Telefonica SA (TEF) 2011 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by. Welcome to Telefonica's January to September 2011 results conference call.

At this time, all participants are in listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions). As a reminder, today's conference is being recorded.

I would now like to pass you over to Ms. Maria Garcia-Legaz, Head of Investor Relations. Please go ahead Madam.

Good afternoon, ladies and gentlemen. Welcome to Telefonica's conference call to discuss January-September 2011 results. I am Maria Garcia-Legaz, Head of Investor Relations.

Before proceeding, let me mention that this document contains financial information that has been prepared under International Financial Reporting Standards. This financial information is [annoted]. This presentation may contain announcements that constitute forward-looking statements, which are not guarantees of future performance and involve risk 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 included in the first page of the presentation which you will find on our website. We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators. If you 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 -- 34914828700.

Now, let me turn the call over to our Chief Financial and Corporate Development Officer Mr. Angel Vila, who will be leading this conference call.

Good afternoon, ladies and gentlemen. Thank you for attending Telefonica's 2011 third-quarter results conference call. It is my pleasure to chair this call as new Chief Financial and Corporate Development Officer.

Today, I have with me Julio Linares, Chief Operating Officer; Jose Maria Alvarez-Pallete Head of the new Telefonica Europe; and Santiago Fernandez Valbuena, head of Telefonica Latin America. Also with me are the heads of the new global units Telefonica Digital and Telefonica Global Resources led by Matthew Key and Guillermo Ansaldo respectively. Miguel Escrig, our CFO, is also attending this call. During the Q&A session, you will have the opportunity to ask questions directly to any of them.

The results released today show that our diversification and scale enabled us to deliver strong revenue growth and solid profitability despite ongoing economic pressure and severe regulation in some of our markets. We are particularly pleased with the very strong commercial activity recorded in the last quarter, leading our customer base to reach the 300 million mark.

Revenue to September was up 5.4% year-on-year on the back of outstanding performance of Telefonica Latin America and sustained growth in mobile data. Despite increased commercial investment in contract and mobile broadband, our underlying or EBITDA margin was 36% with limited erosion year year-on-year as guided at the beginning of the year.

Bye regions, Latin America is already the largest contributor to key financial metrics and quite soon will represent 50% of our results driving Telefonica's growth. Within Europe, stabilization of underlying trends in Spain is to be highlighted, while the very good performance in Germany offset the slowdown in other European countries.

I would also like to highlight the new organization announced in September which will allow us to bolster growth and to further improve efficiency.

Finally, let me stress that we fully confirm our votes for 2011 and our shareholder remuneration commitments.

Let me turn to Slide number 4. Both Q3 2011 and Q3 2010 are quarters impacted by very large extraordinary items that materially affect reported results. Therefore, in order to facilitate year-on-year comparisons, we're showing a P&L in underlying terms. That this -- adjusting to the (inaudible) from such exceptional items, investments in spectrum and non-cash impact from PPAs.

In these underlying figures, we are not adjusting the impact from changes in our consolidation perimeter nor FX. In these terms, revenue rose sharply at 6.8% if we exclude MTR cuts ahead of our peers.

OIBDA exceeded EUR16.7 billion, flat year-on-year as we decided to ramp up commercial activity to foster future revenue growth. Excluding regulation impact, OIBDA would have grown 1% year-on-year.

Net income was over EUR5.4 billion, down 10.6% year-on-year due to the increase in depreciation and amortization and financial expenses.

As a proxy to cash flow generation, operating cash flow pre-spectrum topped EUR11.2 million and spectrum outlays were less than half compared to 2010.

Turning to Slide number 5, our diversified portfolio allowed us to deliver solid profitability and healthy cash flow generation. Revenue growth was driven by our Latin America business, which will account for around 45% of consolidated figures in underlying terms from revenue to operating cash flow. It is important to highlight our lower dependence of Spain which now is just 28% of our sales and 55% of our OIBDA.

By services, we made further progress in enhancing our revenue mix with broadband and services [beyond] connectivity already representing over 26% of revenues on the back of their double-digit year-on-year growth.

In organic terms, as the Slide number 6 shows, revenue grew 0.3% up to September or 1.6% excluding regulation impacts. OIBDA declined 4.6% while operating cash flow dropped 8.6% year-on-year as we increased CapEx in fixed broadband and mobile broadband. These organic results put us on track to fulfill our 2011 guidance.

Turning to Slide number 7, I would like to highlight that net financial debt has decreased about EUR1 billion in the quarter, falling slightly below last year-end level. Over EUR2.5 billion of free cash flow have been generated in the quarter. Free cash flow generated in the nine months through September was EUR5.7 billion, up 11.6% year-on-year.

Let me also highlight that up to September, cash repatriation from Latin America has reached EUR1.7 billion. So net financial debt stood at 2.49 times rolling OIBDA at the end of the quarter and at 2.55 times, including commitments, slightly lower than previous quarter after recent repayments.

Effective interest cost of our debt stood at 4.58%, excluding FX results. This is 24 basis points lower than in the first nine months of 2010 on a comparable basis. It's only 37 basis points higher than in the first half in spite of current unfavorable debt market conditions, and is well below our guidance.

Next slide, number 8, shows the limited impact from currency fluctuations year-to-date benefiting from Telefonica's active FX management policy adequate diversification. Our operating cash flow has been adversely impacted from FX movements by just EUR34 million in the first nine months with appreciating currencies offsetting losses from those depreciating.

