Telefonica SA (TEF) 2012 Q1 法說會逐字稿

Good afternoon, ladies and gentlemen. Welcome to Telefonica's conference call to discuss January to March 2012 results. I am Maria Garcia-Legaz, head of Investor Relations.

Before proceeding, let me mention that this document contains financial information that has been [differ] under international financial reporting standards. This financial information is unaudited.

This presentation may contain announcements that constitute forward-looking statements. Internal guarantees of future performance involve risks and uncertainties and (inaudible) 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 rulemakers. If you don't have a copy of the (inaudible) press release and the slides, please contact Telefonica's Investor Relations team in Madrid by dialing the following telephone number -- 34-91-482-8700.

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.

Thank you, Maria. Good afternoon, ladies and gentlemen and welcome to Telefonica's first-quarter results conference call. It is my pleasure to chair this call.

Today with me are the members of the executive committee. So during the Q&A session, they will have the opportunity to answer the questions you may have.

Progress year-to-date shows that we are delivering on our growth strategy, fully executing the priorities set for 2012. First, on the commercial side, we have had a very strong start for 2012, leveraging the new propositions launched across markets since the second half of 2011. Growth in the quarter was underpinned by the expansion of our mobile base, especially on the mobile broadband space.

Second, top line has recorded a significant improvement year-on-year as increased commercial push is already flowing into revenue. In the middle of the crisis, we are back to positive growth rates despite material drags from migration and Spain. Mobile data sales continue to post very [swift] growth and will drive further top-line growth acceleration along the year.

Third, our businesses in Latin America have delivered an outstanding evolution in the first quarter with sustainable high single digit revenue expansion. To highlight, Brazil already accounts for about one-fourth of our total revenues, similar to Spain and despite having our headquarters in Europe, for the first time, over 50% of our OIBDA comes from Latin America.

Fourth, we are setting the new paradigm in the sector working in several areas, including commercial approach, devices and networks that we will spin for later on. Let me stress that we continue to invest for future growth with focused investments in mobile broadband and fiber. The quantum leap in terms of coverage is particularly remarkable.

Finally, on the financial front, we have been productive year-to-date with 2012 maturities already being fully refinanced, more than 40% of 2013 maturities pre-financed and the Colombian restructuring executed and we are taking further actions to progressively reduce the leverage ratio and to protect the rating.

Please turn now to slide number 4 for a review of first-quarter financial performance. Revenue reached over EUR15.5 billion in the first quarter, up 0.5% year-on-year despite the adverse conditions faced in multiple European markets. Excluding MTR cuts, revenue growth was 1.6%. Below the revenue line, both in 2011 and 2012, we have booked several material exceptional items. In particular, 2012 accounts include a non-cash impact of the reduction in the value of our [indebted] investment in Telecom Italia with a negative effect in net income of EUR337 million, while a year ago, we recorded the positive impact from the reduction in our stake in BT.

So to better understand the underlying performance of the Company, we will focus on the P&L excluding those nonrecurring effects. As such, underlying OIBDA was close to EUR5.1 billion, down 7.4% year-on-year, while underlying net income totaled almost EUR1.3 billion. CapEx to sales was 11%, higher than a year ago, though below our 2012 target due to different quarterly execution paths along the year.

Finally, let me highlight that the first-quarter results are in line with our internal expectations and therefore, we reiterate our 2012 guidance.

Slide number 5 shows the sustained ramp-up in accesses growth to 7% year-on-year. The very strong performance in mobile, particularly in broadband, underpins accesses expansion to over 309 million in spite of the 2 million mobile disconnections in Spain in Q1. Mobile net adds reached 4.3 million in the first quarter, 1.5 times higher than a year ago, on the back of higher gross adds, churn control and a twofold rise in net adds in Latin America. We, again, posted record smartphone sales accounting for 81% of commercial activity in Europe in the first quarter of 2012.

Top-line reacceleration was driven by two key strategic pillars -- Latin America and mobile data as shown in slide number 6. Revenues in Latin America posted high single digit growth with a remarkable 580 basis points acceleration quarter-on-quarter. This performance more than offset the decrease in top line in Europe.

On the mobile data space, the growing demand of smartphones and the strong traction of the new tiered data propositions led to a 55% year-on-year increase in our mobile growth and accesses with a 17% mobile growth on penetration. As a result, data revenues rose 15% year-on-year to reach over one-third of mobile service revenues. Non-SMS revenues already account for 55% of total data sales as we leverage tiered pricing to monetize the strong increase in data traffic with traffic [value] growth rapidly converging.

Let me now stress the outstanding performance of our main growth engine, Latin America, on slide 7. Our operations in the region keep posting growth acceleration on the back of a very strong commercial momentum, which allowed us to grow our access base by almost 11% in the first quarter with a particularly robust performance in (inaudible).

We have led the growth in the region with 4.7 million net additions, posting a new record for the first quarter and more than doubling last year's figure. We also continued to need the mobile broadband adoption in the region with 2.3 million mobile broadband quarterly net adds. As a result, and reflecting this [big] expansion of mobile service revenue, up 13% year-on-year, top-line growth ramped up to close to 10% if we exclude the negative impact from regulation. Please note this that mobile revenues already account for close to 70% of our sales in the region.

On the fixed business, it is worth to highlight the increased contribution of fixed broadband and new services, already accounting for over 40% of these sales. Clearly, our unique portfolio in Latin America is a key differentiating factor and a strong growth platform going forward. 48.5% for revenues and over 50% of our OIBDA already come from this growing region.

Please turn now to slide number 9 to analyze our OIBDA margin evolution. OIBDA was primarily impacted by the rising commercial costs, which were up close to 11% year-on-year in inorganic terms on the strong push in volumes from the second half of 2011 and increased weight of smartphones on the mix. The higher focus on retention will drive [share] reduction in the coming months, benefiting also top-line performance and revenue share as we keep the most valuable customers on board.

Additionally, our initiatives to promote more rational markets and enhance (inaudible) monetization should lead to a more efficient commercial expenditure. On top of that, we will benefit from an easier comparison in the second half of the year.

