Telefonica SA (TEF) 2012 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Telefonica's January-to-September 2012 results conference call. At this time, all participants are in a listening-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, madame.

Good afternoon, ladies and gentlemen, and welcome to Telefonica conference call to discuss January to June 2012 results. 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 risk and uncertainties and that certain results may differ materially from those in the forward-looking statements as a result of various factors. We invite you to read the complete disclaimer, including 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 the slides, please contact Telefonica Investor Relations team in Madrid by dialing the following telephone number, 3-491-482-8700. Now let me turn the call to Angel Vila who will be leading this conference call.

Thank you, Maria. Good afternoon, ladies and gentlemen, and welcome to Telefonica's 2012 third-quarter results conference call. It is my pleasure to chair this call. Today, I have with me Jose Maria Alvarez-Pallete, Chief Operating Officer; Eva Castillo, Head of Telefonica Europe; and Santiago Fernandez Valbuena, Head of Telefonica Latin America. Also with me are Matthew Key and Guillermo Ansaldo, Heads of Telefonica Digital and Telefonica Global Resources respectively. During the Q&A session, you will have the opportunity to ask questions directly to any of them.

During the last months, we have continued executing our strategy with significant progress and visible results in three key areas. First, on the operational side, Q3 results confirm the consolidation of the recovery trend initiated in the previous quarter. We've had sequential improvement in underlying EPS underpinned by sequential growth in OIBDA, both in absolute terms and in margins.

Second, on the financial side, we have significantly improved our financial position with a net debt reduction of close to EUR5.5 billion since the end of June on the back of the substantial improvement in free cash flow and the fast execution of asset disposals. We are particularly proud of the successful IPO of Telefonica Deutschland, which has been the largest IPO in Europe year-to-date and has been executed in a record tying. On top of that, we have been very active on the financing front with over EUR13 billion refinanced year-to-date, increasing our total liquidity to EUR18 billion.

And third, we continue making progress in our transformation into a digital telco, achieving significant milestones in the quarter.

Let me now start with a summary of key financials on slide 4. In the first nine months of both 2012 and 2011, we booked several significant exceptional items with Q3 '11 results being particularly impacted by the provision for the redundancy program in Spain. Accordingly, to better understand the underlying performance of the Company, we are providing a P&L excluding those nonrecurring effects and non-cash impacts.

January-to-September revenue reached over EUR46.5 billion while underlying OIBDA totaled nearly EUR16 billion. Net income was over EUR4.4 billion in underlying terms. The good news in the third quarter is that we posted a much better performance from OIBDA to net income, confirming the quarter-on-quarter improvement trend initiated in Q2.

I would also like to highlight that although material items such as asset write-downs are flowing into the P&L, there are other transactions that are enhancing our equity, but not flowing through the P&L. For example, the restructuring of the Colombian operations, which increased shareholders' equity by EUR1.6 billion.

As slide number 5 shows, we continue improving profitability across the group. In absolute terms, underlying OIBDA grew sequentially for the second quarter in a row with a consistent performance in Europe and Latin America. As a result, consolidated OIBDA margin stood at 35.1% in the third quarter, up 230 basis points in the last six months leading to improved year-on-year trends.

As we anticipated, OIBDA margin in the second half of the year would be better and we are fully on track to deliver on our target. Improved trends in OIBDA flow directly to the bottom line, leading to an inflection point in underlying EPS. As you can see on slide number 6, underlying EPS reached EUR0.36 in the third quarter with a significant improvement since the beginning of the year both in absolute terms and on a year-on-year basis. Underlying EPS in the nine months to September was close to EUR1, well above our 2013 dividend commitment and we still have another quarter to provide further support to dividend sustainability.

Strong diversification continues to be one of our key strengths as shown in slide number 7. We would particularly highlight the growing contribution from our Latin American businesses, which already account for 49% of consolidated sales and for the first time exceed revenue generated in Europe. It is also important to highlight our lower dependence from Spain, which now is just 24% of our sales and 32% of our OIBDA.

Turning to slide number 8, in the first nine months of 2012, consolidated revenues grew 1.1% year-on-year, excluding the impact of regulation, driven by solid growth in two key strategic areas. First, Latin America where revenue growth accelerated in the third quarter to 8% year-on-year in organic terms ex-regulation. And second, mobile data revenues, which continued to enjoy a strong momentum with a 14% year-on-year growth and already account for over one-third of mobile service revenues. This performance is driven by our data monetization strategy focused on increasing smartphone penetration with attractive data propositions based on tiered pricing and integrated tariffs.