On top of that, such movement is compensated by reduction in debt not denominated in euros. In order to protect our solvency, we proactively manage the currency mix of our debt to reduce the FX sensitivity of our leverage ratio. In this sense, as of September, our debt in non-euro denominated European currencies approached two times OIBDA in those same currencies, and the debt in Latin currencies (inaudible) was slightly above two times operating cash flow generated in the region.

In Slide number 9, let me highlight that we have a solid liquidity position that withdraws any pressure for refinancing of 2012 maturities. We can comfortably manage long-term debt maturing next year that amounts to EUR7.1 million as, first, we have an extension option on 2 billion preferred shares maturing December 31.

Second, the biggest maturity as indicated [long trends] for EUR2.4 billion, based also in December, so with more than one year to address its refinancing.

Third, EUR1.8 billion equivalent debt matures in LatAm where local funding markets are not under stress.

Fourth, EUR6.4 billion credit lines maturing beyond 2012 more than covered the sum of banking and LatAm debt maturities that year.

Fifth, only EUR1 billion Telefonica [say debt] matures in the first 11 months of next year. That has been already covered by the EUR1 billion bond issued in October.

We also enjoy a EUR4.1 billion cash position, excluding the [Casa Venezuela]. It is also worth mentioning that we have been reinforcing our liquidity position by increasing our undrawn committed credit lines by EUR1.3 billion in the quarter, most of them long-term, to a total of EUR9.2 billion.

In any case, we will continue with a prudent early access to credit markets, as we have done during the year, where we have raised close to EUR11 billion so far.

Let me now review our operating results starting on Slide number 10, where I would like to stress the very strong commercial volumes recorded in the third quarter.

Our strategy targeted at increasing the value of our customer base translating to two key data points. Contract mobile customers accounted for roughly 50% of mobile net adds in the first nine months of the year, and mobile broadband penetration has already reached [15%].

Figures for our European operations exceed by far the average for Telefonica while the lower data penetration in LatAm is a huge upside opportunity for us.

Especially worth mentioning is the rapid expansion of the mobile broadband base up 76% year-on-year to being a key growth lever for the future of Telefonica Digital.

Moving to Page number 11, mass marketing of smartphones, which capitalizes on the large availability of handsets with competitive prices and on tiered pricing in all of our markets, is bearing fruits, as showed by the sustained ramp-up in mobile data revenue, which posted an outstanding 20% year-on-year organic growth.

Mobile data revenue already accounts for 30% of mobile service revenue with rates reaching 25% in Spain and LatAm and over 40% in Europe.

Particularly strong is the booming growth of non peer-to-peer SMS revenue which stands now at 52% of total data revenue and limits the cannibalization risk from new applications, which so far, continue to have a negligible impact in our geographies. Actually, the peer-to-peer SMS revenues continued to increase over 4% year-on-year up to September.

It is also worth highlighting that Latin America is delivering a sharp 32% growth in mobile data sales despite low mobile broadband penetration.

Let me now walk you through the performance by region, starting with Latin America on Slide number 12. The most relevant feature of Q3 in the region is the very strong commercial momentum with total net adds beating previous historical records, increased volume across core businesses and even higher activity than in the second quarter.

Total net adds rose by 60% versus the third quarter of 2010 where the growth was over 10% quarter-on-quarter. But it's not only the absolute number what makes a quarter exceptional but the good quality of the customer base expansion with focus on the higher-value segments.

In the Mobile business, in Q3, Mobile broadband gross adds almost tripled 2010 figure. Contract gross adds were 25% higher while in the Wireline business we continued delivering double-digit growth in fixed broadband with a significant ramp-up in paid TV net adds and a successful protection of [operational lines].

All this lead to sustained acceleration in total customers growth setting the basis for enhanced topline growth in the coming future.

Slide number 13 sums up the financial results in Latin America. Reported revenue growth was over 18% up to September on the back of the excellent topline performance posted by Brazil, which already accounts for 50% of our results in the region. Excluding Mexico, revenue would have risen a sharp 21% year-on-year.

[Underlying] year-on-year growth in OIBDA was 11%, again driven by the increased contribution from Brazil driven to a solid 36.1% of OIBDA margin in the first nine months of the year.

In organic terms, revenue growth was close to 5%, driven by the very strong performance of data and broadband across businesses, which already account for roughly 25% of fixed mobile revenues with outstanding and sustaining acceleration in Mobile sales.

OIBDA declined 0.9% year-on-year in organic terms with a sharp increase in commercial activity dragging 4.4 percentage points year-on-year. On top of that, annual comparisons were impacted by the lower contribution of regional projects and (inaudible) our disposals and by insurance compensations related with the earthquake in Chile a year ago which altogether dragged 2.6 percentage points in OIBDA growth year-on-year.

Finally, the weak performance of the Mexican business also drove OIBDA down. Stripping out these effects, OIBDA growth would have been very strong.

Moving into our Brazilian operations, we are very pleased to note that one year after taking full control of Vivo we are now even stronger and we continue to widen our leadership in Brazil.

In Q3, we posted record commercial volumes with mobile net adds up over 70% year-on-year and 50% quarter-on-quarter. More importantly, we continue to gain market share in the high-value segments with close to a 37% share in the Contract segment and 43% share in the mobile data space.

Improving volumes and quality at the same time would not be possible without our differential asset base, particularly in 3G coverage where we are well ahead of our competitors.

It is also worth highlighting the launch of new products like push-to-talk which has gained lots of traction in just few months and the projected launched of fixed wireless services in 31 cities outside Sao Paulo in the fourth quarter of the year.

On the financial side, revenue and OIBDA performance was stellar in spite of increased commercial costs. Total revenue rose 5.4% up to September with especially remarkable performance of mobile service revenue which continued to ramp up quarter-on-quarter driven by booming data revenues.