Secondly, network and systems costs rose on the enhanced coverage and capacity of our networks, especially in Latin America. Moreover, high inflation in some countries also drove higher costs. On the other hand, we are implementing cost-cutting initiatives across regions with savings from the headcount reduction in Spain already flowing in the P&L and others leading to recent redundancy programs in Brazil, Czech Republic and Ireland to come.

We also continue to optimize capital allocation selling non-strategic towers in Brazil and in Spain, which were partially offset by the restructuring costs booked in the quarter. We will deliver improved profitability along the year, leveraging cost-containment measures and the benefits of Telefonica global resources.

Let me now focus on the performance of our businesses by regions starting with a more detailed review of Latin America on slide 9. Looking at revenue growth components by geographies, I would like to highlight that we delivered top-line growth acceleration across all our footprint. Even in Mexico where we are facing operating challenges due to the drastic MTR cuts, we are gradually turning around the business coming back to positive revenue growth rates. Retail grew close to 1% with increased commercial costs due to higher activity volumes driving the retail margin erosion. Please notice that our sales were virtually offset by restructuring costs in the quarter.

Turning to slide number 10 to review the performance of our Brazilian business. Mobile net additions reached a new record level in the first quarter allowing VIVO to gain marketshare in a highly competitive mobile market across all segments. We continued focusing on the high-end segment driven by strong smartphone uptake with a smartphone base more than four times higher than a year ago. At the same time, new customer propositions further stimulated customer expansion in the prepaid segment.

Fast accesses growth was compatible with best-in-class quality indexes as reflected by the lowest levels of complaints in the industry across services. In parallel, VIVO is leading the sector transformation. At the end of March, VIVO had over 2700 municipalities covered with 3G, which is more than the rest of our competitors [together] and allows VIVO to push strongly mobile growth and adoption. In parallel, VIVO is adopting a selective fiber deployment, a superior solution for fixed broadband, which allows faster speeds than the solutions provided by our peers and we are rapidly increasing the numbers of households connected.

On slide number 11, mobile service revenues in Brazil kept growing at almost 15% year-on-year, excluding MTRs, driving the contribution of the mobile business to over 60% of VIVO's revenue. It is worth to highlight the data revenues already account for 25% of mobile service revenue reducing the Company's exposure to further reductions in termination rates.

In the fixed business, sales showed a marginal quarter-on-quarter improvement, excluding the impact of regulation. One clear evidence of the benefits of our integrated strategy is the strengthening of our position in the corporate segment, which already represents 48% of our fixed revenues.

In terms of profitability, increased commercial activity, higher weight of smartphones and restructuring costs led to margin erosion in the quarter. Nevertheless, we continue to focus on generating further efficiencies and on the savings around the 10% personnel reduction in place and the April rebranding are still to come. Synergies crystallization is clearly visible below the OIBDA line allowing for a sharp increase in free cash flow generation.

Turning to slide number 12, I just want to highlight the widespread acceleration in the rest of our Latin America footprint where commercial momentum since the second half of 2011 is delivering the results we expected. In the southern region, revenues are accelerating to reach double-digit growth as we are maximizing the benefits stemming from our integrated assets, accelerating growth while transforming the operations. As an example, let me highlight that the agreement with the Colombian government to integrate the fixed and mobile businesses opens new opportunities ahead of us.

Turning to slide number 13, it is particularly noteworthy the turnaround in the Mexican operation where we are starting to see the results of our commercial efforts flowing into revenue performance. The improvement in operational KPIs make us feel confident about the progressive consolidation of revenue growth acceleration along the year. The performance in Venezuela continues to be very strong not only in terms of revenues, but also in terms of benchmark margins. And finally, the evolution of the results in Central America also reflects strong revenue acceleration and please let me remind you that OIBDA is reflecting the startup impact from the recent launch of operations in Costa Rica.

Let me now review our performance in Europe starting on slide number 14. Telefonica Europe continued executing its strategy to regain momentum in key markets and to increase mobile broadband adoption among economic headwinds and strong competition. The success of our enhanced commercial propositions launched from the second half of 2011 and our increased focus on retention pushed handset upgrades up 16% year-on-year.

Additionally, mobile broadband customers posted a solid growth of 27% reaching close to 30% penetration over the total mobile accesses. The mobile growth broadband momentum announced strategy to monetize this growth engine clearly flowed in revenues with non-SMS data revenues up 21% year-on-year. Nevertheless, optimization of usage in a challenging macroenvironment, lower price points and the ongoing regulation (inaudible) impacted overall service revenue performance.

On the efficiency front, I would like to highlight that our focus on cost contention led non-commercial expenses to decline 6% year-on-year partially offsetting the significant increase in commercial costs, which resulted in a 33% OIBDA margin in the quarter. In parallel, we continue working to have more rational dynamics in our markets with clear examples in Germany, the successful My Handy model and in Spain, the acquisition subsidies removal.

If we move to Spain on page 15, I'd like to highlight that we are executing our plan to transform and turn around the business. The first step was to refresh our tariffs across services to become more competitive, stop the loss of high-value customers and drive churn reduction. New tariffs are getting a strong traction in the marketplace. 50% of our fixed broadband customers and 57% of our mobile customers in the consumer segment are already enjoying the new tariffs.

Churn reduction is clearly visible, for example, in fixed broadband, with a 30 basis point decline from Q1 2011 to April 2012. Moreover, early indications in mobile churn of those customers that have opted for the new mobile tariffs point out to a sharp reduction in churn.

Regarding ARPU, early data on the new mobile tariffs shows a limited impact with positive (inaudible) in the low-end segments and a slightly higher year-on-year erosion in the ARPU of the higher-end customers. Fixed broadband ARPU declined 9% year-on-year as we actively migrated customers to the new tariffs to further reduce churn.

The first expansion of our fiber network coverage to 1.3 million households, threefold the homes passed a year ago and the strong traction of the offering with 177,000 houses already connected will drive further churn contention and will help us manage ARPU. In fact, in those areas where we have fiber, results are very positive.

The second step is implementation of a new industrial model to enhance market dynamics and that is why we have gradually reduced mobile handset subsidies since February. Some of our competitors have already announced they will follow us and (inaudible) you should expect a more rational market going forward.

