Telefonica SA (TEF) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Telefonica's January-June 2012 results conference call. At this time, all participants are in a 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 turn the call over to Ms. Maria Garcia-Legaz, Head of Investor Relations. Please go ahead, madam.

Good afternoon, ladies and gentlemen, and welcome to Telfonica's conference call to discuss January-June 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 prepared under International Financial Reporting Standards. This financial information is unaudited.

This presentation may contain announcements that constitute forward-looking statements, which are not guarantees of future performance and involve risks and uncertainties, and that certain results may differ materially from those in the forward-looking statements as a result of various factors.

We invite you to read the complete disclaimer included in the first page of the presentation, which you will find in 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 slides, please contact Telefonica Investor Relations team in Madrid by dialing the following telephone number, 34-91-482-87-00.

Now, let me turn the call over to our Chairman and CEO, Mr. Cesar Alierta, who will be leading this conference call.

Thank you, Maria. Good morning to everybody.

As you can see, our second quarter results show a significant improvement quarter on quarter, with a better performance across all the metrics, from OIBDA to net income in underlying terms. OIBDA in absolute level rose on a quarterly basis, and profitability enhanced sequentially with quarter-on-quarter growth across the board.

These results today show the benefit of our diversification, our key strength to face very different realities, with a posted positive revenue growth on the back of further commercial [push] and a very solid evolution in Latin America. On top of that, we have been taking bold actions to improve market dynamics and enhance our business model through efficiency gains, like the removal of [our] handset subsidies in Spain and a gradual reduction in the UK, and the network sharing agreements reached in UK and in Mexico. In addition, recent news about regulation in Europe point to a drastic change in the way the telco industry has been regulated in recent years, [in our view] a very positive signal for the sector as a whole.

On the financial side, we have taken decisive actions to improve the balance sheet and defuse potential risk, including [and assessing our use demand] of our remuneration policy which allows us to have a full-year [refining] maturity behind the end of 2013.

We are managing productively our portfolio of assets with visible results year to date, and we have decided next actions including preparation for an IPO of Telefonica Germany in the fourth quarter. And, we continue making significant progress to enhance our growth profile and capture the significant growth opportunities arising in the digital space.

Let me now review with more detail our first half performance starting with a summary of the key financials on the slide number 4. In the first half of both 2012 and 2011, we [booked] several significant exceptional items. So, to better understand the underlying performance of the Company, we are providing a P&L excluding those non-recurring effects and non-cash impacts.

January-June revenue grew 0.3% year-on-year to reach almost EUR31 billion, with underlying OIBDA topping EUR10 billion, with a better performance in the second quarter. (inaudible) CapEx operating cash flow came close to EUR7 billion.

Underlying net income was over EUR2.8 billion, and earnings per share stood at EUR0.62 in the first half. Let me mention that [both] metrics significantly improved their year-on-year performance in the second quarter.

CapEx to sales was 12%.

The [immediate] highlight of the second quarter results is the quarter-on-quarter increase in OIBDA across the main regions and key operations, as you can see clearly on the slide number 5. As a result, the consolidated OIBDA margin stood at 34.6% in the second quarter and expanded 180 bps sequentially, leaving a significant lower year-on-year erosion versus the previous quarter.

In my opinion, OIBDA reached the bottom in the first quarter of the year, and I want to underline that. It is my total conviction that the OIBDA reached the bottom in the first quarter of this year, and improved trends will consolidate in the second half of the year. And, I'd like to highlight the better performance in Spain, where OIBDA was up 3% versus the first quarter of the year.

Slide number 6 outlines how we are [finally having] our geographical diversification. We have increased our exposure to Latin America significantly in the last 12 months, representing cerca 50% of key financial metrics of our results with significant contribution from individual markets. And, as you can see, we are not only highly diversified in terms of regions but also in currency terms, with a risk perception that is totally decoupled with the fundamentals of our business.

Our exposure to southern Europe or even to the euro is well below the exposure of other European players whose headquarters are not in Spain. And, importantly, operating cash flow in Spain remains pretty stable quarter on quarter.

Our revenues results and operating cash flow are clearly one of the most [spread] and diversified of the whole industry, as is shown very clearly in this slide.

And, we are not talking only about diversification, but also about reforming our business model from a traditional telco to a digital telco where growth opportunities are very, very large. They lay in the upcoming transformation of wider parts of the economy including security, education, public administration, health, financial service, and other areas that represent between 35% and 40% of GDP, with an addressable market for us of up to 2%, which is nearly double the market today of the telco industry, represents a tremendous opportunity, and I can assure you Telefonica will not miss this huge opportunity.

As you can see in the slide number 8, telcos can use three models to capture the value coming from this digitalization wave -- as connectivity providers, as an enabler/retailer, or as a service provider. Connectivity plays in our strength -- infrastructure, spectrum, and [monolous]. We expect this to remain our strongest play for the coming future.

Digital services are complements. The more are being used, the better clearly for us. Here, we have made already a number of announcements on fiber and LTE deployments, network sharing agreements, and tariffs initiatives.

We see enabler/retailer role very important. This is where our asset base complements other players in our ecosystem. This is about creating new markets, not taking markets from someone else. Here again, we [provide announcements] on many fronts.

Digital services, we will need to maintain relationships and customer engagement on few selected services, for example, communications, financial services, and others. We'll be selective and focus on some of those services where we can make a clear difference with further opportunities to come in the coming future.

It will be about being innovative, develop and sell products behind connectivity to solve social needs, and to be a catalyst for change in [this environment], while reinforcing our core business.

Our view of digital telcos -- none of these three models, but it's really one of the combination of those three models, eventually with different answers [work] depending on the local market conditions. This is the reason why we organized Telefonica the way we did -- different divisions working together towards a common goal, with different roles, responsibilities, assets, and skill sets. And, we have done that clearly ahead of our peers.

And, now, let me hand it over to Angel Vila for a review of our operating and financial performance.

Thank you, Cesar. Please turn now to slide number 9. In the second quarter of 2012, we continued to regaining commercial momentum, despite strong competition across countries. Our customer base surpassed the 310 million mark at the end of June, 6% more than a year ago, driven by the growth in key strategic areas.

Strong focus on the smartphone adoption fueled a solid 18% growth in mobile net ads, versus the first half of 2011. Smartphone net ads grew 40% versus last year's figure, with growth rate reaching 99% in Latin America.

In parallel, we are advancing the transformation of our fixed-line businesses with a selective deployment of ultra-broadband services in those markets where there is potential demand and appropriate regulation and competition. Approximately 24% of our fixed accesses are currently ready for commercial ultra-broadband services and, out of them, around 7% are already connected.

As slide number 10 shows, revenue growth was driven by the robust performance at Telefonica Latin America and mobile data across the group, offsetting headwinds in Europe. Data revenues continue to deliver a [sustained] ramp up in their quarterly year-on-year increase and already account for 35% of mobile service revenue on the back of our profitable data monetization leveraging tier pricing along with integrated tariffs.