On the efficiency side, on slide number 9, I would like to highlight our ability to deliver cost savings with OpEx down 1% year-on-year in the third quarter. Key transformational efficiency initiatives are bearing fruit with significant savings from more rational subsidy models across our footprint, commissions management and headcount reductions among others. We are fully confident on our ability to continue delivering significant cost-cutting across regions, a key lever to offset top-line pressures in some of our European businesses.

On top of local and regional efficiency measures, Telefonica Global Resources is further exploiting scale benefits, helping to maximize business profitability. The unit is consistently contributing to higher efficiencies and cost reduction driven by new ways of sourcing, building and operating our networks and IT. Evolved sourcing models and a clear focus on the right map of vendors are providing the expected results. Additionally, global end-to-end devices management is starting to provide tangible results not only in terms of cost reduction, but also in terms of stronger market relevance.

Please turn now to slide number 11 to review our operations by region starting with Latin America. In the third quarter, mobile commercial activity remains strong, maintaining a clear focus on high-value customers. Contract net adds were solid, especially in smartphones where we are doubling accesses year-on-year. It is also remarkable the improved trends in the fixed business with positive net adds in the traditional business for the first time in two years and higher fixed broadband and pay-TV net adds in the quarter.

Revenue growth acceleration in Q3 totaled 8% year-on-year, but fueled by improved trends in fixed revenues, robust mobile service revenues, up 13% year-on-year. The healthy diversification by businesses was coupled with a well-balanced contribution by our three Latin American regions with all of them contributing to enhanced growth.

As slide 12 shows, the solid revenue performance, easier comps from commercial costs and ongoing efficiency measures drove further improvement in OIBDA and margin expansion in the quarter. OIBDA year-on-year growth in underlying terms ramped up to close 5% in the quarter, with a significant progression from the bitterly flat year-on-year performance at the beginning of the year. OIBDA margin also consolidated this improved trend year-on-year and reached over 35%.

Please turn now to slide 13 to start reviewing our Brazilian operations. Our focus on quality and the integration of the fixed and mobile operations have allowed us to materially widen the gap in customer satisfaction indexes versus our main competitors. There has been a marked turnaround in the fixed business since we launched VIVO as a single brand. On top of that, our new conversion propositions continue to underpin a better performance across segments.

Targeted commercial actions and our leading quality resulted in additional marketshare gains in the mobile business, reaching 37% in the contract segment, combined with a very robust performance in the prepaid segment both in terms of accesses and top-ups. Meanwhile, we continue to transform the fixed business, launching a new 200 megabyte fiber proposition to speed up uptake while we are reinforcing our pay-TV business with the new IPTV platform already launched.

On the financial side, in the third quarter, VIVO delivered a strong set of results with acceleration in revenue and OIBDA growth. Top line rose 5% year-on-year and 3% quarter-on-quarter driven by the sustained outperformance in mobile service revenue and the improved trend in the fixed business both year-on-year and sequentially. Fixed revenues reflected the better commercial performance in the quarter.

The rampup in revenues, coupled with increased efficiency, led to an acceleration of OIBDA growth along the year with VIVO retaining its best-in-class profitability despite the negative impact from regulation. As such, OIBDA margin reached 34.5% in the quarter, up both year-on-year and quarter-on-quarter, excluding specific factors booked in the second quarter.

Please turn now to slide number 15. The main highlight of the southern region is the margin expansion across the region with a particularly strong performance in Peru where the robust commercial momentum was coupled with a rampup in revenue and OIBDA growth year-on-year. The only exception was Argentina where, despite the positive revenue performance, high commercial activity dragged the OIBDA margin in the quarter.

In the northern region, as in the rest of LatAm, we delivered a widespread improvement in revenue and profitability quarter-on-quarter. In Mexico, the turnaround process continues with a strategy focused on quality growth driving ARPU acceleration and inflection in mobile service revenue performance with positive year-on-year growth in the quarter. In Venezuela, once again, operational performance was impressive with revenue growth acceleration and margin expansion amid strong commercial activity.

Let's now review our operations in Europe on page 17. I would like to highlight that Q3 results reflect the benefits of the commercial and efficiency initiatives we have executed across our countries. The successful tariff refreshment allowed us to compete better in the marketplace driving mobile churn reduction and leading to a quarter-on-quarter increase in net adds. Handset upgrades were down in the quarter as customers delayed renewals ahead of the launch of new devices and we tactically reduced the pace in Spain ahead of the launch of Fusion, our new convergent offer.

Our focus on value customers resulted in higher contract and smartphone penetration across our footprint with one-third of our customers already enjoying mobile data plans. Our targeted actions on the commercial side, together with a set of efficiency measures, led Telefonica Europe to consolidate a sequential improvement in OIBDA and profitability with over 30% of OIBDA margin in the quarter.