The results so far show a consistent reduction in mobile number portability churn. However, gross and net additions were penalized in the quarter as we were the only player in the market lowering subsidies up to mid-April. We are setting the stage for a redefinition of the value chain in the mobile business to foster a return to profitable growth in the market.

Finally, the first step is aimed at increasing efficiency beyond commercial costs and delivering the best experience to our customers leveraging best-in-class networks. Top-line performance continued to be impacted by a challenging trading environment with pretty stable trends in the fixed business. Weaker performance mobile service revenue was mainly driven by further usage optimization, lower prices and our new commercial policy on SMS premium. Additionally, increased commercial efforts also impacted mobile service revenue as loyalty points accounted as lower revenues.

Nevertheless, strong focus on the cost side has allowed to contain our OIBDA deterioration quarter-on-quarter despite increased top-line pressure. The successful execution of the new (inaudible) program has led to savings of over EUR55 billion in the quarter. Roughly 4500 employees have joined -- sorry -- 4,000 employees have joined the first two tranches of the plan and 3,149 have already left the Company with the remaining leaving before the event. As a result of all our efficiency actions, OIBDA margin expanded sequentially.

Turning to slide number 18, in the UK, we are regaining commercial momentum in a highly competitive market. Contract mobile net adds were the highest since Q3 2010 underpinned by the strong volume upgrades around high-end smartphones and 8% year-on-year increase in gross adds. As such, we have improved our relative position versus other players while also expanding our smartphone penetration to 41%.

I would like to mention the recent launch of the new proposition on and on around tiered data tariffs to further reinforce our position on mobile broadband, which is centered to data revenue growth. This offer is an additional step to secure the level of marketshare with the right commercial initiative and lower incremental costs. I would like to highlight that unlimited data propositions launched by certain competitors have not impacted our marketshare of gross adds proving the success of our rationale approach.

Top line continued to be under pressure, mainly impacted by usage optimization and contract renewals at lower price points. Though stabilizing year-on-year, growth trends as commercial efforts start flowing into revenue. [Voice] performance improved while SMS trends stabilized with data revenues increasing their weight to 48% of mobile service revenue.

Regarding profitability, higher activity around retention and acquisition explains most of the OIBDA erosion. Please notice that activity in first quarter 2011 was particularly low while we have also increased commercial efforts quarter-on-quarter. Going forward, efficiencies derived from improved contract churn and the lower volume of customers out of (inaudible) as the bulk of renewals were done in the quarter should translate into a lower year-on-year increase in commercial expenses.

In Germany, on slide 19, our growth story continued. We recorded a strong set of results, gaining value marketshare with the best ever quarterly contract net adds at close to 300,000 on the back of consistent churn improvement and continued growth of gross adds. It is worth highlighting our partner distribution channels' activity, as well as the strong business segment performance.

Consequently, smartphone penetration increased 5 percentage points to 21% with a 95% smartphone share over total shipments. This, combined with successful monetization of data services and a better revenue mix, led to a sequential acceleration of mobile service revenue growth to 10.5% in the first quarter, excluding the negative impact from MTR cuts in Q4. OIBDA posted a robust double-digit annual growth as revenue growth flows through, which coupled with higher efficiencies led to a margin year-on-year improvement of 2.2 percentage points to 23.4%.

Please turn to slide number 20 to review our operations in the Czech Republic. Commercial momentum continued in the mobile value segment with strong growth in the contract base, up 6% year-on-year, underpinned by better contract churn and mobile broadband growth. In the fixed business, fixed broadband accesses continued to increase with VDSL already representing 19% of the base.

Revenues showed a sequential improvement for the third quarter in a row driven by the continuous improvement of the mobile segment, as well as increased contribution from Slovakia. In parallel, profitability remains strong with a 40.5% margin showing a limited year-on-year erosion, leverage an ongoing efficiency agenda in the Czech Republic, sale of non-core assets and growing our OIBDA in Slovakia despite higher commercial costs and different ICT projects phasing.

Now to finalize the presentation, let's move to the financial side on slide 21. We have been able to execute a well-balanced financing exercise year-to-date relying on both the capital markets, as well as the financial institutions jointly with alternative funding sources for an amount of up to EUR7.5 million. And we have been able to successfully do so under quite difficult market conditions.

Since refinancing allows us to say that 2012 has already been fully refinanced, taking into consideration our expansion options on the preferred shares that mature in December. Moreover, given the level of financing completed, we could apply resources to cope with more than 40% of the maturities for next year 2013. This productive management has also allowed to improve our healthy liquidity position as we continue to increase our price position, excluding Venezuela, to EUR6.3 million. More significantly, we have again increased by EUR1.3 million our undrawn committed credit lines reaching EUR11.4 billion.

It is also worth highlighting that we have been able to extend EUR1.5 billion collateral lines maturities ranging from two to four years. Effective interest costs have increased year-on-year though we continue to remain at the top part of our guidance.

Turning to slide 22, we can see how we are able to reduce our debt thanks to our asset rationalization, mainly stemming from the agreement reached from Colombian restructuring and other asset disposals such as Hispasat, PT, Zon resulting in EUR1.5 billion debt reduction. Nevertheless, this is offset by negative FX movements, non-recurring financial expenses, commitments, (inaudible) and share repurchases.

Going forward, we expect our free cash flow to enhance our financial flexibility as the impact on higher payments versus accruals on seasonality and non-recurring effects recorded in the first quarter should not be extrapolated for the whole year. Working capital sector seasonality will revert the consumption seen in the first quarter of this year.

Turning to slide number 23, we remain mindful on the importance of enhancing financial flexibility and our focus towards improving our leverage ratio by year-end. We are in portfolio optimization mode and looking for selective monetization of our assets across geographies with EUR1.6 billion already achieved. We expect in excess of additional EUR1.5 billion proceeds from further asset sales already undergoing, including Atento, where we continue to actively analyze other divestiture options to maximize the value of our portfolio. On top of that, we adopted our shareholder remuneration to a sustainable trend under current market conditions providing us flexibility.