On top of that, fixed broadband and paid TV revenues posted a very strong annual growth already accounting for 20% of total revenues. OIBDA growth stood at 7.8% with margin expanding year-on-year to 36.3% despite increased commercial investment as we are leveraging integration synergies.

Regarding the Brazilian integration on Slide number 15 and after finalizing the corporate restructuring in early October, I'm pleased to announce the increase of the original guidance provided a year ago for the expected synergies.

After increasing in July our target for operating synergies, we are now upgrading the net present value of expected tax and financial synergies to EUR1.7 billion. So, all in all, we expect now to reach synergies with an NPV between EUR4.4 billion and EUR4.8 billion with over 50% of the total value [of Brazil] and ahead of our initial forecasts.

Let me now move to Slide 16 and quickly review the performance of our operations in the southern and northern regions in Latin America. In the south, commercial activity in the third quarter was strong across our footprint with strong revenue growth in Argentina, Chile, Peru and Colombia and sustained acceleration in mobile service revenue at those markets.

In the north, our operations in Venezuela posted solid revenue and strong margins, while Mexico's performance continues to be weak. We are already [ramping] our commercial proposition in Mexico due to drastic cuts in MTRs, having launched (inaudible) schemes that should contribute to accelerate the capture of mobile market share as well as to accelerate the cannibalization of fixed traffic in the coming future.

Moving now to Europe, I will start with Spain on Slide number 17. During the third quarter, we launched new commercial offers across businesses to enhance our competitive position, which are already delivering positive results. The new integrated fixed broadband offer introduced in September has clearly set an inflection point in net additions where the mobile offer launch in July has led to lower churn levels.

Regarding financials, I would like to stress the stabilization in comparable trends as revenue recorded the same decline as in Q2, 6.6%, while OIBDA deterioration was contained quarter-on-quarter, delivering a marginally improved OIBDA margin.

Please bear in mind that 2011 results still do not reflect the benefits of the new social agreement signed in Q2 which should lead to additional cost savings. Therefore, the healthier OIBDA margin reported is also a reflection of our rational approach to commercial expenses and particularly subsidies in a context where some of our competitors are just focused on volume and are heavily deteriorating their margins.

Our strategy has allowed us to continue reporting revenue, OIBDA and Operating cash flow Shares well above access market share.

Turning to Slide 18 to cover our Spanish fixed business. In the broadband market, the new commercial offer launch in September has led to a significant ramp up in gross adds. Therefore, we expect our fixed broadband access base to record a record performance in coming quarters.

In pay-TV, our enhanced content proposition, including all the football league, is also being reflected in our strong net add figures. So, we're seeing improved commercial trends which are compatible with a better performance of our connectivity ARPU, which remains stable quarter-on-quarter.

Again, our new offers are very attractive for our customers but are not value disruptive for us.

In terms of revenues, Q3 year-on-year performance continues to be driven by similar factors to those we have seen in recent quarters, though we recorded a slight sequential improvement on the back of the better broadband business already mentioned and improved trends in traditional revenues.

Regarding our Mobile business in Spain and despite the adverse economic conditions, I would like to highlight the very strong growth delivered in mobile data.

Overall broadband accesses rose close to 50% year-on-year up to September while data ARPU recorded a solid improvement driven by the strong performance of connectivity services which already represents 75% of our data revenues in Spain. The good data performance is also helping to manage ARPU in the Contract segment, which already accounts for 69% of our customers, delivering stable ARPUs quarter-on-quarter.

Our focus on this segment is driven by our policy to maximize the value of our customer base with significantly higher relative ARPUs and lower in churn versus pre-paid. Churn should improve as the new [service] gets launched led to a 30% growth in churn for those customers who applied for the new rate.

Finally, a very strong performance in data should be further empowered by the new data [center] offer recently launched. We're bundling voice, SMS and data, being the first in the market to launch bundles with unlimited SMSs and offering lower prices for those customers who have fixed broadband with us, therefore boosting gross selling opportunities.

In the UK, in the third quarter, we regained commercial momentum in a challenging environment with no signs of competition relief. Contract mobile net adds increased over threefold quarter-on-quarter following the launch of the new smartphone tariff structure at the end of August while we kept churn low at 1.1%.

Smartphone adoption continued growing, reflecting the good acceptance of our renewed tariff portfolio reaching a 36% penetration in September. It is remarkable that 60% the customer segment has already contracted one of our three bolt-on tiered pricing choices, the majority of them on the GBP6 and GBP10 price range. This is [centered] to data revenue growth acceleration to close to 10% year-on-year driven by the non-peer-to-peer SMS revenue increase of over 38%.

Topline continued to be under pressure, impacted by the slowdown in customer growth [sustained] out of the bundle (inaudible) optimization amid customer confidence weakness and the significant hit of regulation.

Regarding profitability, we posted a solid OIBDA performance up 5.1% year-on-year with a 27.3% margin in the first nine months of the year.

In Germany, turning to Slide 21, we continue posting very good results leading value marketshare as we leverage a strong commercial momentum on our renewed tariff portfolio, best in class customer satisfaction, and the flexibility of "My Handy" handset commercialization model.

It is also worth to highlight our partner distribution channels, which are driving the low-end smartphone segment with sub EUR100 devices.

We are very pleased with the remarkable contract mobile net adds, over 250,000 in the quarter. This, combined with increased usage of data services, led to an acceleration of mobile service revenue growth from 5% in the first quarter to 9% in the third quarter, excluding the negative impact from MTR cuts.