Turning to slide 18 to start with our operations in Spain, I would like to highlight that, after one year of execution, there are visible results from our turnaround plan, which we are implementing in different stages. The first step was the launch of the new fixed broadband and mobile tariffs, which had great traction among our customers leading to a sharp reduction in churn, the cornerstone of our initial push. Once the customers were comfortably installed in the new tariffs, we took a second step forward and removed subsidies for new customers leading to significant savings in commercial costs. The first step was the implementation of several measures in order to increase efficiency with an aggressive simplification of processes across the Company, from workforce to IT and handset portfolio while increasing quality levels to improve customer satisfaction.

All these efforts have led to a radical improvement in our financial results. Though revenues continue to be under pressure, operating cash flow performance has improved significantly, reflecting our levers to enhance OpEx and CapEx efficiency. Q3 OIBDA is up on a sequential basis for the second consecutive quarter with margin higher than a year ago. Let me also stress that the double-digit reduction in CapEx is sustainable without jeopardizing our increased fiber rollout efforts.

The fourth transformation step in Spain is the launch of Movistar Fusion. This is a key milestone in our strategy to regain commercial leadership in the market. Movistar Fusion is the best convergent offer in the market and the first time our customers will benefit from a single bill. It bundles fixed broadband TV and mobile services at very attractive prices and we offer add-ons (inaudible) offer to our customer needs.

We aim at increasing the customer base who have older telecommunication services with Telefonica, what we call totalised customers, leading to further churn reductions and we also expect to capture new customers in the market. At the same time, Movistar Fusion will lead to lower commercial costs on the back of changes in our loyalty program and the introduction of handset financing facilities. The best way to describe the attractiveness of the offer is customers' reaction. Just one month after the launch, we have already reached 430,000 customers.

Please turn now to slide 20 to review our operations in the UK where trading activity continued to be solid in Q3. Contract gross adds rose 18% year-on-year. (inaudible) lower upgrade activity as customers delayed renewals in anticipation of the new devices launch at the end of the quarter. We retain benchmark low contract churn levels, which together with increased gross adds led to solid net adds in the contract segment with smartphone penetration growing 8 percentage points to 44% in September.

Top-line pressure continued in Q3 with mobile service revenue reflecting impacts from MTR cuts and the new roaming regulation with total revenues posting stabilizing year-on-year trends. Profitability continued improving with sequential growth in OIBDA both in absolute levels and in terms of margin, which stood at 25.3% in the third quarter. The lower upgrade activity, together with the positive impact from the ruling on ladder pricing, drove the quarter-on-quarter margin expansion.

Turning to slide 21, the recently listed Telefonica Deutschland continued posting very good results, gaining value marketshare on the back of a strong commercial offer and the success of our data monetization strategy. Trading activity was strong with a consistent momentum in net adds in the quarter. In addition to this, data revenue grew at a faster pace than data traffic with the gap between these two metrics widening year-on-year. Mobile service revenue growth remains strong with stable ARPU trends. As a result, Telefonica Deutschland is now the number three mobile player in the German market by revenues.

In addition, OIBDA increased 14% year-on-year with growth accelerating in the quarter reaching an OIBDA margin of 27.2% in the third quarter, up 2.4 percentage points year-on-year. Operating cash flow was robust reaching EUR533 million up to September.

Let me now update you on the progress made in our journey to become a digital telco in the last few months. To enhance our position as a connectivity provider, we have recently launched new conversion propositions both in Spain and Colombia, while, in Brazil, we have strengthened both broadband and Pay-TV offerings.

In our enabling/retailer role, we have extended operator billing agreements to new countries and we have also launched new machine-to-machine services in key industries, while services like Kantoo are having great traction with our 3 million Brazilian learning Spanish, English or French via mobile phones.

Finally, as a provider of digital services, we are also advancing rapidly. To be highlighted is a recent approval by EU authorities of our JV for advertising and financial services in the UK. The agreement signed with Aurasma, the world's leading augmented reality platform and the success of [Woida] with over 170 collaboration agreements with startups.

Let's now move to the financial side on slide 23. Net financial debt has been reduced by EUR2.3 billion in the quarter, mainly due to the significant free cash flow generation since the end of June, coupled with the completion of asset disposals, mainly the sale of China Unicom stake. As already anticipated in previous calls, free cash flow generation has been enhanced on the back of our better operating performance and the unwinding of the working capital consumption recorded in the first half of the year.