To recap, we had a very solid commercial start for 2012. Our top line has recorded a significant improvement. We have posted an outstanding performance in Latin America. At the same time, we are setting a new (inaudible) in the sector. Finally, we do reiterate our 2012 outlook as we will deliver a progressive improvement along the year. Thank you very much for your attention. Now we are ready to take your questions.

(Operator Instructions). Jesus Romero, Merrill Lynch.

Thank you. I just had a question on [expanding] some mobile market. If you look at the number of customers you lost in Q1, I don't know if you could give us detail of how many of those customers were lost in the month of March. On the math I do with the 2.5 million customers you lost on a yearly basis, that is about EUR7.500 billion of revenues. Otherwise, you can give us a little detail on what is that customer loss in April and whether you are seeing any improvements in the month of May so far. Thank you.

Thanks for your question, Jesus. Out of those 2.5 million that you were mentioning, 2 million are coming from the cleanup of the base and out of that 1.3 million is coming from prepaid because we have applied a different criteria. We have passed from a balanced criteria to an activity criteria because it was more realistic. And on the contract side, we have been cleaning up some customers that were not effectively using one of our services and is providing us with a significant amount of churn when we realized that. So we are actively cleaning up and that accounts for 2 million.

The other 500,000, we have the real activity of the quarter. If we focus mainly on the trends of March, which we said if you take away the handset subsidy, the bulk of those are coming from that math and as the operators have started to realign, this trend has significantly been improved in the month of April and in the first weeks of May.

It is worth mentioning that different players are having a different commercial approach. Some of them have decided -- namely Vodafone have decided to eliminate subsidies as well. It looks like other players like (inaudible) are going in that direction and (technical difficulty) is staying with a subsidy model, though we think with a lower (inaudible). So we are closely monitoring portability figures. We (inaudible) a lower productive performance with different players and we have different tactical reactions depending on the different players.

But it is -- it was a hot quarter. We knew that. But the economic model in terms of getting church down and retaining high value-added customers and putting the focus of our loyalty programs and subsidies effort on existing customers, which are the most valuable ones, is starting to get some traction and we are starting to have some churn indicators that looks are going into the right direction, though it is still soon. So this is a little bit of the color that I can share with you.

Thank you.

Mr. Achtmann, JPMorgan.

The first one is on Spanish broadband ARPU. So in mobile, the growth has been slowing to 2.5% after plus 11% in the previous quarters. Is that a trend we have to assume will persist in the future as penetration has already reached 30%? Secondly, on fiber, in all of your markets where you roll out fiber, the success -- the takeup is quite successful, is there a case that you should accelerate the fiber rollout to catch more of that broadband market? Thank you.

I didn't get the first question. I think it was on managed service revenue (inaudible) in Spain on the mobile side. There are three major -- if that is the question -- there are three major effects on the acceleration of the decline of mobile service revenue. The first one is that we have cut our commercial practice based on SMS premium programs with partners that were creating a significant amount of quality concerns and claims and a significant amount of cost (inaudible).

And in terms of billing claims, we have cut and we have become much more selective on the SMS trading agreements and commercial understanding and promotions that we were doing with third parties. That explains basically one-third of that growth. Then you have the loyalty programs, which are accounted as negative revenues. So (inaudible) that netted some revenues. Those loyalty programs are increased compared with the previous quarter because that takes part of the commercial strategy of blending or making sure that we retain the most valuable customers that we have and therefore we invest on the loyalty program to make sure that they stay with us. And when we accrue that and those therefore are flowing through revenues.

And they are only another part, which is a lower part of this, is the new targets. We have been effectively migrating actively 3.3 million customers from out of total base of residential contract customers of roughly 7. something million. That is 40% of the base has already been migrated and that creates another tension in terms of lower ARPU, but again with a significant improvement in churn. So the overall equation will be improving sequentially around the year. So that explains that drop on the mobile service revenue.

Considering the fiber on the fixed part of (inaudible), considering the fiber deployment, so far results in terms of ARPU, churn, [CSI] and on customer experience basically in terms of installation time and the learning curve in terms of the average cost of subscriber acquisition costs in terms of the investment of timing in the households are improving significantly. And that explains why the take-up ratio is improving so significantly.

At the same time, we are trying to be very selective on the home passed criteria in order to make sure that before we passed one neighbor or one city, we have commercial traction and therefore that their take-up ratio is improved. And that had, for a very geographical approach, has helped us to be much more efficient. We are pretty positive on the deployment and the results, the commercial results and therefore, we keep with our current plan of significantly increasing our deployment and our speed of connections.

Mr. Ierodiaconou, Citi.

Hello. Two questions please. My first question is around the leap year effect and whether you can give us an idea of how much your revenue growth benefited in Q1 and perhaps if you could comment as to how you expect to get to the more than 1% growth for the full year given the start that we have.

And my second question, and I am sure there may be more questions on KPN later, but I am more interested about the general principles. Given your commitment to the leverage target, can you rule out either changing the dividend policy or using your shares as currency in order to execute any strategic transactions? Thank you.

This is Julio Linares. Regarding your first question, generally speaking, at a [group] level, we didn't see -- of course, there was a positive effect, but we didn't see a relevant effect. Though there is different behavior for market in some of them, the impact is bigger than others. But overall, there is not a big impact at group level.

This is Angel Vila. Regarding the second question, first respect to KPN, we don't have any comments regarding that specific situation. We would only say that it evidences the strong undervaluation of the European telco sector and the valuation that the strategic players already attach to European telcos.

With respect to the dividend, we are not envisaging any change to the dividend policy that we announced in December of last year.

Mr. Prota, Morgan Stanley.

Yes, thank you. I have a couple of questions. First, on the UK, you have been mentioning something in the presentation on this, but I would like you to elaborate a bit more on whether there is seasonality in spending in the first quarter that has brought forward costs and therefore could drive better margin throughout the year and your view on whether such a high level of spending is worth and when revenues will turn around. That is my first question.

And the second question is on the subsidies elimination in Spain. First thing, whether that was already included in your guidance or not and secondly whether you are expecting a net positive impact on EBITDA from this year or the savings that you could get from subsidies will be fully offset by increasing subscriber retention costs and maybe also the attention is turning to lower tariffs from competitors. Thank you.