I would like to stress the marked sequential slowdown in OpEx in the second quarter of 2012, reflecting the continuous focus on efficiency improvements and eased commercial cost growth on the back of the new handset policy in Spain. As a result, consolidated OIBDA improved its year-on-year trend in the second quarter, and our OIBDA margin expanded 180 bps sequentially. Year-on-year margin erosion also improved by almost 100 bps versus the previous quarter.

Please turn now to slide number 11 to start with our Latin American operations, where business fundamentals remain sound. Organic revenue growth rates keep healthy levels, driven by a double-digit growth in mobile, thanks to sustained commercial activity with gross ads growing above 20% in the first six months.

Smartphones adoption continues booming in our base, more than doubling its penetration on the base, year on year.

Mobile revenue growth is fueled by strong mobile service revenues on the back of increased data consumption and growth in voice services.

The weaker performance in the fixed business is strongly affected by specific factors in Brazil in the quarter.

Increasing mobile traffic is affecting traditional fixed business. However, our exposure to traditional fixed voice is just 20% of revenues in the region, while the remaining 80% keeps growing almost at double digit.

Turning to slide number 12, OIBDA in the second quarter showed a sequential improvement. It was higher than in the first quarter in absolute terms, but it also improved both in terms of year-on-year evolution and margins.

In such a diversified portfolio, there are as always negative and positive impacts affecting quarterly performance with tower sales and some other specific factors in Argentina, Venezuela, and Brazil affecting margin evolution. However, efficiency gains were visible in the quarter, supporting the quarter-on-quarter margin improvement.

In terms of year-on-year comparisons, profitability continued to be explained by the increased commercial activity in 2012 and the higher effort in transformation towards mobile data. Year-on-year commercial efforts will be more comparable in the second half of the year, leading to a lower margin erosion.

Please turn to slide 13 to review our Brazilian operations. We continue to lead the market, leveraging our differential propositions both in terms of assets and strategy. Our focus on providing superior service quality is clearly very good.

Telefonica Brasil maintained a strong commercial activity in the quarter with mobile net additions up by almost 30%, year-on-year. Smartphone users multiplied by three times, versus year end 2011.

Vivo is leading mobile growth [and] adoption in the market, on the back of its superior 3G coverage and network quality, which are clearly visible at revenue level. Data already accounts for more than 25% of mobile service revenue, a benchmark in the market.

We aim to continue leading quality in the Brazilian market and, for this, we keep investing strongly for the future as shown by the recent acquisition of spectrum.

In the fixed business, we're accelerating the transformation, speeding up both our broadband connections with increased CapEx in the second half of the year to enhance commercial momentum in the fixed [router] market.

I would also like to highlight the successful rebranding and, just one quarter after marketing our fixed business under the Vivo brand, the Company is leading customer satisfaction in Brazil.

In terms of financials, revenue growth in Brazil continues to be sound, with marked differences between businesses. Mobile service revenues kept growing fairly nicely at over 13% year-on-year, ex-regulation, with pretty strong prepaid top-up levels and no signs of slowdown.

In terms of fixed-to-mobile substitution, it should be noted that mobile service revenue expansion is more than 2.5 times the erosion in traditional fixed voice revenues, resulting in the net of both impacts being clearly positive.

Fixed revenue performance, quarter on quarter, was impacted by several issues, with two-thirds of the weaker performance explained by non-recurring factors. These include the full consideration of TVA from second quarter 2011, retroactively to January 1 of that year, which means that in Q2 2011 we included six months of TVA's results instead of just three months. We also include the seasonality associated with different execution of projects in the corporate segment.

On the other hand, OIBDA improved sequentially both in absolute terms and in margin.

Moving to our operations in the southern region on slide 15, the highlights are that revenue growth remains strong across key countries, mainly fueled by strong commercial activity and solid mobile data revenues. Especially remarkable is the good growth recorded in Peru and Argentina, with top line in Colombia being hit in Q2 by seasonality of IT projects.

Chile continued to deliver a steady performance amid increased competition.

At the OIBDA level, as we already explained there, different specific factors impacting performance in the quarter, especially in Argentina and Peru.

On the next slide, number 16, we summarize the results recorded in the northern region. Let me highlight that Mexico is already showing revenue growth in the second quarter, a significant progress from previous quarters and just one year after introduction of aggressive [MTR] cuts. In addition, the recently announced agreement with Iusacell and our new commercial proposition will drive further benefits.

Let me now review our performance in Europe, starting on slide 17. We have regained commercial momentum across our footprint over the second quarter on the back of the good traction of our refreshed tariffs and churn reduction, which led to a strong performance in mobile contract net ads, up 22% quarter-on-quarter. Moreover, focus on expanding smartphones led to a 32% penetration rate.

Improved commercial results were compatible with a better OIBDA evolution. OIBDA reached close to EUR2.7 billion in the second quarter, up 6.3%, quarter-on-quarter, leveraging a sharp cut in commercial costs, down close to 7% in the quarter. As a result, margin improved sequentially to 35.5% in the quarter, with further benefits to come from our recent decisions to improve profitability across markets.

Top line continued to be impacted by the intense macroeconomic, competitive, and regulatory pressures.

Turning to slide 18 to review our operations in Spain, I would like to highlight that our plan to reverse the situation is starting to yield positive results. Our initiatives to recover competitiveness through our proactive migration of customers in the consumer segment to our refreshed tariffs have led to more than two-thirds of fixed broadband customers and over 50% in the mobile contract business already enjoying better propositions.

The major benefit from this fast repositioning is the sharp churn reduction across services, which has become more visible in Q2, leading to a much better evolution of net ads, quarter on quarter, especially in mobile contract segments. Please notice that net ads in contract voice accesses were already positive in May and June.

On the other hand, the rapid adoption of the new tariffs is negatively impacting ARPU, though we expect ARPU erosion to ease from Q4 on the anniversary of the new portfolio.

The second key lever of our turnaround plan is the implementation of a new industrial model to enhance efficiency. On this front, results are also evident. Our decision to remove mobile subsidies for new customers from March was followed by some competitors, leading to lower activity volumes in the portability market with a better trend in our net results despite the introduction of the 24-hour portability from June 1.

Subsidies removal is driving significant net savings in commercial costs, which are already flowing into the P&L. Additionally, improved quality has led to a strong reduction in customer claims, driving further cost savings. Efficiencies gains are also coming from the rapid completion of the redundancy program in the fixed-line business, positioning us well ahead of our peers to benefit from the sector transformation derived from the new regulatory framework in Europe.

We have already done our homework [to add up the] cost structure of the legacy businesses with very material savings in personnel costs, close to EUR120 million in the first half of the year.

The gradual improvement in operating performance and a tight cost management make us comfortable to assess that our Spanish business reached the bottom in the first quarter, with a better financial performance expected for the coming quarters as we fully capture the benefits from the new commercial model and the headcount redundancy plan.

This better evolution was already visible in Q2. OIBDA reached over EUR1.7 billion in the second quarter, increasing sequentially. OIBDA margin also expanded quarter-on-quarter, reaching 45% in the quarter with a very limited year-on-year erosion. This performance was achieved despite increased top line pressure in the fixed business.

