the levels that we have been having in the last year. What happened in Telesp was precisely when we were upgrading the network in the upper part of the network, in the most northern part of the network. So you should not expect CapEx over revenues to pickup significantly in the next years. Okay?

We have now time for one additional question.

Our last question comes from Ivon Leal from BBVA. Please go ahead.

Hello. Good afternoon, gentlemen. Just a couple of questions, first one in Spain for Guillermo--I was wondering, specifically in the month of June and July, you have seen your share of net adds in the mobile business and broadband business improving after I guess the interesting retention offers that you launched end of May.

And the second one is on CapEx in general terms. You've (inaudible) in year 2009. I was wondering if business conditions were to remain tough in 2010, do you think that 2009 CapEx levels are sustainable or really maintaining this CapEx level would affect mid-term growth?

Well, regarding June and July activity in terms of mobile, yes, we are improving in June. And July is a good month. And in broadband and fixed broadband, June was better than the previous two. And July is okay. Fixed broadband is not booming. It's--we're better than the first quarter. But we are not booming. The market overall is not growing. It's roughly 50% of the net gain that we have as a market on 2008.

So it's not a booming market. And the changes that we're seeing in our net gain share are positive. But they are small changes. And regarding wireless, it's a much more elastic market and depends a lot more on the offers that--and the effort that you put in the market and also on the offers and efforts that the competitors are also placing.

So we're having a good June and a good July. And this is a very competitive and dynamic market. And we'll continue doing so.

Regarding CapEx, roughly the first half of the year, we are investing 7.5% of our revenues. As you know, as we mentioned before, this tends to increase along the year because of seasonality. The savings are geared--coming from different sources. First, there's a structural change that we finished some of the [GSM] investments. So that's something that will remain. And we're investing more on 3G.

Second, we obviously, sadly, we are investing less on access in the fixed business because we're having less new lines, a couple lines, broadband lines, and also TV. So that's just something that I hope will revert in the future. And we are getting better prices, leveraging our scale from the group. And that's something that will remain and will continue improving.

So I think these levels are sustainable. Obviously, we have to see what happens next year. I hope that we can invest more because the market is improving. And -- but if it's not happening, we can continue managing this way.

Thanks very much.

Well, in general regarding CapEx, first of all, as Guillermo said, we really see that we have some benefits, clear benefits on our scale. So today we are able to manage prices quite well, helping us to reduce CapEx. Second, you have to take into account that 25% of our CapEx is to maintain our business.

And this is the area where we are doing higher effort in order to keep this amount of CapEx and to try to reduce it as much as possible. 75% of our CapEx is related with growth opportunities or transformation opportunities. But also, opportunities depend a lot on the demand. And of course, we always try to compensate our investment with the demand, specifically to cover 2G demand in the different countries and ADSL demand.

In addition to that, we continue doing a significant effort in order to try to improve our 3G coverage because we believe that this is really needed for future growth. And we are evolving permanently our networks toward fully IP networks. So we are not stopping any investment related with growth of or transformation and taking into account that I think we could manage our capital levels to the right market conditions.

Okay. Thanks very much. It's very helpful.

Well, ladies and gentlemen, thanks a lot of attending this first half results. We expect to see all of you that are able to join us in 70 days. That is October the 8th and the 9th of this year. Therefore, we will be able to spend a longer time giving you more clarity. So we'll see you all or at least hear from you in 70 days. Thanks very much.

Telefonica's January to June 2009 results conference call is over. You may now disconnect your line. Thank you.