Thanks, Luis, for your questions. I mean taking the first one on the UK, and more specifically on the evolution of the margin in this first quarter. The first message is there are indicators here in the first quarter of the previous year we have almost no retention costs as we have no expiration or almost no expiration of contracts with (inaudible) customers. And the bulk of those have been mainly in the fourth quarter of next year, first quarter of that year.

That means that we want to preserve those high valuable customers, which, by the way, I would like to stress that the customers life value of the contract is higher in average than any other segment. So we want to preserve those and that is why we have been investing heavily in retention costs in this first quarter of the year.

While that is recurring not for the future, I would focus on the seasonality fact that most of the customers were reaching the iPhone in the first waves of the iPhones and therefore, the bulk of those have already been flowing through, but it will keep going through the year, totally at a much slower pace in terms of that.

Let me stress the fact that thanks to the (inaudible), churn is best-in-class, so we do not only have the best customers in the UK market, but we have the lower churn customers thanks to that effort and we deeply think taking Europe (inaudible) that is worth the effort as well that in Spain where essentially the answer is yes. We deeply think it is the right thing to do to create value and to preserve the most valuable customers.

On top of that, there are other efforts that we have been doing in the first quarter in the UK. We have been investing a little bit more in advertising that will be phasing out somehow the end of the year. So basically the comparison is not fair because the first quarter of last year, we have almost no retention costs and we have been having a significant effort in this quarter.

With respect to the subsidies in Spain, was that included in the budget on our waterfall or not, the answer is yes; it was designed that way. We knew that the first quarter was going to be very tough. We knew that it would take a while till others may consider follow that path or not in terms of competition in Spain. But we deeply think that the payback of that effort in terms of churn reduction is lower than a year.

And so we are positively -- we are monitoring on a weekly basis churn evolution because thanks to the handset subsidy strategy, which, by the way, we are not eliminating. We're just focusing this handset subsidy effort on our existing customers. Thanks to the loyalty programs and thanks to the new tariff refresh, we think that we might be able to get much better churn figures in the next month. And in fact, things are starting to go into that direction.

For us, it is key to monitor the portability. So we make sure that that is reflected in not a heavy loss in customers. So very early stage, it was planned, it was designed that way. We think it is needed at the sector level (inaudible) in Spain with the current markets in consensus. So we think this is the right direction and we really want to -- we need to monitor that on a weekly basis, but we are deeply convinced this is the right direction.

Mr. Minerva, HSBC.

Yes, good afternoon. Two questions please. The first one on Germany, could you describe what you mean in your release by tiered data pricing driving growth in contract ARPU in Germany? Is this the way that you design tariffs, which means that new customers are naturally taking the higher levels or I should say willing to pay more when they take a new tariff?

And secondly on the CapEx in Latin America, can you maybe elaborate a bit on the allocation of capital? Thank you.

Well, taking the question on the German market, on the German what we mean by data, tiered data pricing means that generally speaking, not just in Germany, we think that we can be competitive in the market without having an all-you-can-eat data tariff. That means that if you have the right business intelligence (inaudible) in terms of wooing your customers' database knowing what are the normal users in terms of capacity and in terms of speed of downloads, you can design the right tariff, including bundles of SMS and voice.

That is what we have done in Germany. By the way, we have done exactly the same in the UK and that is why we think we can be competitive in the market. That requires a permanent (inaudible) on the download necessity or a requirement from your customers and that is what we tried to do.

The message here is that we think you can be competitive in the market without having an all-you-can-eat data tariff, which, by the way, put significant pressure on your network and that is why we think that with the current cuts and mainly with the current information systems that we have by which we can top up our customer demand if they require extra data capacity by without a big shock, I think that is the right strategy and that is what we are trying to do.

This is Santiago. On CapEx in LatAm, very few surprises actually. We have significantly increased the amount spent on CapEx in Q1, although the seasonality effect makes all the quarterly comparisons difficult to draw the conclusions from. Our priorities are well known. We want to cater to the data needs of Latin Americans and in order to do that, we will expand coverage, we will participate in spectrum auctions in to provide coverage and quality, which is second to none.

This is especially true in the case of Brazil where, on top of mobile coverage, we are also extending gradually, but surely in the fiber deployment in a similar vein to the one that Jose Maria was mentioning before on Spain. On that, there is no specific geographic allocation of capital. The budget is proceeding as expected and whether or not it is enough, I think the market will have to tell us in a year's time.

Ms. Bienenstock, [Dimension Research].

Yes, hi. Two questions I guess for Santiago. Just a question on Mexican minutes. I am trying to get to the bottom of this Mexican minutes and what has actually gone on there. Their business is clearly turning around. Your [off-net] minutes are now cheaper than your competitors and so -- but minutes are down hugely. How much of that is about accounting? Presumably minutes are actually up if you didn't take into account the accounting change of minutes to seconds.

And then secondly, is there a risk about your Brazilian business given the premium prices with MTR cuts coming and a lot of prices likely to fall? Are you concerned at all about a sort of premium price overhang in your Brazilian wireless business? Thanks.

Robin, I am not sure I got well your second question, but let me try and answer a little bit of the Mexican minutes. What is going on is a change in the shape and the form of the customers that we are attracting and the customers that we are leaving behind. That may have a confusing effect until the year lapses because of the different nature of the prepay that come and the prepay customers that go. Not much more than I can be explicit and if you wouldn't mind going again for the second question where the sound was not very good, I would appreciate it.

Yes, sure. The second question is just you are currently placed at a premium in Brazilian wireless to peers. So as mobile termination rates (inaudible) and mobile wireless prices come, are you concerned at all that you're going to have a crossover hang and have to cut your prices substantially in Brazil on wireless?

Okay, got you. Thank you for going back again. The reason we have the premium pricing in Brazil is twofold. For instance, we are much better exposed to the fast-growing and more valuable data traffic and that explains partially why we have the price premium. And second, we tend to cater in excess of our overall marketshare to the upper half of the market just because we have the better products, the better coverage and the better customers.

Is that price premium going to converge? Well, I think the jury is still out. We certainly have no signs -- we can point to no signs of that being the case. If we are modestly correct about the market being tiered and segmented, there will be different habitats for customers to live in and to the extent that we continue providing good service and the quality experience, I don't see why overall pricing should converge. The lower rungs of the ladder, those occupied by the aggressive pricing entry-level prepaid, might be different, but it is a much more structured market than that statement would suggest.