In addition, OIBDA posted a year-on-year organic increase of 2.3%, reaching close to 25% margin in the third quarter with the benefits of business restructuring and large scale and further efficiencies offsetting increased commercial spend.

To close the review of our European operations, let me highlight the sequential operating and financial improvement across the board posted by Telefonica Czech Republic a shown on Slide number 22.

Solid commercial performance in focused areas was maintained in the third quarter. In Mobile, we out-performed in the contract market after recording positive net adds driven by mobile broadband customers' uptake. It is also worth to highlight that fixed broadband performance on the back of the VDSL launch which is helping to protect the existing customer base and to better manage ARPU.

As a result, we have increased our fixed broadband market share by 2 percentage points, year-on-year.

In addition, line losses continued to decrease sharply. In the third quarter, Czech revenues showed a sequential improvement and in Slovakia we recorded another strong set of results. Profitability remains stable year-on-year, thanks to cost efficiencies, consolidating the best-in-class margin in the Central Eastern European region where operating cash flow generation continues to be very strong, exceeding EUR0.5 billion up to September.

Let me now briefly explain the new organization approved in September which will accelerate the execution of the strategy presented at the investor day.

The creation of Telefonica Digital and Telefonica Global Resources will reinforce our status as a global player and leader in the digital world and will allow was to capture the most of the opportunities afforded by our global scale and industrial alliances.

At the same time, we are simplifying and managing the business geographic mix leading to the configuration of two large regions, Europe and Latin America. Reporting along this new structure will begin in the first quarter 2012.

The first new global unit is Telefonica Digital, a brand-new organization with a mission to create a powerful Telefonica to outperform in the digital world and reinforce our profile as a growth company. Telefonica Digital aims to create new propositions and revenue streams and provide value to customers via pure telecommunication services.

We are starting from solid foundations. Basing in the same cluster of existing assets like Terra, JAJAH, Tuenti Telefonica and GiffGaff and the verticals featuring these top services in key growth areas such as financial services, machine-to-machine, cloud, security, health, media, and advertising.

We are now in the process of assessing and prioritizing the opportunities where we can make breakthroughs and add value to Telefonica. Telefonica Digital will exploit our leadership position in markets where we are present, leveraging on our 300 million direct customer relationships and will also explore over-the-top opportunities in the right markets with the right partners.

Let's take our new global unit, Telefonica Global Resources, [it delivers] the full potential for global scale to maximize business profitability. We have already been making significant progress on global projects, but we aim to accelerate the generation of additional synergies and to maximize the benefits from scale economics. We are already working on a few flagship projects, focusing our efforts on fewer but with higher-value impact opportunities.

First, we will increase the level of our standardization in global sourcing to further increase the level of aggregation in global purchases, leading to significant additional savings.

Second, we will further advance in the global management of IT infrastructures, progressing in transformation and providing enablers to the regions to carry out their business with competitive advantages in terms of cost and service quality.

Third, we will apply more radical approaches in the management of our operating assets. For example, we aim to further advance in network sharing, reaching new agreements and going beyond the traditional site sharing in some cases, and we will continue with the sale of non-strategic core elements, such as towers, in the areas where they do not provide the competitive advantage.

Finally, we will speed up the growth of our MNC business reaching our natural market share.

All these organizational changes are being implemented, and we have set clear priorities in the short term to drive growth and profitability and to improve our financial flexibility.

In Latin America, Santiago and his team are focusing on maintaining our operating and financial leadership in Brazil where negotiations with the Colombian government to merge our fixed and mobile businesses are underway. This transaction, when finally approved, should lead to significant synergies and debt reduction.

Turnaround in Mexico is another key target for the short term.

In Europe, Jose Maria and his team are working to balance the stronger commercial momentum with free cash flow protection in Spain, while in the UK the main goal is to enhance our commercial activity.

In Germany, the whole team is focused to keep on gaining high-value marketshare while in the Czech Republic we aim to continue delivering a superior cash generation.

Regarding Telefonica Digital and Telefonica Global Resources, both Matthew and Guillermo are working fast to quickly launch their units to foster growth in the digital world and to fully leverage scale benefits.

Finally, my first priority in my new role is to improve financial flexibility, exploiting several levers and building on our strong free cash flow generation. We will proactively manage our asset space. We will also increase our focus on profitable and efficient investment where we continue to have a very strict working capital and tax management. All of this will allow us to reinforce our growth profile and to deliver on all our commitments, which we reiterate.

To sum up, we are building the foundations for future revenue growth. We are on track to meet 2011 guidance, leveraging our diversification and strong growth in mobile data. We continue to have a sound free cash flow and a strong liquidity position. Our new organization will bolster growth and efficiency gains enhancing execution. We will pursue an active portfolio management to optimize use of capital and improve financial flexibility, and the strong free cash flow generation will allow was to comfortably reiterate our dividend commitments.

Thank you very much. Now we're ready to take your questions.

(Operator Instructions). Jesus Romero, BofA Merrill Lynch.

Thank you. The first question was on the P&L account. How concerned are you with all the austerity measures that could be introduced in Spain with a new government starting on November 20? Do you feel confident on the possibility of maintaining the net debt and that consensus is looking out at for EBITDA in 2012?

Second, you were saying about the financial flexibility. How important is the current rating that Telefonica has right now and do you see the net debt [to EBITDA] declining materially over the next 12 months? Thank you.

This is Angel. I'll take your first question on Spain and the overall economic situation. We do not expect any improvement in the short run. Competition is not showing either any sign of competitive relief. So we're focusing highly on our -- remodeling our commercial strategy through the [ties]. You know that we have been launching new ties on the contract side, we have been on the Mobile side. We have been launching a new fixed broadband proposition as well.