Mobile service revenue remained more resilient in April to June, with a much lower sequential deterioration than in the previous quarter when we recorded a positive impact from the [leap] year. This performance is explained by a lower impact from our loyalty programs, which offset the negative drag from determination of a contract with [an MB&O] in the quarter.

Enhanced quality and lower churn are also driving CapEx efficiencies. Despite a significant higher budget for fiber investment in 2012, 20% up year-on-year, total CapEx in Spain will be down versus 2011, further supporting an improved operating cash flow year-on-year performance versus 2011 along the year. On top of that, let me stress that the recent news on regulation will be particularly positive for our business in Spain, where unbundled local [look] prices are well below the European average.

Please turn now to slide 20 to review our operation in the UK. Telefonica UK consolidated its improved market momentum in the quarter, expanding its mobile base on increasing contract gross ads, up 26% year on year in Q2, and a sustained contract churn improvement. As result, contract net ads grew sharply, totaling 251,000 in Q2, with further increases in the contract mix to 51% of our total base.

At the same time, our OIBDA performance improved, rising quarter on quarter on the back of efficiency measures and contention on commercial expenses as the Company gradually lowered handset subsidies and upgrades slowed down. This resulted into a sequential OIBDA margin expansion to reach 23.4%.

The better [trading] activity led to a consistent improvement of revenue trends with mobile service revenues, except [DRs], consolidating their stabilization trend. Non-SMS data sales growth accelerated to 19.5% in the second quarter on the back of successful data monetization strategy. We expect to continue strengthening mobile service revenue in the second half of the year despite competitive pressures in the market.

In Germany, our strong franchise continued to deliver a solid set of results, as the slides 21 and 22 show. Our new commercial approach adapting our contract portfolio with the launch of O2 Blue reinforce value for money propositions.

[LTE] that is recently launched and original focus are delivering continuous churn improvements and a steady mobile base expansion, with a better customer mix as contract segment already accounts for 52% of our mobile base.

The strong commercial momentum has led to consistent market share gains, especially among higher value customers, reaching a 19% share in the contract segment and [deflecting our market dating] smartphone penetration. Additionally, the strong investments in recent years to expand our distribution channels, our solid network, and the spectrum to exploit the mobile data opportunity leave us in the best position to capture future growth in the attractive German market.

We experienced solid trading momentum and ARPU growth, year on year and sequentially, leverage on better contract mix, and higher consumer spend due to successful data monetization. All of these flow into financials, with mobile revenues growing 11% year on year in the second quarter and total revenues accelerating their growth trend to close to 7%.

OIBDA is up close to 13%, both quarter on quarter and in the first half, on the back of strong top line performance and efficiency measures driving an OIBDA margin expansion to 25.7% in the second quarter.

January to June operating cash flow increased by 13.4%, year on year, showing the strong acceleration in growth from top line to cash generation.

To finalize with the operating performance, let me update you on our guidance for 2012. Last February, we gave a guidance for revenue growth above 1% in current terms, at the specific foreign exchange assumptions. However, given weaker than anticipated macroeconomic conditions and a stronger drag from regulation than previously envisaged, we now expect to deliver flat to positive revenue growth by year-end.

Nevertheless, we reiterate our expectation for OIBDA margin erosion in 2012 that will be lower than in 2011, with a better year-on-year evolution in the second half of the year driven by better year-on-year comparisons in commercial activity, net savings in commercial costs in Spain, and further cost efficiencies across countries. On top of that, operating synergies in Brazil will become visible in the coming months.

CapEx to sales guidance remains unchanged, at similar levels than in 2011.

Let's now move to the financial side, on slide number 24. Net financial debt increase in the quarter is mainly related to the timing of the dividend payment and the execution of the share buyback which, coupled with negative FX movements, commitments cancellation, and the impact of telco refinancing, offset positive free cash flow generation and the EUR1.5 billion debt reduction from the closing of the Colombian restructuring.

Further positive impacts from our asset rationalization strategy will be visible in the short term. We have already got all the necessary regulatory approvals for the partial sale of our stake in China Unicom, which will effectively reduce our debt burden from July 30. This, coupled with the sale of our stake in Hispasat, will contribute with EUR1.3 billion cash proceeds.

Free cash flow generation will improve in the second half of the year, on the back of a better operating performance and the unwinding of the working capital consumption recorded in the first half of the year. Debt reduction will be significantly accelerated by the shareholder remuneration measures announced yesterday that will generate significant cash savings.

We maintain a solid liquidity position, with set maturities covered until beyond the end of 2012 -- 2013, until the end of 2013. This comfortable position is driven by our strong activity in the bond and credit markets since the beginning of the year and the recent adjustment of our remuneration policy which improves liquidity immediately and reduces refinancing risk.

We fully refinanced 2012 maturities in the first quarter, and we have also reduced 2013 maturities by nearly EUR1 billion to EUR6.7 billion.

Our cash position, excluding Venezuela, stood at over EUR5 billion at the end of June, while total undrawn credit lines amount to EUR8.9 billion with over 80% maturing long term. It is worth to highlight the geographic diversification of undrawn credit lines, with about one-fourth of them signed with Spanish institutions, while American and Asian banks represent another one-fourth, and the rest being widely split among diverse other European countries.

Let me say that although credit markets have deteriorated, we have demonstrated our ability to refinance and extend existing credit line maturities for an amount of EUR2.4 billion in the year.

We are also benefitting from our geographic diversification, and in the current credit environment, we have recently secured full underwriting of a BRL2 billion debentures issuance that will be closed in the coming weeks.

Effective interest costs have increased in the quarter, though continue to remain at the middle part of our guidance. And, the acceleration in debt reduction will lead to lower than anticipated financial expenses, affecting positively the P&Ls.

Let me now hand it back to Cesar.

Thank you, Angel. Let me stress that we are fully committed to enhance our financial [flexibility] and to deliver our leverage target for [E&M] in the current extremely challenging economic and financial environment, exogenous factors are creating severe instability and are exacerbating potential financial risks.

[Since these] factors are clearly beyond Telefonica's control, it is crucial that the Company take definitive steps to effectively defuse potential risk. In consequence, the Board of Directors decided yesterday [under] criteria of prudent administration, it is in the best interest of the Telefonica stakeholders that dividend and share buyback program corresponding to 2012 be cancelled, as a one-time exceptional measure.

The rationale behind this decision are, first, to further strengthen the balance sheet; second, to substantially accelerate the reduction in the short term; third, to decouple from exogenous macro factors affecting our country of domicile; fourth, to immunize from debt market liquidity conditions by having refinanced maturities behind the end of 2013; fifth, to reach the execution of the already announced portfolio management; and, sixth, to continue investing in profitable growth in our operations.

Additionally, we are fully committed with the execution of the already announced portfolio management and asset divestments program, including the sale of Atento, and the IPO of Telefonica Germany in the fourth quarter of this year. In the analysis of potential listing alternatives for Latin American business, on top of that, we are continually monitoring market conditions to make further selective asset monetization.