Thanks.

Mr. Robilliard, BNP Paribas.

Yes, good afternoon. Thank you very much. First a question on Latin America. You mentioned that there has been a lot of increase in commercial expenses and that is one reason why the margin diluted a bit. But when I look at, for instance, the press release of VIVO and I look at, for instance, personal costs, which are growing 8% year-on-year on an adjusted basis, it does seem that there is also a little bit of cost inflation. So maybe if you could comment on that with regards to Brazil, but also in other countries in the region, are you generally seeing some cost inflation?

Second, going to Germany, I mean obviously we have seen probably one of your competitors getting a new shareholder with deep pockets. Does that change in any way the way you think about your strategic position in Germany and how well you are positioned? Thank you.

It's Santiago again. On Brazilian cost increases, you are partially right that there is a bit of cost inflation going on in the region. There is no way denying it, but I don't think that is the main explanation of why costs showed up in the first quarter. They are typically related to the expansion of our customer base, which, as I think we mentioned in the presentation, record levels. Brazil has added more customers in the first quarter than it has ever had. So the last areas of market capture are still going on and that had an effect on commercial expenditure.

Also I would like to highlight the fact that because of the excesses of data products and the higher cost, unit cost of smartphones, it is only natural that when you have a big increase, which is likely happening this year in the adoption of these devices, you will have a unit cost increase that is not going to be permanent as smartphone adoption is increasing, but it is not going to be doubling every year.

So two components to that cost increase. One is genuine cost inflation in some quarters. Most of them, however, related to the strong customer growth and partially related to s unit cost increase as the customers turn away from feature phones into smartphones.

And with respect to the situation that may have indirect implications on the German market, we would like to reiterate that, at this stage, we would not want to make any comments regarding that specific situation.

Mr. Boddy, Goldman Sachs.

Yes, thanks for taking my question. A couple of things that caught my eye. On page 23, toward the end of the presentation, you talk about opportunities under review for I guess faster deleveraging. And I know you talk about portfolio management. I guess we have seen a couple of situations recently where operators are now able to sell into private equity at significant premium to current trading multiples. Is that something that you are thinking about and can you give us the framework by which you decide what kind of assets are core and which ones you might look to selectively monetize?

Secondly, I just wanted to ask a broader question about commercial costs. It is now a sort of change in the attitude of the Company, which is going to last for a while. So you are going to continue to invest at this high level in commercial costs, particularly in LatAm and then look to get better revenues as a way of improving growth and profitability or is this time bound? Is this a period you are investing for and then you'll see the margins recover as you reduce the competitive intensity? Thank you.

Thank you, Tim. This is Angel Vila taking your first question regarding slide number 23. As you have seen, even in taking into account the post-closing events related to the Colombia restructuring and so on, we will still be outside or above the target leverage that we have expressed and committed to the market of 2.35. This has come from increased CapEx payouts from some negative FX movements and some other FX, which are explained on slide number 22.

But we remain committed to this leverage ratio. We remain committed to preserve our rating. We remain committed to our shareholder remuneration. So clearly we have to step up our efforts with respect to activities or actions regarding debt reduction. We have already achieved EUR1.6 billion. We have in progress potential transactions that would have in excess of EUR1.5 billion. We don't want to provide specific numbers, but our estimate and given the progress of those would be in excess of that.

And then we are assessing a variety of potential actions that we are reviewing and we are lacking the sense that we have multiple options on which we can act. We can tap capital markets with potential ideas of some of our assets and we are assessing the effectiveness of those. We are also analyzing which assets, if any, we could deem additionally to be non-core. And we can also use the lever of selectively monetizing stakes in some of our operations.

So this is what we are working. We wanted to highlight it to point out that we remain committed to our leverage targets, our shareholder remuneration targets and that we will continue to activate these actions obviously with respect to market conditions.

Could you share anymore just on the framework of your thinking on that? Is it about long-term market structure attractiveness? How are you thinking about making those decisions?

Those decisions are leading to obviously market attractiveness. We are no looking at expanding our portfolio in other operations. We are looking at options that can increase the value of operations that we have and obviously to the return of capital that we have employed in our operations.

Okay, thanks. On the (inaudible) side?

Having your second question, I do so from the last part of last year. I think we have a strong commercial push in most of our most relevant markets. Because of that, you have seen a commercial cost increase very much related with our commercial activity. That delivered very significant access growth.

Regarding the rest of the year, though we are going to keep the high level of activity, we will see a positive impact because of the subsidies cut in some countries. And we will see as well positive impact because the iPhone impact dilution along the year. In any case, we will manage these commercial costs very much in line with our revenue growth for the rest of the year.

Mr. Milner, Arete.

Thanks very much. I just want to come back to Spanish mobile. Service revenues fell 18% in the quarter. I just want to understand what was the service revenue trend before and after the change in subsidy policy? And then second question moving to Brazil, I think the EBITDA fell in the quarter adjusted for restructuring and tower sales. I mean thinking back to the last synergies that you anticipated at the time of the VIVO deal and also the good mobile growth that you are seeing, it seems quite disappointing. You mentioned some of the reasons customer growth, smartphone take-up and cost inflation, but I wonder if you can just talk in a bit more detail about how and when sort of the EBITDA growth trend might start to improve from here. Thanks.

Okay, taking your question about mobile service revenue in Spain excluding MTRs, the increase year-on-year is 16.2% compared with 12.4% in the previous quarter, in Q4 2011 and again three major sources of that deviation and none of them is strictly linked to the handset subsidies. So we have not seen an acceleration of that because of the handset subsidies. The SMS premium that we had been much more selective, much more selective because it was causing us a significant amount of bad revenues that we were forced to correct in other quarters, claims and costs and IT and billing claims.

The loyalty programs, which is the one that is somehow related to handset subsidies because we had increasing the handset subsidy activity in our existing customers because we consider to have the best, the most valuable customers and therefore, we are increasing the loyalty efforts, the (inaudible) the savings that we have in other [sunset] -- in other subsidies, handset subsidies below revenue the revenue line.