We continue to see further positive impacts from our asset rationalization strategy with additional cash proceeds from the IPO of Telefonica Deutschland and a (inaudible) and other minority stake disposals. On top of that, the refinancing of the preferred shares, currently accounted asset, will reduce debt by EUR800 million through the swap by treasury stock at market value. All of these post-Q3 events will contribute to reduce net debt by an additional EUR3.2 billion. Let me stress that, as of today, we are pointing towards EUR50 billion net financial debt by year-end compared to a debt figure of over EUR58 billion at the end of last June.

On slide 24, we detail we are performing excellent financing activities so far in the year totaling EUR13.4 billion. This compares quite favorably with last full-year financing activity at EUR11.5 billion. This has been achieved despite decreased sovereign risk and other financial environment in 2012.

Since June, Telefonica has raised over EUR5 billion long-term financing in the credit markets with extremely strong support from credit investors both in Europe and in Latin America. As shown by the heavy oversubscription of the bonds raised, nearly 11 times in Colombia or Chile and above 9 times in the euro market. It is to note the broad diversification of our financing activity. Only 15% of total banking financing raised during the year corresponds to Spanish financial entities, while American and European, [such as Spain], have contributed 30% each and Asia is the remaining 26%. On top of that, 77% of total undrawn credit facilities have signed with nondomestic financial entities.

It is also to highlight the ample diversification by funding instrument proving that Telefonica maintains all markets open. Roughly one-third of the financing has been raised through bonds at the holding level; another third corresponds to syndicated loans; and the remaining third are coming from bonds in Latin America and other funding sources from public entities.

Slide 25 shows the benefits of our productive financing activity, which has allowed us to build a significant liquidity cushion of EUR18 billion, up EUR4 billion since June. Our cash position, excluding Venezuela, stood at EUR7.8 billion at the end of September while total undrawn credit lines amount to EUR10.1 billion with nearly 90% maturing long term. This places us in a quite comfortable position to manage debt maturities, which are covered beyond 2014.

I wish to highlight that all the financing efforts have been completed while keeping effective interest costs in line with previous quarters and continue to remain at the middle part of our guidance. And our average debt life is back again above six years as per our guidance.

To wrap up, let me stress that our strategy is delivering visible results. Sequential OIBDA improvement across regions is driving an outstanding improvement in EPS with nine-month performance consistent with our full-year guidance, which we confirm. We are also increasing materially our financial flexibility with a significant step forward in debt reduction in the second half of the year and a well-diversified access to financial markets with the recent success of the IPO of Telefonica Deutschland providing a new platform for additional flexibility. It is also important to note our progress to become a digital telco. All in all, we are accelerating the transformation of Telefonica.

We are now open to any questions you may have.

(Operator Instructions). Tim Boddy, Goldman Sachs.

A question about Spain. Obviously, in the press, we read about Yoigo potentially being up for sale. Can you remind us what contribution to EBITDA Yoigo currently represents in the Spanish business? Secondly, given the very strong momentum you have achieved in deleveraging and refinancing as you highlight, does it still make sense to look at listing options in Latin America given it seems, relative to current trading multiples, you might not get the value for those attractive growth assets? Thanks very much.

Thank you very much. On your first question, as you know, we cannot disclose that figure. But, as you can imagine, we are following the process very closely and we are reviewing anything as the outcome is known.

With respect to the second question, we continue our internal work of analyzing and assessing the options with respect to a potential IPO of our Latin American businesses. No decision has been taken on such a transaction, but we are working in the preparations in the case we decided to move ahead with it.

Okay, thanks very much.

Next question please.

Luis Prota, Morgan Stanley.

Yes, thank you. Two questions also on Spain. First, just regarding the Movistar Fusion on the 430,000 customers you were mentioning, I don't know whether you can give us some light on what percentage of these new customers are coming from your existing customer base and therefore will give rise to some revenue dilution and whether you expect the net balance of new customers taken from competition and cannibalization to give rise to any kind of short-term pressure in revenues and EBITDA.

And the second question is on margins. Your margins in the third quarter were very strong in Spain. I don't know whether you could give us some light on what savings were generated from the lack of subsidies, headcount cuts and others? And also with the stronger commercial activity in the fourth quarter whether we should expect margins to drop materially and the third-quarter margins to be considered as a kind of one-off. Thank you.

Thank you. And I think that, as you saw, the number that we are releasing is 430,000 customers year-to-date. I won't be able to give you more details around the mix on those customers, but I'd have to say that since the preregistration that we saw early in or late September until today, all we are seeing at the right strength and we will definitely give you more details towards the fourth quarter.

It is for sure the best value offer that there is now in Spain, so as you know, we are starting to see the appropriate and the right reaction from our current customers, the ones that were already with us partially or totally, definitely the ones with whom we can uplift and foster new services and with the new customers. As you know, our aim is to go both for the current customers and also for the new ones.