Very recently, as of yesterday, we launch a full branch of new ties in mobile, both voice and data. So no major changes. We're not expecting a major improvement in the short run. But we keep going and commercial activity is improving. Our commercial momentum is becoming stronger so we are not [discovering] and we're not considering improvement but we will keep going to the same direction, commercially speaking.

This is (inaudible). On the leverage ratio, we have reiterated our target for leverage of ratio for year end. The exact level by year end will depend on the financial market rates, especially on FX but also on interest rates. Will also depend on further improvement targeting working capital, also on the pace of commitments on new [pre-retirement] programs and the OIBDA [evolution] in the last quarter.

I should say that we don't have just the ambition of generating cash flow to pay the dividend, but to have some leeway for other purposes and also including some debt cancellation. So we reiterate the leverage ratio for year-end as we have expressed.

Next question, please.

Tim Boddy, Goldman Sachs.

Yes, thanks. Two questions, first of all, in LatAm, it seems like the cost of growth for a couple of quarters now has been consistently higher than expected. Is this a sustainable trend or could we see a point perhaps next year where we start seeing EBITDA growth accelerating faster than revenue growth as opposed to obviously this year's trend?

Secondly, just on what you're saying around disposals, it would be helpful to understand how broadly you're thinking. Is this all of the current assets and scope, including things like the China Unicom stake?

Then just to clarify your dividend guidance in relation to that, I know you're saying you want to pay the dividend out of cash flow. Could that be cash flow that includes cash generated from disposals? Thank you.

Tim, this is Angel. Let me take your question first of all as to when and if the OIBDA decline that you've seen this quarter might turn around.

I think the answer is twofold. First, market is growing faster than we had originally planned, and we are doing better in general terms than what we originally thought and as required, especially in a place like Brazil, that we [step up higher] commercial efforts. This is a welcome development in the sense that acceleration in growth is going to mean higher penetration and a better result for those already present at relevant market shares like generally tends to be our case.

On top of that, we have had on this quarter a number of different irregular events that have coincided in the sense that they're nonrecurrent or they do not happen every quarter. That might have blurred the EBITDA picture, which I think that underlying you can say is proceeding at the right pace.

Whether we will regain acceleration in OIBDA growth sometime next year will continually depend on what happens with the market growth and with the attitude of other competitors who are of course also trying to reach the same goals.

With regard to the investments, we're working in several projects to maximize the value of non-core assets and to optimize the use of capital. Given the volatility that we're seeing in the markets, we would rather not disclose which are those projects or the timing of those executions.

But I should say that the final target of these sales is to optimize our portfolio rather than [amass] to accomplish with -- to accomplish our [remuneration] commitments.

Next question, please.

Georgios Ierodiaconou, Citibank.

Good afternoon. Two questions from my side. The first one is on the EBITDA trends. Obviously we're seeing just over 1% decline in the margin and your three-year guidance suggests a small decline more or less flat margin. I was wondering whether you can give us some color on how you expect the margins to progress beyond 2011 and will the improvement be a result of specific efficiency measures beyond the one you announced in Spain or whether that is a result of lower commercial investment in Latin America and other parts of the footprint?

My second question is on the Spanish business. The regulator reported close to 90,000 mobile number portability deficit for every one of the three months in the summer. I know, in the past, you are very focused on churn but it has been rising this year. So my question is would you be willing to allow churn to increase further or do you believe, at this time, the priority is to stabilize the KPIs? Thank you.

Regarding your first question -- this is Julio Linares -- when we provide our guidance for this year, we prioritize topline growth an effort to capture growth opportunities in our footprint. Because of that, taking into account the uncertainties that we saw in the market are own macroeconomic competition, consumer behavior. We provide (inaudible) guidance to be able to manage those uncertainties.

Reality has been tougher than we thought. And we thought that it was tougher because of the macroeconomic evolution, because regulation and because competition. Additionally, consumer were very sensible to pricing and indeed optimizing their ties.

On the other hand, it was great. The growth in mobile broadband, though it has a significant impact on the growth side because of the commercial effort regarding smartphones. Because of that, we have this kind of margin and OIBDA evolution.

Of course, we are using all the levers we had in order to improve these efficiencies, particularly now, taking into account our new organization for Global Resources.

Next question, please.

Taking your question about Spain and churn, for us, we focus on churn in the different segments. As a result, we do answer on different fronts.

First of all, in terms of the new products and services that we have been launching, we are starting to get traction, as I was telling you before. That's showing significant improvement in net add figures and reducing down churn, namely on the broadband -- fixed broadband side. So you will see some traction on some improvement in the coming months.

As well, on the contract side, with this [$0.06] ties that we launch a few months ago, they're starting to show good signals as well. Therefore, on the contract side, the churn on the mobile side is getting better. The new ties again that we launch yesterday bundling voice and data on the mobile side again will help us on that direction, so the pending issue would be on the pre-pay side where we are going to become very tactical. We will see some [companies] -- you will see some [companies] from us from here to year-end but we [are not] disclosing them now.

So churn is always a focus, but we are also very keen on value. Therefore, for us, we are managing churn on the different segments. So you will see some improvement on the different products and services and we will keep you posted.

Next question, please.

Will Milner, Arete.

Thank you. I guess the first question is just on shareholder returns and the commitments that pay shareholder returns at a similar level beyond 2012. So I think EUR8 billion annually. I guess just in the context of the organic EBITDA trend today, which is over minus 4%, and rising interest costs, are you still confident in your ability to pay that level of shareholder returns beyond 2012? What might cause you to think differently about that?