And the third one, which is derived from the effect of the migration to the new tariffs, those are customers whose promotions were expiring or who have been actively migrating and therefore, they have a lower ARPU. You have also there on that part a positive increase of the leap year of roughly 0.7% in the quarter. So the net of that is the evolution. None of that is directly related to the subsidies except in the loyalty programs.

Yes, this is Santiago. In terms of when or if Brazilian OIBDA margin will recover, you rightly pointed out that there are number of one-off effects that are not going to be coming back from the remainder of the year. Most of them related to personnel restructuring. I have also mentioned cost inflation. I think it is fair to expect that, despite the high temperature, competitive temperature in the market in Brazil, those strengths will smooth out as the year progresses. The reasons being for the one-off nature of some of these movements and also a part of the savings that are going to come from the integration of our fixed mobile businesses, which is already completed, will start transpiring as the year progresses.

We have no way of knowing how strong the market will continue pushing. What we have been able to record last year is a slight increment in our OIBDA margin -- I'm sorry -- in our OIBDA marketshare and irrespective of what ends up happening, we would expect that to continue being the case this year.

So I think there are one-off very clear effects that are not going to come back in the coming quarters, so that should be an improvement in growth rates relative to last year. And the fruits of the integration are going to be highly visible, probably in the second half.

Mr. Funell, Credit Suisse

Thanks. Just follow-up questions please. The strategy where you have got a very large gap between your level of SRC per unit and your SAC is quite unusual when we look at the history of the industry. Do you think that is a temporary phase that you are going through? I know you are planning ultimately to try and lower your SRCs over time as well, perhaps once you have locked customers into these new plans. Perhaps that is something we can look forward to later in the year in terms of margin improvement.

Secondly, this is sort of more a question of principal rather than specifically about KPN. Do you think given your performance in Germany that you need to be involved in German mobile consolidation?

Okay. Taking your question, even though it is global, I think that probably you are referring to the Spanish market mainly because it is the most --.

Yes, sorry. I meant Spain.

So I would say that, yes, we see it as a change of paradigm, which means that we knew this is going to be a first phase, which was going to be tough because when you remove subsidies, you don't know what the other competitors are going to do, but you think that being the market leader, you will have some effect on the market and you will try to readdress the marketing trends of the whole industry.

So we think that the retention costs, was it here through the handset subsidies or in the UK, is something that you need to have because we have very valuable customers. Again, when you do the net present value of the chain of revenues of the different customers, we have an outstanding value customer base that we need to retain and therefore subscriber acquisition costs of the existing customers increases.

At the same time, you bet on the churn reduction because do you think that (inaudible) that you apply to these loyalty programs to improve your quality indexes. And you put the right incentives in the distribution chain, you can drive that down to a much better churn to improve. Remember that at the same time we have been totally refreshing the tariffs. The entry levels are much lower than they were a year ago and therefore, you will also be heeded by the fact that the renewals are coming at a lower ARPU, but they are not churning.

So the full effect, you need to have a few months to see if the churn is applying the countermeasure, the positive countermeasures we think and we are measuring that in the last seven months since we are starting with this strategy. And this early stage of month of churn indicators prove that we are going to the right direction, but still wait a few months to make sure that this is the case. Wasn't that to be the case, the payback of the effort is less than one year.

German consolidation, please?

Yes, this is Angel, with respect to the second question. We are very happy with our German asset, which is a core asset. It is an asset where we have invested substantially in the last years. The return on that investment is growing. The Company is growing at a subscriber level, revenue level, OIBDA, OIBDA margin, operating cash flow. So we are very satisfied with our operation. And with respect to something non-organic on the asset, I can only reiterate that we are not going to make comments on this situation.

Okay, thank you.

Mr. Marsch, Berenberg.

Yes, hi. I just wondered if you could quantify for us how much Spanish EBITDA benefited in the quarter from the actions that you took on handset subsidies. And secondly, would you be able to give us the actual change in Spanish mobile service revenues in March year-over-year?

So thanks for the question, but unfortunately you are asking very sensitive commercial information that we do not disclose. I reiterate what I have said before. Things are going to the direction that we were planning early stage. We started in March and that is why the figures of customers in March were affected because (inaudible) followed but later. Some of the others followed later, but unfortunately I cannot be more specific because, as you might imagine, this is highly commercial sensitive information.

Mr. [Cura], Deutsche Bank.

Yes, two questions if I can. So firstly on Brazil, your Brazilian fixed KPIs seemed quite mixed with the loss of pay TV subs and slowing broadband additions. What explains the slowdown and should we expect any improvements in the rate of fixed phone declines for the rest of the year? And second on Spain, you reduced your commercial expense by 3% in Q1. Should we view this level of reduction as sustainable for the rest of '12?

Yes, this is Santiago again. Thanks for the question. On Brazilian fixed, I think there are two opposing factors. One is that we continue having an erosion in both fixed line and then single product contribution at the same time that we have an increase and reasonable growth on the broadband product, including fiber, which is off to a small in size, but very promising development. So my expectation is that the contribution of fixed to Brazil, despite the high-growth nature of the wireless asset, will stabilize and turn positive throughout the year.

Thank you.

Taking your question on Spain, the commercial cost in the first quarter. I mean remember that the subsidy thing just in March is just one month out of three of the quarter. And it has all the defects. I mean for example, at the same time that we were removing subsidies, we were less active on TV campaigns, on (inaudible) campaigns and therefore, this as well as some one-offs in terms of our commercial effort that we are going to be deciding very practically if we need to renew or not.

Having said that, and including churn, as I was telling you, the payback of the effort should be less than one year and therefore, we are betting that the churn improvement will be flowing to our accounts and therefore will be helping us to (inaudible) as well other commercial actions in a much more practical matter. So the answer is yes, we wanted to be into that direction, but again too soon to say that the whole strategy is working. We will need to monitor that.

Mr. Lyall, UBS.

Hi there. Two questions please. First on Spanish mobile, some pressure ports and distribution channels have suggested you would have to reintroduce subsidies and increase discounts quite heavily for customers porting from orange. Could you confirm whether you have had to maybe tune strategy a bit into April and maybe some of those savings as a couple have suggested there might disappear?