All these actions should help to reduce the Company's risk position to levels that are aligned with our business fundamentals.

To sum up, in second quarter, we have delivered a better performance across metrics, from OIBDA to net income in underlying terms. Our risk position is clearly decoupled from business fundamentals and does not reflect our best-in-class diversification.

OIBDA improved materially quarter on quarter, with sequential increases across operations, and OIBDA margins performance in the first half of the year is consistent with 2012 guidance, with OIBDA evolution expected for the second part of the year.

We have taken further initiatives to optimize resources and improve business profitability. And, in the current extremely challenging economic environment, we are undertaking actions to improve balance sheet and defuse potential risks. And, we are clearly making significant progress in our journey to become a total digital telco.

Thank you very much.

And, now, we are ready to take your questions.

(Operator Instructions) Torsten Achtmann, J.P. Morgan.

The first one is on Spain. While the wireless business has stabilized on the quarter-on-quarter basis, wireline seemed to have accelerated the downturn. Could you explain what is behind that? And, is that something which will continue throughout the year?

And, second one would be on the credit lines. Are the credit lines tied to any rating? Or, in other words, could they be cut or pulled if your rating gets downgraded by two more notches, in any case?

Thank you.

Taking your question on the evolution of the wireline business revenues in Spain, let me say that this is actually due to an induced movement that we have been doing in actively migrating our most valuable broadband customers to a lower tariff. And, therefore, right now, more than two-thirds of our customers in broadband have already migrated to new tariffs. And, this is creating a short-term impact on the revenue growth. But at the same time, we have been able to manage a better margin, our average margin per user [performance].

Because churning has been significantly reduced and before that we used to have a probably 50% of the customers that were stepping out of a promotion, leaving the Company, for another supplier, right now we are able to preserve those customers and that, jointly with the fact that we are significantly increasing the quality of our services here in Spain, means that churn are at historically low levels in Spain.

So, it is true that that has been affecting the short-term additionally to the macroeconomic conditions.

Revenue performance in Spain, that would stabilize progressively, but we have a much more loyal customer base, much lower churn, much better operational metrics, and an OIBDA margin evolution. And, on top of that, that is going to have a significant impact on lower CapEx, because [therefore] preserving those customers in terms of installing or getting more customers from the outside was putting significant pressure on CapEx.

So, overall, it is true, and that has been affecting our revenues in this quarter. And, it's probably going to be affecting in the coming months. But, the overall equation is positive, and it is further contributing to a bigger margin per customer and to lower intensity of CapEx.

By the way, the equation is solidly based on the fact that churn is at historically low levels.

Hello, Torsten. This is Angel. We have no rating triggers in our financing, neither in the credit lines nor in the bonds nor in the long-term facilities. So, no rating triggers in our financing.

And, also, as you can see on slide number 25, we have very well diversified this origin of counterparties for our credit lines.

OK. Perfect. Thank you.

Next question, please.

Luigi Minerva, HSBC London.

Yes. Good afternoon. I wanted to go back on your positive comments about the European Commission's policy statement on fiber, and I wanted to ask you two things. Firstly, how that statement is going to change your fiber strategy, let's say, over the next 12 to 18 months? And, secondly, picking on the point that the Commission emphasizes that they endorse a technology-neutral approach, whether this statement will push your network architecture more toward the fiber to the node, compared to a fiber to the premises? Thank you.

This is Julio Linares. Thank you for your question. Our view on the new regulatory policy for Europe is positive, as it is for the investment community. We really believe that there is significant change in the right direction that is addressing the first priority for the European market, trying to achieve a less-regulated policy framework that is the most adequate one in order to push and stimulate investment around next generation access networks.

As you know, there are two new recommendations coming with this general policy. There is one for non-discrimination. And, the second one around cost methodology to be applied for the determination all the regulated wholesale services. That will take several months and, then, it will be [very] likely that will have a direct impact in the next six months. But, of course, it will be very positive impact for the next coming months.

Saying that, in addition to this general framework, I think it is very positive to take into account that there are not going to be any pressures on the current unbundled local look prices. On the other side, taking into account our prices in Spain, we have even an upside possibility here.

I think as you said that is very important that this policy is technologically-neutral, but we don't see any impact on our current strategy regarding the deployment of the different technologies. As you know, we will use the best mix of the available technologies in each market, depending on the current competition and situation of each individual country and market.

OK. Thank you very much.

Next question, please.

Georgios Ierodiaconou, Citi.

Yes. Good afternoon. I have two questions, please. My first question is on the country of domicile. This was one of the reasons you mentioned drove the decision to cut the dividend. And, as you highlighted it earlier on page 6, you are a lot more diversified than some of your peers. Yet, (inaudible) seem to make all the difference. Can you clarify if it would be possible in principle to change domicile? If it's feasible in practice? And, whether if you were to make such a move, it would be enough to decouple your rating from that of the sovereign?

And, my second question is on the dividend. Can you please confirm that the EUR0.75 for 2013 onwards will be all in cash? And, whether you will rule out scrip dividends in future?

Thank you.

This is Cesar Alierta. If you see the evolution of our debt, basically the evolution of our debt is due to two factors, the buying of O2 and the operation in Vivo. So, we are being penalized for having invested outside of Spain, which is [clearly] to me and a very clear contradiction.

The increase of our debt is due basically to investing in Europe and in Brazil, and investing in some of the biggest growing markets. And, I see a very clear contradiction that a correlation between the financial risks they are giving to Telefonica, which is three or four times more than our peers. [We] have more revenues inside euro and less diversification than has to us.

And, you know, we have the domicile in Madrid, and we will keep the domicile in Madrid, because we are in 25 countries and I think our business will be looked from the cash flow generated in the 25 countries. And, I remind you that Spain generated [51%] of the revenues and are stable.

So, that is very clear. And, that's the reason that, you know, anyway -- taking the (inaudible) present situation, it was clear to the Board that we had to take actions to decouple and make the reality be related to the fundamentals of our business. And, that's the reason we took the decision on the dividend, extending the maturities behind 2013. And, that means that we feel very comfortable.

We will achieve the leverage ratios we said that we will reach at the end of the year, and we'll continue on optimizing our asset portfolio on deleveraging Telefonica while not affecting the growth potential of Telefonica. And, this is clear, and we can do both things.

And, the thing we have done in the first seven months of the year are very clear, you know, with the optimizing of the portfolio and what we're going to continue to do.

And, we are going to pay EUR0.75 in cash. And, I may remind you that EUR0.75 is less than 50% payout of our free cash flow we expect for the coming years. So, that's the answer to your question.

Very clear. Thank you.

Next question, please.

Mathieu Robilliard, Exane BNP Paribas.