We are reiterating our shareholder remuneration in the light of the strong free cash flow generation that we're seeing. The first nine months, as I said before, we reached EUR5.7 billion of free cash flow, which is up 11.6% year-on-year. Now we expect free cash flow performance for the full year.

We do not provide free cash flow targets, so we cannot provide that free cash flow out for the next year. But as a reference, last year, after the spectrum, we generated 8.5 billion free cash flow. EUR175 per share would (inaudible) on EUR7.9 billion of that. So it would be 78% of free cash flow generated in a year like 2010.

From 2013 onwards we have not dissected what would be the speed of shareholder (technical difficulty) dividends or potential share buybacks. It will be decided later on, taking into account investors' interest and also market conditions.

Okay, thanks. My second question, just switch to the UK, it looks like minute volumes there are now falling 11% year-over-year, and the relative performance I guess has deteriorated. I just wonder if you can talk around the prospects for improving that relative revenue performance in the UK? Thanks.

Thanks for the question. The answer obviously is yes. We keep focusing on volume rather than value but we need to acknowledge that during the last months, the deceleration in revenue -- in service revenues has been mainly based on the reduction on the base growth. Therefore, we already -- we have already launch the end of August a new set ties namely on the smartphone field on the contract side where we specifically aim to [regress] market momentum. In fact, according to the latest figures that we have, we are getting traction on that side, both in prepay and postpay. So, yes, we are focusing on that and, yes, we are taking commercial action.

Next question, please.

Jerry Dellis, Jefferies.

Two questions, please. The first one is regarding the workforce reduction and the new collective agreement in Spain. As the benefits of that come through in 2012, should we expect to see this invested in heavier commercial investment as we've seen in Brazil and in Mexico in the last quarter, or should we see through perhaps into a stabler EBITDA trend as you see market conditions at present?

The second question is just regarding mobile data. Back in April, you provided some very interesting information about the percentage of customers who are hitting the caps in their tiered data plans. I wonder whether you had any other updated information around that to give us some sense of what proportion of your smartphone customers are now trading up through the tier mix? Thank you.

I will take the first question on the workforce reduction in Spain. The process is being run and is processing according to [a schedule]. So we will see the benefits of that reduction flowing through the P&L account during 2012 progressively because you are going to depend on the end of this year, or this year how many people will (inaudible) for that, and secondly what time of next year they will be leaving the Company and (inaudible) will have a [timing] impact [all along the] year.

The use of those savings of those efficiencies is going to be decided [on a year-on-year] basis depending on market and commercial conditions but you should expect those efficiencies to flow all along the year, not at the beginning of the year but throughout the year 2012. I will keep you posted on the process.

Regarding your second question, I'm trying to answer for the whole Telefonica group. Right now, we have penetration of mobile broadband, I mean dongles, smartphones and tablets altogether of 15% of our total base.

With this penetration, we are above expectations, both in accesses on ARPU levers on the ARPU that we are getting with this kind of broadband, mobile broadband customers is 1.5 average mobile ARPU, which is in line with the information that we provided in our investors conference in London.

Profit that we have seen in this mobile broadband customer base is better than average profit. This is all in line with information that we provided at that conference.

Next question, please.

Keval Khiroya, Deutsche Bank.

I'm asking two questions for me please. First, you reported 0.3% revenue growth in the first nine months. Do you consider this to be within the definition of up to 2% revenue growth?

Secondly, you have upgraded your [position] synergy targets, which is a positive. But can you give us some color on the phasing of incremental synergies? Thank you.

Can you repeat the second question please?

Yes. So you have upgraded your results synergy guidance, which is positive. Can you give us some color on the phasing of the incremental portion of the synergies?

Regarding your first question, our revenue growth is within our guidance that we provided at the beginning of the year. That means that we will have positive growth up to 2%.

Okay, thank you.

Yes. In terms of the synergy extraction process in Brazil, what we can share with you is what we have upgraded is the nonoperating part of them. Now that we have been able to clarify a bit better how the full impact of the reorganization process is going to be. But unfortunately, we're not in a position to disclose at this very moment exactly how we're going to be (inaudible). Those will be, however, event driven, meaning, by the time we report the results and we file the tax returns or we refinance the earnings -- I'm sorry, the synergy -- new values will be more visible than they are today.

Okay, that is clear. Thank you.

Next question, please.

Torsten Achtmann, JPMorgan.

Good afternoon. Two questions please. First, on Latin America, when do you expect to see the benefits of the higher commercial activity come through in terms of revenues and therefore when do you think we can see more accelerated revenue growth coming from Latin America?

Secondly, on Spain, it seems total voice traffic seems to --- the decline seemed to have accelerated in the quarter compared to last quarter. Can you give an update? What is happening and is there any chance this could turn around in the near-term? Thank you.

This is Angel. Let me take your question on LatAm first. The sequence of events should be we get new adds, especially those related with contract, in the contract segment with new products like mobile broadband. That eventually translates itself into higher revenue growth. How fast that process happens depends crucially on how well penetrated the market is. So it will be very market specific. It is hard to generalize because I might be off in one market and in in some others.

Brazil is probably at the tail end of that process because Brazil [weighs] so much. I think it's going to be sooner rather than later that we can see some acceleration in growth.

So, say for instance, this quarter, that we've had very good topline numbers in Brazil. That --- you know with the wobbles and the ups and downs that are to be expected from the very competitive environment probably should be the trend going on.