With regards to the second questions and regarding the margins [herself], we are very pleased with the third-quarter result on the margin. It is a clear improvement and is showing that our strategy on the transformation journey since the beginning of the year, moreover since the end of last year is paying results.

What we need to focus is specifically on the cost reductions that are allowing maintaining these high margins, which we believe are sustainable. And in particular when you look at each of the contributions to this performance, it is both on the incremental savings and personal costs throughout the year. As you will remember, this happens every quarter and through next year. It is also the cost efficiency initiatives that are not only removing the subsidies, but also creating new ways of operating within the Spanish operation.

I have to highlight that I have been in this new role for only seven weeks and it is very impressive to see how the Spanish team is leading this commercial strategy, its leading effort within the OB and in the Spanish telecoms operations. They are also taking very seriously the efficiency program both on personnel and rest of the efficiencies within the network. And we believe this is a continuing program, so there is room for more efficiencies and we are working on that very closely.

Next question please.

Mathieu Robilliard, Exane BNP Paribas.

Good afternoon and thank you very much. I have two questions. Please, with regards to revenues, first, you are running slightly below your full-year guidance; yet you have reiterated the guidance. So I was wondering where you expect the reacceleration in Q4. It does seem to me that, in LatAm, despite the strong growth, comps are a bit tougher in Q4 and there is no acceleration in the growth when you look at the revenues, including the regulatory impact. So I assume it must be from Spain or from Europe, but maybe if you can give a little bit of color of where you expect the acceleration in revenue to come from.

And the second question has to do with cash flow development. I wanted to have a little bit more detail into one of the items that appears on page 23, which is FX commitments, cancellation and others. Quarter-after-quarter, this is a big consumption of cash. This quarter, it is EUR900 million. Previous quarter, I think it was EUR700 million and before that around EUR400 million. Maybe if you could give us a little bit of color and guidance into that item. Thank you very much.

Thanks for your question. Taking the first part of it on revenues on the guidance, let me first stress that the guidance was given under a certain framework of exchange rate that we are encouraged to take because those are -- this is the framework which you should review your projections.

And the second part, in terms of on a region-by-region basis, in Europe, we have revenue pressure. It is true that it has been affected by regulation. We are very focused on value on average margin per user. We expect OIBDA to continue improving mainly driven by efficiencies and the trends that we have been seeing in this quarter should continue. And in Latin America, we see revenues accelerating in Q4 due to a very solid customer base growth. And OIBDA evolution in Q4 will be -- you need to consider that it was impacted last year by tower sales. Therefore, excluding tower sales in the second part of this last quarter of the year, our OIBDA growth should continue to improve.

So basically we see the trends that we are having in the third quarter being extrapolated to the fourth quarter and please consider the framework of the exchange rates in which we were giving the guidance at the beginning of the year.

Hello, Mathieu. This is Angel. With respect to your second question, in this column of FX commitments, cancellation and other, we have various effects. The first one is the impact of interest accruals or interest payments, which is basically reversing what we saw to the contrary in the first quarter of the year. These would be around EUR655 million of the total EUR899 million of this column. Then we also have the mark-to-market of interest rate hedges, which is around EUR270 million and the rest, FX is around EUR60 million and the rest is a part of the employee retirement commitments that become due in the year and they become debt.

Next question please.

Keval Khiroya, Deutsche Bank.

I have got two questions, one on Spain and one on Brazil. It looks like Vodafone is extending its handset subsidies beyond summer. Do you feel a need to respond to this at all? And secondly, on Brazil, your Brazilian fixed line revenues remain weak. They are still 49% and your KPIs in Pay-TV in particular are quite poor and what steps are you taking to improve this and when will the revenue trend improve with that as well?

Thank you. First of all, on your first question, we have seen some of our competitors going back to subsidies and as you know, this is our commitment within the Spanish strategy not to go back to subsidies, so we don't think it is necessary to respond on that front. In fact, our aim is to continue working on our transformation program and right now, we are in the fourth stage, by which the allowance of Fusion has already impacted positively our clients and the reaction is positive.

I think that we show a very clean business, a very clean operation and we don't see any need to go back to subsidies. In fact, some of our competitors have repeated our offer, they came out very recently and our belief is that not so much you see the subsidy in handsets anymore. But that obviously you need to analyze. I think that that was the question. Thank you.

Yes and now this is Santiago. On Brazilian fixed, you know their situation there is very competitive. There are a number of one-offs that you might want to single out before making the final comparison. This has a lot to do with improvement that we have had in Q3. We feel much better about how things are going and we have a number of actions, including the deployment of our IPTV platform this month, launching some OTT products that are going to reinforce the value of our fiber and video sell product and the launching of the renewal of the TV satellite, TV product. So it is not as good as it sounds, but it is certainly pointing in the right direction in the sense that once you exclude the one-offs, the improvements are quite real.