Good afternoon, and thank you. First, a question with regards to your revenues, as you've shown that you still have good revenue growth in most of Latin America, yet there's been a slight slowdown when we compare it to Q1. There's also some slowdown in some European countries. And, so, my question was, how do we reconcile that with the fact that you have continued to invest over the last few quarters? And, is that the reason why you changed the revenue guidance, because you're seeing a slowdown already in some countries? And, related to that, where have you been disappointed? The reason why you downgraded the guidance, is it because of Latin America? Is it because of Spain?

A second question has to do with your financing strategy. And, I'm trying to reconcile slides that you put out today about debt maturities, that's slide 25, and the equivalent slide you put in the Q1 results. At the time, you were talking about 40% of the 2013 maturities being prefinanced. That number doesn't show here this time. Maybe, it's just a presentation issue. If you can clarify that? And, also, I see that undrawn credit lines have declined from the previous quarter. So, maybe, also if you could clarify that?

Thank you.

Regarding your first question, as we see that Latin America revenues are growing, and they will keep growing, the new reason to change our guidance for revenues is basically that we expect weaker macro conditions in some countries, not of course in all of them, but in some countries, and because we took into account as well the stronger drag from regulation that we are already facing.

But, sorry, the weaker macro, is that only in Europe? Is that also in Latin America?

Basically, in Europe.

Hello, Mathieu. This is Angel. With respect to maturities of 2013, you are seeing on slide number 25 a lower figure than in the first quarter, because we have been extending the maturities of some financing beyond. And, then, we have brought them forward. So, that's why the figure is lower.

And, also, what we said at the end of first quarter, that we had 40% of maturities covered. Now, what we're [saying] is that we have 100% of those covered. So, we already have, even in the absence of divestments, and once we have closed the China Unicom transaction, we have all debt maturities covered until beyond the end of 2013.

So, here we are in an exercise of expanding our liquidity cushion for the next period until the end of 2013 and beyond.

Sorry. If I can clarify that. By, covered, you mean, prefinance, as you meant in the previous quarter? Is that covered by the free cash flow? Or, is that covered by existing lines that are undrawn?

With the cash that we have, the cash that we are going to generate, and the facilities that we have, we would be covered until beyond the end of 2013.

Thank you very much.

Next question, please.

Tim Boddy, Goldman Sachs.

Yes. Thanks. I wondered if you could confirm whether you've spoken with the credit rating agencies about this decision and whether you have some reassurance that this can isolate you from the potential risk of a downgrade to the sovereign rating in Spain, reflecting the diversification you've been discussing?

It would also be helpful to understand whether with this stronger balance sheet, you are able to be more price sensitive on any potential asset disposals that you plan, to just give you -- for example, if market conditions become even more challenging, does it give you flexibility to delay potential IPOs? And, I guess related to that, does this change the way that you're thinking about German consolidation, given your balance sheet is again getting stronger?

Thank you.

This is Angel Vila again. My first observation about ratings agencies should be one of coherence. All of us have read the latest reports from S&P, Moody's, and Fitch which were issued in May, June, July, respectively. They are public, and they state objective metrics which would lead to stabilization of our ratings.

The results that we are presenting today, where we have a quarter-on-quarter sequential improvement, expected improved performance in the second half, and the dividend action, would position us in compliance with those metrics. So, we would expect rating agencies to be coherent and properly incorporate these facts into their assessment. So.

The second observation is about decoupling from sovereign rating. As you know, certain agencies have methodologies that link sovereign and corporate rating, and a rigid application of such methodologies that would fail to take into account the geographic diversification, the solvency, and liquidity of Telefonica could create some potential undue damages to Telefonica. Therefore, we would expect that the methodologies that would be applied by rating agencies would be applied in a way that recognize the diversification, solvency, and liquidity of Telefonica.

With respect to the second part of your questions, which is -- and, by the way, we have had preliminary conversations with ratings agencies after the announcement that we did yesterday, and they are showing, or interpreting this as a very positive movement from Telefonica.

With respect to the second part of your question, which relates to the divestment policy, we continue to be committed to the divestments program that we have but, obviously, since we have other debt maturities covered until beyond 2013, even in the absence of those divestments, this provides us the flexibility with respects to timing, with respect to valuation of those divestments to which I insist we remain fully committed.

Next question, please.

Will Milner, Arete Research.

Thank you. First question, actually just following on from the last one on the need for an IPO in Germany, I mean, given the cancellation of the 2012 dividend certainly doesn't seem to have led to a sharp move in the share price, I just want to understand why you're still committed to IPO-ing the best European asset? And, why would you not potentially also delay restarting dividends in 2013 to prevent you from having to IPO Germany?

And, the second question is actually on Brazil. Quite a bit more evidence I think in the quarter of tougher competition, especially on wireline. And, I think certainly adjusted for a big provision reversal and some tower sales, the OIBDA is falling high single digits, in reais. I just wonder if you can talk a bit more about the prospect of being able to generate consistent underlying OIBDA growth, given the commentary you made about operational synergies being noticeable, or coming through, in the next couple of quarters.

Thanks.

Hello. This is Angel Vila. Regarding the first question, we have not contemplated cutting the dividend beyond the one-time exceptional cut of 2012, because as we have [definitely] expressed in the past, it's in Telefonica's DNA to have an attractive and compelling dividend to its shareholders. And, the financial projections that we are having with the operation of the business and the different measures that we're taking, we can be comfortably covering such a dividend.

With respect to the German IPO, it provides -- that's a project that provides not only a potential source of liquidity and debt reduction. It's a project that provides a platform in Europe that can allow us to highlight the value of such an asset, that can provide us a platform for capital raising in case there were continued financial volatility in Europe, and it provides us with a platform for further development.

It's a very attractive asset which we have been [estimating] that is growing in all its metrics from revenue to OIBDA to operating cash flow. It has a very effective cash generation even after taxes because of its tax position. And, we believe that it should be very attractive for potential investors.

And, let me highlight one thing, you know. Clearly, we want to highlight the value of the group. And, the IPO of Germany, one of the reasons in which when you look at the sum of the parts, there is clearly discount. We are [harming] on the value of Telefonica because of having the domicile in Spain. We want to highlight the value of the group.

And, I want to reiterate you one thing. For Telefonica, the domicile is the 25 countries in which we are. That is our domicile. OK?

This is (inaudible) Santiago. Let me try and answer your question about Brazil. Well, number one, I appreciate that Q1 and Q2 have been quite busy in one-offs. I will not go into detail, but I am more than willing to spend time on those. The one thing I can say is that two of those, the brand launch that was expensive but successful, with Vivo now encompassing both fixed and mobile products, is clearly one-off event, and it will not happen again in the second half of the year. And, the restructuring coming from the putting together of the fixed and mobile businesses is also behind us. So, clearly, on those two fronts, the second half should be better.

You were right to point out that weakness lies exclusively on the fixed end of our businesses, and they are in particular all voice. And, we have two observations there. One is that broadband continues to expand, that we continue to have an active presence in that market. And, second, we are ready to launch, around October, a new IPTV product which we think is going to help us sell more to the upper echelons of the market, and we will show that, you know, though we may be coming in a bit late into the growth of that particular segment, we are going to make a lot of noise.

Next question, please.