We're also very happy that our leadership in the new products like mobile broadband is so far unfettered and it is going to be very hard to catch up on us because of the investments that we've been able to make in the past. Eventually, those revenue growth shall of course translate themselves when markets stabilize into OIBDA and in the rest of the account.

Taking your question about voice traffic evolution in Spain, it's true, it has been -- the decline accelerated a little bit in the third quarter and that's why we have reacted with these bundling strategy both on the wireline and on the wireless.

As a result, because we have increased the attractiveness on the amount of minutes that we are bundling, we expect to have a better evolution of our MOU during the next quarters. In fact, after the launching of the [$0.06] that is we have gained some traction and we hope that, with the new [targets] on product we launch yesterday, we will get some traction as well there. But you are right. During the third quarter, voice traffic decline a little bit more than in the second quarter.

Thank you.

Next question, please.

Matthew Robilliard, Exane BNP Paribas.

Good afternoon and thank you. Two questions, please. First, with regards to organic EBITDA trajectory, which has deteriorated throughout the year for the reasons you've highlighted, Q4 2010 on ['09] numbers are going to be a tough comparable. So I was wondering in which part of the business you were expecting a recovery so that you can offset that tougher comparable and stay within guidance?

Then a second question regarding [LT] options in Brazil. Apparently, the schedule is moving ahead and I think the Minister of Telecommunication was talking about the possibility of a new entrant in Brazil mobile through LT auction. Maybe if you can give us a little bit of color in terms of the timing and the kind of different players that you envision in the market? Thank you.

Regarding your first question, what we expect is that, in Spain, we will not see major changes on revenues, on EBITDA performance we will leverage on our commercial activity that we expect to improve in this four quarter thanks to our new commercial proposition launch in the market, as well as the sales of some non-strategic assets.

In Latin America, we will see improve trends as we capitalize the strong commercial activity (inaudible) in the last quarter particularly on the synergies in Brazil that are progressing well.

In terms of the expected LTE auction, the Minister of Telecoms in Brazil has said that, by the end of April next year, there should be an auction that is not a full decision but it is an indication it will be in the 2.5 GHz space and we're still unsure about what the other conditions about coverage, required investments or quality would be. (inaudible) will be a few more of those.

We have the intention of course to participate and whether or not there are new entrants or new bidders remains to be seen. We certainly think this is a good investment for the future although, quite frankly, it might have been a bit early relative to the recent auctions and the still ongoing deployment of 3G. But nevertheless, whenever it is auctioned, we will participate.

Thank you very much.

Next question, please.

Jonathan Dann, Barclays Capital.

Hi there. It says in the slides that so far you have repatriated EUR1.7 billion of cash. I think, on the second quarter, you might have said you were expecting EUR3.5 billion. Could you just update us on the amounts?

Then secondly, you've provided net debt in Spain, UK, Czech Republic, I believe Germany has to hold cash. Currently does it matter at the group level where the cash balances sit in terms of liquidity, or is it -- are you able to manage refinancing, etc., without much larger dividends from Latin America?

This is Angel Vila. On repatriations, we have repatriated EUR1.7 billion from Latin America last year. By the same time, we have repatriated EUR1.1 billion. What we said at the end of the second-quarter conference call we by then had repatriated EUR1.4 billion is that we were expecting to double that figure by year-end.

This is Miguel. Regarding your question (technical difficulty) our cash, it is mainly located in Latin America. The cash that we have usually in Spain or in Europe it's used basically to pay down the credit lines that maybe redrawn later on. Anyway, we have a centralized cash management and so although the cash is owned by Latin American companies, a big part of that is (inaudible) through our central cash unit management so that this can be use also in -- at the holding level.

Next question, please.

Giovanni Montalti, Cheuvreux.

Hello. Good afternoon. Sorry. Just coming back to Brazil, could you confirm if we can expect an improvement in profitability already starting from the next quarter? Thank you.

Giovanni, this is (inaudible) here. I think it's not prudent to say when the acceleration in trends is going to happen. I think the direction is quite clear though. It might be next; it might be the following, but certainly all of the requirements are in place. But I would rather not commit right now to an acceleration -- immediate acceleration in trends.

Can I quickly follow-up on the synergies? Is there any synergies already -- I mean are you already taking -- making news and executing a portion of those synergies on the (inaudible) and financial side? Thanks.

Well, most operational synergies are taking place gradually. They are happening after the integration, which is very recent. Some of them are going to be extracted by things like -- let me talk to you as an example -- by long distance being split between Sao Paulo and outside of Sao Paulo, which previously had to pay taxes because they belong to different company and now they are all within the same company. This is an obvious, very clear tax saving that is -- because it is now going to be internalized.

There are many others like that, not thousands, but there are many others like that that have been (inaudible) services and goods sold.

The financial and the tax events, as I think I mentioned before, are more event specific and they will happen more likely next year than this year.

Thank you.

Next question, please.

Luigi Minerva, HSBC.

Yes, good afternoon. Two questions on regulation. The first one, in Europe, in a speech (inaudible) at the beginning of October mentioned two options or two possibilities with regards to incentivizing investments in the next generation access investments. The first one was a reduction in [ULL] copper prices. The second one was inevitable increase in wholesale retail fiber-based prices in the medium term. I was wondering what are your views on these two possibilities, on the first one, maybe in the short term and the second one whether it is acceptable over the medium term?

My second question is on Brazil. [Anatel] launched some bundling consultation process in August. I was wondering if you can give us an update if you have more visibility now on the priorities of Anatel, the type of cost methodologies they're thinking of and whether Telesp or Telefonica Brazil would be interested in becoming an unbundler outside Sao Paulo in the new framework? Thanks.