Torsten Achtmann, JPMorgan.

Good afternoon. Two questions, the first one on Brazil where (technical difficulty). The first one on Brazil, the competitive intensity is increasing and the regulator is introducing more aggressiveness on MTR reduction and on say (inaudible) and asset opening up. Can you give any early indications how you think it will change the competitive landscape and your business and how you look to respond?

And secondly, on the buyback Telesp has introduced, is that more a formal flexibility measure or is it really that you are trying to implement that over the next year and therefore reducing the minority float of Telesp?

And secondly, on potential asset sales outside of LatAm, are you looking at further options of other assets where you could list minorities or sell partial stakes on assets you have in your portfolio? Thank you.

Thank you. This is Santiago again. On the latest plans from the regulation, I think it is fair to say that after all has been said and done, it is lighter than we had feared and it is worse than we had expected at the beginning of the year. I think the brighter part is that we finally have no bill and keep or partial bill and keep measure and I think that is the right development because it is going to make adjustments in the future MTRs easier.

And as to the pace of decline in MTRs, it is true that they are lower than we had expected at the beginning of the year, but they are also manageable. It is a bit early to understand what the full impacts are going to be, but remember two things. First, that if you have an integrated operation like we have in Sao Paulo, the final net effect is likely to be lower than if you are mobile only and second, that unlike in some of the markets, the Brazilian market is characterized by fierce competition and very small differences between the marketshare of the top player, which is us, and the bottom player and that helps reduce the impact of any MTR at the end of the day. Once the tariffs are lowered or very similar, it is difficult to make a lot of elasticity from one network to the next.

This is Angel. Could you please repeat your second question?

The second one was literally on potential further asset sales outside of LatAm. So are you looking at any other assets or stakes of asset you could potentially monetize next year if you decide not to do LatAm or on top of LatAm?

Okay, well, what we already communicated back in May, June we have been delivering. We also said that we would be analyzing the potential IPO of Telefonica. Latin America, which, as I said before, we are still in the process of internal analysis. We do not need to do that transaction, but we may decide to do it depending on what provides the best value for our shareholders. We still maintain a small stake in [NPD] which we are monitoring market conditions to see when is the best moment to monetize. We have received expressions of interest from potential interested parties in some of our assets, but we will assess those always with the perspective of seeing whether they provide value for Telefonica.

I would like to stress that all of the investments that we have done this year so far have been done in such a way that they do not alter at all the equity story of Telefonica or the long-term value perspective for the Company.

Ivon Leal, BBVA.

Yes, hello. Good afternoon, everybody. My two questions are in Spain. The first one, since the launch of Movistar Fusion at the beginning of October, there are a number of competitors that have already mature offers. So actually now how do you feel the new commercial proposition has improved your positioning in the market given the price? Others are already matching yours.

And the second one, maybe if you could help us how you expect to compensate the ARPU declines I guess you expect to get in 2013 due to the Movistar Fusion. Could you give us a number in terms of what is the marketshare you need to increasing in fixed and mobile in order to compensate that or is compensation coming from now commercial cost reduction?

Thank you. I think that, since the launch of Fusion at the very beginning of October, we are seeing the right evolution within our clients, as I mentioned earlier. We are unable to give you the number of 430,000 customers year-to-date as fully Fusion customers. And I can give you another signal of how this is going with regard to the fixed broadband, which we are up to 43,000 so far.

The positioning for the launch of Fusion, as I mentioned earlier, is part of a program. Since we launched the program, we knew our competitors would have the capacity to react and some of them have done so. Analyzing the latest new offerings, obviously they were able to do the replicability of the offer, but we still believe that Fusion is the best value offering for our clients that were already with us and the new clients.

Obviously, we cannot give you yet the mix of the declines because it is very early days. But, again, to reinstate that all that I am seeing is the right trends and hopefully, we will be able to give you more details very soon.

When you tell me what -- when you ask what can we do in order to compensate the ARPU declines or initial ARPU declines, I think that the offer is very well-studied so you go step-by-step and to some of the potential initial declines as we compensate and we have the mix of clients that we want within our offering contracting fixed broadband. So the customers who contract fixed broadband are positive to our mobile services. It is also positive on mobile customers, which contract the fixed broadband and the fixed voice service is a positive again in any mobile additional lines. And of course, as you can imagine, any new customers adding to the offering.