Sean Johnstone, Bank of America.

Hi. Good afternoon. I want to look at your statement on net debt. (technical difficulty)

Hello?

Paul Marsch, Berenberg Bank.

Hi. Thank you. I have two questions. On page 25, first, it sounds like I'm not the only one who is a little bit confused by how your liquidity situation stacks up. And, maybe one way of answering it is, could you perhaps give us your view of what that liquidity chart, the cash and equivalents plus the undrawn credit facilities, would look like if you hit your guidance for the full year? What would that look like at the end of the year?

And then, secondly, a question on Germany again. Clearly, it's been widely reported that you were close to a deal with KPN on E-Plus, but couldn't get credit agency backing. Are you still working on resolving those credit agency concerns? And, is it still an option in your plan to revisit that opportunity if credit agencies can be pacified?

In regard to your -- this is Cesar Alierta. In regards to your second question, you know, I mean, it's very, very clear that there were substantial synergies in the market consolidation in Germany. But, we said very clearly that the priority for Telefonica is deleveraging and to improve our financial [flexibility]. And, that's the reason that this deal has not been done.

This is Angel Vila. With regards to the first question, we will not give guidance on what would be the cash position at the end of the year. But, clearly, this will be influenced by the position that we have now, by the cash that we're going to be generating in the second half of the year that will be substantially higher than the one that we have generated in the first half and, also, on the financing exercises that we can execute in this second part of the year.

With respect to the evolution of cash between now and the second half of the year, the operating cash flow decline that you have seen in the first half will be lower. So, the second quarter has already been better than the first quarter. The second half will be better than the first half. You should see a better evolution of operating cash flow.

Also, the working capital consumption, which you can see on slide number 24, it's accumulative close to EUR2 billion in the first half of the year. It will more than fully reverse in the second half. Working capital, as you can see in every single one of the last years, is highly cyclical, and this will more than reverse.

Third, on interest expense, we are having a higher interest expense, because we have higher debt and we have higher interest costs. Also, in the interest expense, some payments that we've had in the first half of the year, we had over EUR200 million of non-recurring items. This financial expense in the second half would also go down, because the debt will go down.

And, we are saving on taxes so far, compensating the increases that we see in Spain with savings that we're getting in other jurisdictions.

So, you should be expecting a much better free cash flow generation in the second half of the year, which coupled with financing activity will result in the position that we will have in cash and undrawn lines by the end of the year.

Thank you.

Next question, please.

James Ratzer, New Street Research.

Yes. Thank you very much. I had two questions, please. The first one was just regarding wireless in Spain, comparing your performance with that of Vodafone. I mean, it's been widely publicized you're both changed your subsidy policies. But, if I look at your average pricing per minute, Vodafone decided to give some of that value back to customers by cutting its voice pricing sequentially, whereas your average price per minute seems to have actually gone up sequentially from Q1. Do you think that differential in pricing trend is sustainable? Please, it'd be interesting to get your thoughts on that?

And, secondly, I had another question with regards to Brazil. It's now coming up through almost two years since the deal completed. I was wondering if you could just give a feeling of what's going on behind the scenes on the synergy process? Why is it now two years on that you feel confident the synergy is going to come through in this second half? And, why haven't we been able to see them in the first two years since the deal completed?

Thank you.

Taking your question on wireless in Spain, namely on the comparison that you're making against Vodafone, we don't see those differences. And, in fact, in market trends on average entry points, we think that we have become highly competitive. So, it's probably due to some of the bundle assignments that we have. So, I would invite you to check that numbers with our team. I'm more than happy to go through those, because we don't really feel that difference. And, in fact, the market trends are very positive on our side on this part of the business. So, it might be some bundle assignments.

But, on effective price per minute, we are very competitive, and we have been very competitive both in contract and progressively in prepaid. And, thanks to that, we have been able to show a significant improvement in churn. And we have been back to positive market gain, market net ads in contract namely.

So, we don't experience that difference. Please check those numbers with our team. We are more than happy to go through them, because those doesn't account for market reality today.

And, do you think your price per minute hit could stabilize?

Well, in fact, what we see is that we have been competitive, as I was saying. The ARPU, if you measure that in terms of mobile service revenues, in Spain, it has been stabilizing. So, how we -- we have been migrating already 52% of our total customers to a lower tariff. This difference of tariffs is roughly six years, and the main comparison that you should derive is, what if we would not have done this? We are already passing the point in which our revenues are already stronger today than if we would not have done that, because the churn levels that we were having before in the customers of those EUR60 were roughly [6%]. And, now, we have historical low levels of churn.

So, thanks to that, the average margin per user is higher today than it was before. And, in fact, the revenue trends compared to the one that would have been if we would not have moved our entry points is today starting to be better.

So, I think that now is not just about subsidies. It's about the entry points. It's about the quality of services. It's about the fact that the number of calls that we are getting to the call centers has basically halved. And, therefore, the OIBDA margin trend is much more sustainable than before.

Yes, this is Santiago again. In terms of when the Brazilian synergies will show up, let me just make two comments. One is that it is almost two years exactly to the date that we signed the deal with PT on Vivo, on the second half of -- Brasilcel, to be precise -- but it's only a year and one-half or slightly less than since the deal closed. And, it's only been six months since the two companies finally integrated. And, obviously, a lot of the synergies are going to show on the negative side, as I just mentioned in terms of integration costs. And, from now on, I would commit to say that through the end of this year, we should be more specific about what those synergies have actually turned up being.

That should also include the tax synergies which are not insignificant as a result of this merger, which only happened in February.

OK. Thank you very much.

Next question, please.

James McKenzie, Fidentiis.

Yes. I've got a couple of questions. Firstly, of Angel, you were talking about the interest expense. In the last couple of years, we've become used to interest payments being well below the crude interest costs and, yet, in this first half of the year, that situation has turned around. I was wondering, could you give us some idea of what you're expecting for H2?

And, then, on the Spanish business, when I look at the churn, the churn has obviously come down to very low levels. Could you give us an idea of, for the new plans, if the churn is significantly below the average churn you're showing in these charts?

Hello, James. This is Angel. In the first part of the year, we have recorded some non-recurrent interest expenses to the tune of EUR200 million. Part of this had to do with Colombia. One of -- before we took all the debt reduction, there was one monthly payment that had to be put into the financial expenses that went into the first quarter. We also had some one-times related to Peru, and so on.

Also, there is seasonality in the coupon payments. There is a concentration of coupon payments in the first part of the year that also make distortion of that.

So, this is basically the, either a seasonal or non-recurrent items that were in the first part of the year. From here, you should expect debt reduction. As I said before, next Monday, on July 30, we are closing the transaction regarding China Unicom. That will provide an immediate debt relief in excess of EUR1.1 billion. And, we continue with our efforts to divest assets.

And, the cancellation of the share buyback will result in us having the shares in our Treasury stock. They will not be cancelled. And, we have more flexibility with respect to those. Obviously, we would not contemplate divesting them in this price, because it's not reflecting Telefonica's value.