Regarding your first question, we really believe that (inaudible) tied to reviews, prices in the market through wholesale or through bundling (inaudible) is not the right solution to incentivate investment in the new [generation]. We really believe there are all the frameworks that will be much better in order to stimulate that kind of new infrastructure development.

In terms of -- Santiago here. In terms of the unbundling process, in Brazil it just started. It was announced I think by early next year we should have much more clarity about how and when it's going to be applied. Prices are, to the best of my knowledge, still not known.

The Telefonica strategy, still not fully developed -- but I can give you some indications is that outside of Sao Paulo we have very little if any interest in using that instrument without knowing the prices. Maybe if the pricing is attractive, we have to take a second look at that but our current strategy is to use the fixed wireless technology to access the market outside of Sao Paulo as we have just launched in some of the southern states of Brazil two weeks ago.

So we don't have still full clarity. It is coming. The conditions are unknown and we will in all likelihood not participate heavily, at least not heavily, on the outside of Sao Paulo market.

Next question, please.

Ivon Leal, BBVA.

Hello. Good afternoon. A couple of questions in Spain. The first one is, given that you've highlighted in the third quarter the commercial investment in order to try to gain commercial traction for [other] markets, I was wondering if we should expect part of the savings generating Spain as a result of restructuring to be reinvested in order to regain market share in 2012 or rather we should expect that to flow through the [BD] line.

The second one is you say that your commercial -- the [length] commercial offering fixed broadband in Spain has given some good results. And actually if we look at the numbers released by the Spanish Telecom regulator looks like is a fixed -- the fiber deployment which is really attracting very good results (inaudible) your initial coverage target has changed at any point in time [currently] this quarter. Maybe give us some color on your target coverage for 2012 and how the fiber deployment is working.

Well, on the first question about how we're going to be treating efficiencies next year, first of all, efficiencies are not just going to come from the voluntary reduction program on our (inaudible). We have other plans in Spain, namely on the handset reduction in terms of the amounts of handsets that we're buying externally in terms of the capital that we have. We have already announce that.

We will keep centralizing more of our purchasing effort and therefore we expect to generate more savings thanks to the action of Guillermo Ansaldo's team on Global Resources. So you will see more saving [than that] -- or more efficiency process running in Spain and all around Europe than just this workforce reduction.

For sure we will reinvest some of those in commercial activity because we see the market, we see value in the market. We are seeing value in the commercial offer, as I was telling you before, on the fixed broadband both on fiber and in DSL and for sure on the mobile side, namely in contracts.

So, yes, we've had to be much more efficient next year but not just with the reduction of the workforce, with other plans, and, yes, we intend to reinvest part of that on the commercial effort because we do see value and growth on that side.

On the second question on the results, we are getting traction on the fiber. We are happy with the fiber deployment and with the speed of deployment. It is not huge. We are going now step-by-step, but it is doing very well.

On the EUR24.9 offer that we launch at the end of August, beginning of September, the numbers of the evolution of net adds that were negative for a while. This is starting to show better results and I hope that from here to year end you will see the traction on that product, but, yes, we are optimistic and, yes, we're getting better results (technical difficulty).

(technical difficulty)

I'm sorry, but we do not disclose that information. In terms of both (inaudible) but getting very significant traction, namely in Barcelona and in Madrid. I will try to give you more color on the next calls, but for the time being we do not disclose that information.

We have time for one additional question, please.

Fabian Lares, JB Capital Markets.

Hi, good afternoon. Thank you for taking my question. Regarding the evolution of the Company debt and the amount that has been paid down by the nine months generated, I was wondering, considering that in the foreseeable future we do not see the capacity of the EBITDA rising any stronger and obviously with CapEx commitments your capacity to generate more operational cash flow is probably limited.

I was wondering whether, as of 2013, you are considering other shareholder remuneration formulas outside the cash and the share buyback. Namely, I'm thinking of scrip issues.

The second item would be related to Argentina. I was wondering whether you will give us more color related to the possible hyperinflation or the excess inflation that could be happening in that market and whether you are able to contain that at the OIBDA level? Thank you.

Okay, with respect to the first question, (inaudible) remuneration after 2012 we have still not decided which would be [the split of such] and as I said before we would take [into] market conditions and investor preferences when the time arrives. You spoke about the potential scrip dividend, what I can say is that we are not contemplating in our agenda scrip dividend given the low valuation levels that we have in Telefonica share price.

In terms of Argentina, two comments. One is that Argentina is still not a hyperinflationary economy by accounting standards. Inflation it is quite high but official inflation is slightly lower than whatever real recorded or expected inflation.

This is not a new trend. This has been going on for a number of years and as a result of that, we've been able to adjust the non-inflation exposed part of our business quite dramatically, meaning nonregulated or less regulated prices have taken a bigger role in our basket of products, [specifically] is fixed that remains -- startups remain frozen (inaudible) there.

There has been and there will continue to be an impact on costs, because costs are adjusted if not in full to inflation at least very much so. So it is a typical thing to comment.

On the other hand, the increased tendency of Argentineans to spend on the back of a better economy and high inflation is helping alleviate that trend somewhat. So considering that inflation is not a welcome development, we still think that, in Argentina, it is a less unfavorable event than it might be in other regions.

Okay. (multiple speakers)

At this time no further questions will be taken. Angel Vila, I will turn the call back over to you for closing remarks.

Okay, thank you very much for your participation and we certainly expect to have provided some useful insights for you.

Thank you and good afternoon.

Telefonica's January to September 2011 results conference call is over. You may now disconnect your line. Thank you.