Another very important factor is that the churn continues its trend of going down and overall, all the strategy that we had in mind is provoking a more dynamic market in Spain. We are happy to say that we believe we are leading that new dynamic market with this commercial strategy, which at the moment is leading the offerings in the market. I think that I answered all the questions, no? I am not missing any? Okay, thank you.

Robin Bienenstock, Bernstein Research.

Thanks very much and congratulations because I think a breathtaking amount of work went into delivering those results. So two questions, if I may. The first is about Spain. You are focusing on total telecom offers and clearly, these are going to put wireless companies under a lot more pressure and wireless-only companies -- (technical difficulty).

Sorry, it's Maria. There is something wrong with the line. We cannot hear you properly. Can you repeat please?

Yes. So can you hear me now hopefully? On the total telecom offers that are going to put wireless-only companies under a lot more pressure, I guess what I would like to know is whether or not you are going to face the same headwinds in Germany and Mexico where you are the wireless-only businesses rather than the total telecom businesses?

And separately, with Latin American MTRs falling, a lot more longer-term pressure on wireless revenues in Latin America, I am wondering whether that means you need more CapEx sooner in Latin America in wireline to reduce any eventual cannibalization.

Robin, this is Santiago. The sound was not too good, so if I understand -- if I did not understand you correctly, please do correct me. If I understand what you're pointing at, you are talking about the headwinds facing some of our operations and whether or not CapEx would need to be deployed at a faster pace than we have done until now to compensate for that.

I think you probably may be right in terms of the fixed lines, especially in Sao Paulo, as I think I mentioned to you in one of the earlier questions. But I think that what we -- we have almost everything we need to counter the possible headwinds on wireless as we have already done most of the investments, as we are already in the process of not seating but harvesting some of those CapEx efforts, especially in the markets that you mentioned, namely Mexico and I cannot speak for Europe, but I would assume that my colleagues are probably going to be on time.

So yes, the environment is challenging. But no, I don't think we are lagging behind with the possible exception of a minor push that we have to do in fixed line Brazil.

And going back to the European question, starting with say Germany as mentioned earlier and yesterday in the conference call, we have seen solid trading momentum in the quarter and the sustained low contract churn. With regards to the MTR questions, as you know, in Germany, we are not expecting them until December, different to the other markets. And what we believe as a whole in Germany that we need to stick to a balance in between growth and profitability of the operations.

With regard to the CapEx, in the third quarter, it is an important increase of 40% year-over-year as a signal we don't expect similar increase in the fourth quarter. Although I have to reinstate that it is a continued investment process into our 3G networks, so we want to ensure the stability and the quality of our network, as well as accelerating the LTE deployment in the country.

I think that we have, I don't know if you have seen the results come in from [connect this publication], it is already giving us very important results of our German operation and I encourage you to look at them because they reinstate that the quality and investment base is proven to be a good one.

Paul Marsch, Berenberg.

Yes, thanks. I just have two questions. Firstly, are you expecting Fusion, the Fusion tariff in Spain to lead to a higher level of handset upgrades? And secondly, maybe you could clarify any progress on the tax and license renewal situation in Peru. How much tax has been demanded by the Peruvian authorities? Have much have you paid so far and has there been any progress actually on the license renewal in Peru?

Well, starting with the Fusion -- with the Fusion question, I think that just to remind that Fusion does not have a subsidy within the offer. Actually we started with that policy at the beginning midyear. And in the second question regarding Fusion (inaudible) on upgrade, so we are not expecting that to happen and it is not within the Fusion.

Yes, Paul, this is Santiago again. An update on Peru, nothing much really to update you on. We do expect that the license renewal process that has gone through a rather long and convoluted administrative path is coming to an end. I think the end may very well be satisfactory and I think some of the published statements by the ministers in Peru are pointing to that direction. Nothing finalized and nothing is done until it is completed, but certainly we do think that it is very likely that before the end of the year that process of renewal, license renewal will find a satisfactory completion on both grounds.

And on the tax side, they are released in March to talk about. This process has been going on for 10 years now. We don't expect it to close in the next weeks. It's obviously very long and protracted and might be complicated from the technical side. What I think is a welcome development is that this is no longer a media issue. This has been and will continue to be a tax-related issue with us and the courts and we will make some progress as time proceeds.

You know that we did spend a lot of money at the beginning of the year paying down the partial payment, but no further payments have been done since then and no significant decision has been taken by any of the courts where we have this -- let me remind that this started almost 10 years ago as a consequence of two things, which we feel very strongly about and that is why we have been challenging the tax administration's view and those are related to whether or not we can take off from our income the revenues that our customers cannot pay to us and the deductibility or lack thereof of interest when it is devoted to investment.