And, then, the saving of the November, the EUR0.40 in November. That's around EUR1.8 billion, also saving.

All of this will result with action in the interest expense.

Sure. Any guidance with respect specifically to payments versus accrued interest, i.e., the cash flow interest rather than P&L interest?

I can say that payment will be lower than accrued, in the second half.

OK. Thank you.

Taking your question on the Spanish business and churn lows, the answer is, yes. On the customers that we are retaining on what we call the evaporation rate, which is the early signs of churn of the customers that we are acquiring and the ones that we are retaining, on voice, which means that we are effectively having a better performance than the churn levels that you are seeing on the slides on the voice part of the business.

We are still suffering from some [dongles] impact coming from previous years, coming from previous campaigns that is still affecting our churn levels. But, if you ask me about the customers responding to the new policy, yes, the churn is even lower than the levels that you are seeing there.

And, that's why we think it is a sustainable trend. As you might imagine, we are monitoring that, because this is the compensating factor of the fact that we have been reducing the entry points, the prices. And, that's why this equation is working in terms of average margin per user.

If you include on top of that the fact that the quality increases is having, as a result, a much less intense call center activity and, therefore, a significant cost reduction, the overall equation is becoming very positive.

You mentioned voice. Would that include --? Would you include fixed broadband in your churn calculations?

No. We are talking about voice [processed] smartphones. I'm just excluding the dongles, I mean, because it was a specific one-off.

Is the fixed broadband churn also well below what you're reporting as an average churn for broadband?

No. On fixed broadband, it's an average similar, but again, remember that we were losing the most valuable customers. In both sides of the business, wireline and wireless, the effective result of this strategy is that we have been stopped exporting high valuable customers to the portability market. And, that means that the portability market has been significantly reduced and, in fact, it has been focused on the less valuable customers, because we have been preserving the most valuable ones.

Right. OK. Thank you.

Next question, please.

Luis Prota, Morgan Stanley.

Yes. Thank you. Two questions, please. First, on Spain, the question is on the VAT increase we are going to have in Spain in September, whether you are planning to pass on to customers at least for mobile contract and fixed broadband? Or, you are planning to absorb VAT within your margin?

And, the second question is on Brazil. We've seen recently some regulatory action from Anatel which was leaving Vivo in a very good position relative to peers. The question is whether you think that this is suggesting that the regulator is more vigilant now and could take action in other areas, maybe forcing Telefonica to invest further and increase CapEx, maybe in fiber or any other area?

Thank you.

Thanks, Luis. Taking your question on the VAT in Spain, our prices -- the market prices in Spain is always before VAT and, therefore, I think that the market prices will get the same instructions. Therefore, VAT will be passed through to the customers. So, we do not expect to change that strategy.

And, on the Brazilian regulatory action, I think the only thing I can say is that we are happy not to have been included on that list, but we don't have any further comments on, you know, what the regulatory actions are. Anatel has always been a very demanding and very vigilant, as you said, regulator, and we don't expect that to change.

However, I think it proves that over the past couple of years, we've been investing just about right in order to prevent these things from happening, although we will continue to monitor all the quality indicators that are numerous and not always easy to manage, so that regulatory hurdles are not an obstacle.

Sorry. If I can follow up on the VAT question? And, thank you for your answers. Obviously, it's quite difficult to pass on to prepaid customers, VAT. So, I presume that you will be giving less minutes for the same price. Are you expecting a very direct relation between VAT increase and reduction in prepaid ARPU?

Well, you are right. I mean, customers are used to top up a specific amount of money and, therefore, effectively they will have either less minutes for the same price. So, the answer is, yes.

How this is going to be affecting elasticity is still unclear. But, we will keep you posted.

OK. Thank you.

Next question, please.

Frederic Boulan, Nomura.

Hi. Good afternoon. Two questions, M&A. First of all, to follow up on the question on E-Plus. So, I guess the market can appreciate that acquiring assets is difficult in the current credit environment, but will you considering reopening discussions with them based on different structure around the merger or JV, for instance?

And, secondly, on Latin America, you mentioned Germany as a kind of platform for further operations in Europe. Would you consider Brazil as a similar vehicle for Latin America IPOs? Or, would you plan to work on an individual asset basis?

Thank you very much.

Regarding Latin America, we are still in internal phase of analysis of several alternatives. Clearly, we have a very good collection of assets in the region, second to none, and there are very different possibilities on how to structure it, be it country by country basis, regional, or semi-regional. All the alternatives has pros and cons, and we are still in the internal analysis phase of the course of action.

In the case of KPN, I was very clear. The priority for Telefonica is to deleverage and get the goals, and that's our priority. And, as I said in my previous comment, I mean, the synergies are very clear, but we had to opt, and we opted for the priority which is the deleveraging of Telefonica.

OK. Thank you.

Next question, please.

Jonathan Dann, Barclays.

Hi there. Two questions. The first relates to, I guess, have you spoken to the rating agencies about, I guess, if you raise debt at any of the subsidiaries? Or, I mean, are they still worried about subordination as a negative credit event? And, as part of that, if you could remind us where you are on cash repatriation from Latin America?

And, then, my second question, historically a strong part of Telefonica's DNA has been management's commitment to share ownership. You mentioned there were Treasury shares. Will management be acquiring more shares?

OK. On the first question, we have got positive informal responses from rating agencies to the move that we announced yesterday.

With respect to LatAm repatriation, we have been repatriating in the first half of the year over EUR600 million.

And, with respect to the share ownership question, I pass to Cesar.

Key management of Telefonica is heavily invested in Telefonica shares, and the reason we are heavily invested in Telefonica shares is we believe that Telefonica value is much more higher than is today. We know the fundamentals. And, I think we can look at exogenous factors are (inaudible) exogenous factors. At the end of the day, the important thing is the fundamentals, and fully committed, and we are very happy with the purchases of shares we made. And, I cannot say any more on that, that we believe and I want to stress this that the real value of Telefonica is much more higher than today. And, we know the cash flows and, you know, (inaudible) the numbers.

OK. I just realized, this is Angel, that my response previously was incomplete. We have room for debt in subsidiaries. At this stage, about 15% of our total gross debt is sitting in subsidiaries. So, we still have room to increase the debt that we have in those subsidiaries, even up to around 10% before we hit any concern that ratings agencies may have regarding [subtotal] subordination.

Thank you very much.

Next question, please.

Stanley Martinez, Legal & General Investment Management.

Good afternoon to everyone, and thank you for taking my call. My first question returns to the Spanish fixed broadband business. And, Jose Maria, would you characterize your strategic repricing to new EADSL tariffs as substantially complete? Because, it appears that your realized average broadband ARPU in H1 is now broadly level at about EUR38 per sub per month with Jazztel and ONO, much as your domestic mobile realized ARPU is now lower at EUR20 across the piece for all major carriers. So, my question is, do you feel that the new tariff in domestic broadband is now broadly affordable for current market conditions? Or, does the price-value equilibrium for Telefonica and the whole Spanish broadband market still need to reprice lower over several more quarters?