And then second, just (inaudible) German situation, you emphasized in the presentation a lot on the financial flexibility you have got. Could you just confirm that there are no time or liquidity constraints that restrict you from reacting to AMX's move if you decide to? Thank you.

Taking your question on the noise on the distribution chain and getting back to subsidies, the answer is that we are pretty firm on our strategy of trying to change the paradigm of the sector mainly in Spain with the subsidy strategy and therefore the bulk on the back of our effort to our existing customers and therefore trying to move away from incentivizing churn of our customers either from us or from the others.

Having said that, tactically and not just through subsidies, there are other actions that we can take in order to make sure that in the portability field, we do not lose to the battle in a hard way or that we balance that situation. That doesn't have to be through subsidies. There are other actions that we can take, but again we are pretty firm on this new handset strategy. We need to try to see if the churn is going to the right direction and again, we think it is, so we are not going to be -- we are not going to be altering that for now.

Regarding the second question, I can only reiterate that we have no comment to make on potential situations that may be evolving in the European telco area.

Mr. Peddy, Macquarie.

Yes, hello, everyone. Just a couple of things. I was just intrigued to know are you doing anything different in Germany to what you are doing in the UK given the noticeable difference in performance. And secondly, in the UK, you talk about usage optimization. Is that something that the consumer is stimulating or is it something that you are actively stimulating in so that you can actually secure your customer base? Thank you.

Okay, thanks for the question. We know that both markets are different in terms of a significant amount of features. Was it on the distribution schemes or others, but namely the most important differentiating factor that I would point out is that, in Germany, for example, we are away from our subsidizing handsets for a long, long while. We are financing them through a third-party and therefore, the commercial model is different.

Having said that, we have refreshed our tariff in Germany as well as within the UK. We have most of the database analysis. Our customer intelligence is shared in terms of our best practices are on the route. So we don't see major difference apart from the specific difference of each market.

On top of that, taking the out of bundle of the usage strategy in the UK, we are not necessarily fostering that. Every customer decides, but we have been refreshing our ties and we have been launching a new tariff that includes a much higher degree of SMS and limited SMS and limited voice and a significant amount of data capacity because we want it to be competitive against the all-you-can-eat data offer from other players.

For us, the important message is that, thanks to this tariff, we have been able to prove ourselves and the market that you don't need to have an all-you-can-eat data tariff to be competitive in the market if you have the right information about usage demand, the capacity demand of your customers. And therefore, designing the right strategy and designing the right product attracts the right customers and helps us to make a better and most efficient use of our network. So that is a little bit what I can comment to you.

Mr. Lares, JB Capital.

Hi, it's Fabian Lares from JB Capital Markets in Madrid. Two questions please. The first one is regarding Argentina. Surrounding the situation that happened with Repsol YPF recently, are you in any way, shape or form concerned following the fine that you were imposed, a possible worse relationship with the government and any other interference from the Argentine authorities? And in particular, how that can concern aspects related to repatriation of cash and possible treatment of the amount in hyperinflation states.

And second, regarding Central America, with the launch of the Costa Rican operations, while I understand that these are small, I was wondering if you could give us some kind of context of the expectations of what we should look forward to in terms of potential size of the market. And would this be a kind of operations similar in size and contribution to say Uruguay or something along these lines? Thank you very much.

Thank you. This is Santiago. First, in Argentina, I think I can go as far as saying that not much has changed on the telecom space in Argentina. Essentially nothing has changed on our end and whatever is happening in the other sectors is certainly not for us to comment on.

On the (inaudible) fine, we are going through the review of the wording, the exact wording of that number. You may have seen that there are two very different components. One is the fine itself, which is MXN6 billion or roughly EUR1.5 million. The remainder of the full amount being a MXN10 pro rata per customer compensation that the regulatory authorities suggest that we do for our customers.

Two comments there. One is that the interruption of service is more likely than not going to be proven not to have been a problem of Telefonica, but something initiated from without the Company that may have a final effect and we are cooperating with authorities on that investigation.

And second and most important is that after the five to six hour service interruption, we immediately reacted compensating our customers on the prepaid and on the postpaid or contract segments by other -- eroding that day from the charges, extending the lives of the top-ups or in this case, because it was Easter week, giving them for free until that Friday, so an additional four days free SMS connectivity capabilities.

So we think we have done more than what is required to first sort out the problem. Second, we are optimistic that the true nature of that interruption is going to be proven not to have originated from Telefonica and that has an effect. And third on the compensation, we think that we have more than done our fair share of the whole thing.

On Central America, I think [Q4 results] -- the fact that the numbers are small doesn't mean that they are unimportant. Costa Rica, because of its start-up nature, is likely to contribute negatively for a while yet and the rest of the region, the four major -- the Central American markets, behave in quite different ways. Certainly, we are making progress in some of those, as you may have seen and the competition, especially on (inaudible) and new products, is accelerating. We have the intention of completing the 3G coverage there where we are lagging behind so that we can provide as good a coverage as possible and as competitive a service as any of our competitors can.

Mr. Cook, Insight Investment.

Hi, good afternoon. Two questions, please. Firstly, did the two syndicated loans you raised this quarter both expire in 2013? And secondly, with regard to the disposals that you got in progress, do you have interested parties for all of them and if so, is that how you got to the estimate of just over EUR1.5 billion? Thank you.

On the first question, the syndicated facility that was refinanced and extended maturities are in 2015 and 2017. Could you please repeat the second question?

So the second question is with regard to the disposal in progress, Portal, [Rumbo], Atento. Do you have interested parties for each of those disposals and is that how you got to your estimate of over EUR1.5 billion?

Well, the value that we are estimating is in excess of EUR1.5 billion. We are not attributing value to a specific asset. We don't want to disclose that the bigger of these transactions or estimates would be Atento and that process is progressing very positively.

Okay, thank you.

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

Well, ladies and gentlemen, thank you for attending this conference call and looking forward to seeing all of you at the Investor Day of Telefonica Digital that we would hold in early July. Thank you.

The sales forecast January to March 2012 results conference call is over. You may now disconnect your lines. Thank you.