OK. Thanks for your question. Well, the answer is that, remember that we have been taking the entry point down from EUR39.90 to EUR19.90, the basic offer, and EUR24.90, the basic offer plus value-added services. Today, the take up of customers is that the vast majority of them, the vast majority being more than 70% of them, are going to the EUR24.90 offer. And, that means that we have become competitive. If you add to that the fact that we have been turning positive in net gain in this quarter, that means that we are back on track being competitive.

We are commercializing the fiber at a higher entry point, and when we will be massively -- as we are massively deploying the fiber today in Barcelona and in Madrid, we'll keep you posted about this entry price. But, today, we feel competitive.

The next step for that is probably going farther into what we call the totalization, which means that bundling further the broadband products with voice and with wireless and potentially with TV and having a single approach to the customer would help us to become even more competitive and to increase the perceived value for money for the customers.

So, the answer is, yes, we feel we are competitive. We think that the commercial fields that we are getting and the traction that we are getting support that assessment. The fiber is the next step. And, you should expect from us totalization strategy to increase our competitiveness and an attraction of our [overall] prices.

Well, that's very encouraging. If Maria will just oblige me one other question if I may, to Angel, on the financial model. I just wondered whether you could provide me and other investors with some realizable upside potentially from higher [ULL] pricing? And, also quantify some benefits that we may have from the various active network sharing arrangements that would support the Chairman's viewpoint that we have reached a trough in European OIBDA here in H1?

Well, it's Jose Maria. Angel transferred that question. I mean, I am more than happy to go through it at any point. I mean, in terms of unbundling, we feel comfortable with the current prices. Remember that the prices today in Spain is below the EUR9 that has been established by the European [fiscal]. So, we'll keep you posted on that potential upside at any point.

And, on network sharing, we have done a very aggressive network sharing. Aggressive mean very ambitious, active and passive, negotiating agreement with Vodafone in the UK. That is going to help us to do two things at the same time. First, to catch up with the best network in the UK in a shorter period of time, and to do it in a much more efficient manner. We think it is a very valuable agreement, and we intend to extend that to wherever we can do it in Europe, because we think it is the most sensitive way of deploying the new generation networks.

And, I think that Europe doesn't have room for too many -- there are too many networks in Europe today. So, we need to work very intensively for those agreements, because it provides time to market and significant amounts of synergies and, therefore, a huge amount of value for the customers.

All right. Great. Very good. Thank you very much, indeed.

Next question, please.

Jerry Dellis, Jeffries.

Yes. Good afternoon. I've got two questions, please. Firstly, in Spain, Vodafone said that a side effect for them of the new subsidy model was that they found that gross ads is coming under heavy pressure. And, they said on the conference call the other day that they may have to take a few measures to regain commercial traction in the weeks and months ahead. If Vodafone were to increase subsidies, how would you potentially react to that?

And, then, in Germany, your recent margin growth momentum is obviously very strong. Service margin is almost back at 30% now. Do you believe that margin expansion is sustainable, bearing in mind the repricing that's really hitting the market from a number of your competitors, particularly EUR20 flat rates?

Thank you.

Thanks for your question. In terms of the overall market in Spain and without willing to comment on what might be the intentions of one specific competitors, I think that the model is starting to work. And, what am I saying that? Because in fact, remember that Vodafone starting this thing one month later than we did and, therefore, the benefits of churn reduction will take a little bit more to flow to their own accounts.

But, basically, the goodness of the model is not just on the subsidies. For us, the attraction of the model, the subsidy is one part of that equation, but the lowering of the entry prices, the lowering of the entry points, retaining the most valuable customers, getting the kind of churn levels that we are getting, getting the number of calls that we are getting, which are significantly reduced, basically half in six months, we are entering into kind of a virtual cycle in terms of -- and the subsidies is just one component of that.

So, we will monitor permanently the situation, but if the portability market might be one proxy of the short-term impact of any of those strategies, we have become pretty attractive on the -- we have improved significantly our portability metrics. And, on top of that, we have been able to significantly [drive] up that market.

So, we'll keep you posted, but subsidies is just one part of the equation. I mean, the sustainability of our market is not based on that.

Remember that this is not just affecting margin. It is only positively affecting CapEx in Spain, because the fact that we are having a much lower level of churn means that we can do the same kind of market share with a significant less CapEx intensity in terms of routers in the homes of new customers. So, it's starting to have a significant impact on capital allocation.

We'll keep you posted. We will monitor that significantly. But, for the time being, it is starting to get traction.

In terms of Germany, we think it is sustainable. We even envision a little bit more. We have changed the model in Germany as well. Remember that we are not subsidizing handsets in Germany, that we have this My Handy instrument which is a [factoring] instrument that the customer decides how they want to finance their own handset. We have been changing significantly the approach to market. We are getting traction on our customer base and everything on (inaudible) and, therefore, it will have the accumulative benefits of the recurrent revenues.

And, on top of that, we have learned that it is very valuable to change our strategy and to become much more regional, because being more regional because of the tariff structure in Germany means that we can enjoy a better margin on the on-net traffic, even on the off-net traffic, in the German market.

So, we have several levels that we are tracking and monitoring. We are learning a lot on that market. Churn is coming down significantly again. So, yes, we envision to have, to preserve those levels of margins in Germany.

Thank you.

We have time for the last question, please.

Simon Duff, M&G.

Hi. I've got two questions, one on liquidity and one on cash repatriation. On the liquidity, could we get further clarification on this EUR5.1 billion cash and equivalents, ex-Venezuela, because I'm struggling slightly with that on the basis that the consolidated balance sheet only shows EUR4 billion cash and equivalents? So, does the EUR5.1 billion include some of the EUR8 billion that's included in your net debt definition? And, if so, can you just give us some idea of what the EUR8.3 billion consists of, if it's not normal cash and equivalents? And, what is the true cash and equivalents position, ex-Venezuela, as per the balance sheet definition? Because, clearly, it's lower than the EUR5.1 billion that's in slide 25.

And, then, the second question on the repatriation. I think, did I catch you earlier in saying it was EUR600 million to date. I think last year you did EUR3.3 billion. So, you're expecting an acceleration in the second half? Or, can you give us a feel there for of what the full-year expectation for repatriation from LatAm is?

With respect to the second question, yes, we have repatriated slightly above EUR600 million in the first half. We're expecting this to significantly improve in the second half of the year. We do not expect to hit the repatriation figure that we had last year of about EUR3.3 billion. But, we should be close to EUR3 billion for the whole of the year.

With respect to the second question that you're asking, I can only say at this stage that the EUR5.1 billion cash and cash equivalents, excluding Venezuela, has been calculated in a consistent manner with the way that we have been presenting this information every quarterly presentation. And, we would encourage you to get in touch with our IR department so they can give you all the details on the reconciliation.

OK. Appreciate that. Thank you.

OK. This is Cesar Alierta. On behalf of all my colleagues of the executive committee, I want to thank all of you for attending our second quarter results and all your questions. (Inaudible) Thank you very much.