Those two items are we think crystal clear. Any other constituency in the world would accept them as tax-deductible and then the fact that the numbers might be so interesting is simply the fact that they have been compounding at a fast rate from the year we started, not because the number itself was very nice. My colleagues point to me that we did spend 134 million, that is about EUR35 million at the time.

James McKenzie, Fidentiis.

Hi, two quick questions on Europe. Firstly on Spain, your fixed band or fixed broadband churn has ticked up quarter-on-quarter and we don't have a full series of these. Could you just discuss the reasons for that? Is the market getting more competitive or is there a seasonal tickup as we have seen in I think other operators? And then secondly, the lack of handset upgrades in the UK, does that bode badly for fourth-quarter margins when presumably the upgrades are all going to come through?

Thank you for the question. With regard to Spain, I think that the key messages on the fixed line or fixed revenues evolution on the nine months is that, first of all, we believe that the 11% sequential movement is broadly stable. And the reality is we have seen accesses and voice decline driven by both a bit of a lower access space and a higher weight of flat rate and bundled traffic coming in competition.

With regard with specifically fixed broadband revenues, as you know, they were affected by repositioning of the new tariff portfolio and I can give you numbers up to date. The number -- the proportion of the lines that have moved to the new portfolio is reaching 76% of residential fixed broadband up to September 2012. So the year-over-year evolution in the quarter has worsened a bit.

However, in September, we have started to see a revamp in the evolution and we have started to reposition in the month compared to last year. It is important to mention the churn, which is much lower, is minus 0.4 percentage points year-over-year and I think that is the best number, which finished at 1.9%.

The rest of the questions regarding the UK, it is important to say that, during the third quarter, we were waiting for the new high-end devices to be -- to have the stock and to be positioned in the market, so we didn't have all the commercial activity that we normally used to have. The expectation in the fourth quarter is that we will have more activity, but we will watch very closely the margins and also that commercial activity.

I want to reinstate that this is about normal activity. This is about having the right behavior in the market and as I mentioned earlier, we believe the UK market is also showing different behaviors and a more rational approach to handset commercial activity.

Justin Funnell, Credit Suisse.

Thanks very much. You mentioned during the call potential shifts in Spain. I think you were mentioning less spend on handset retention. I guess for years, you have had this loyalty scheme on people use the phone and build up points and trade them in for new phones. Are you shifting away from that model?

And you also mentioned moving into a handset finance deal. Is that going to be along the lines of perhaps the O2 My Handy model where you could see actually quite substantial handset deals offered, but done through working capital and factoring? Would that make you more competitive in the handset space?

And then secondly on Brazil margins, I guess I have been waiting a few quarters to see if your margins would benefit from the Telesp piece of the merger and margins remained pretty flat. Is that a trend or should we actually see some margin expansion in the coming 12 months?

Thank you for your question. Within Spain, as you know, Fusion specifically has no subsidies for handsets and that was also part of our commercial strategy set at the beginning of our transformation program.

When you ask me about the ways of being more efficient on handsets commercial activity, as you know, we have different approaches depending on the countries. But in Spain, it is a different system than My Handy in Germany. In Spain, what we have is an agreement with a financial institution that is working increasingly well.

With regard to My Handy, I think it is one of the best financial offerings and it is working well from the beginning to the end of the process. So we believe this is a way going forward to make sure that the operations businesses look clean and that we stick to our mainly business operations.

This is Santiago again. On Brazilian margins, I feel there are two forces acting upon them. One is structural that you mentioned and it is the cost reductions as a consequence of the integration of our operations that are going to have a modest, but long-lasting effect on margins and then there is the result of the commercial activity of the quarter, which really coincides with the sales. So you should expect some stabilization of the structural points going forward, but you should also expect us to continue pushing or pulling from the commercial lever depending on what the market is demanding there.

Right now, aside -- I think I have mentioned throughout this call, we are putting a lot of emphasis on everything fixed and broadband-related and we probably should spend a little bit more there and we are satisfied with the way our commercial measures are acting and the results we are getting on the wireless, especially on the high-end contract and on the smartphone end. So we are probably not going to be pushing too hard on that one. But take those two observations as temporary and tactical, not as structural.

Frederic Boulan, Nomura.

Hi, I have got two questions. Firstly, if we could come back on Spain? You seem to want to focus our attention on sequential improvements. So firstly in mobile, ARPU has been flat in the last four quarters at around EUR21.5. Should we expect this level to be sustainable or should we foresee the usual Q4 drop? And similarly at the EBITDA level, you show a sequential improvement in the last two quarters. Is there any message here for us for Q4?

And secondly, (multiple speakers).

Frederic, sorry again, we are having some problem with the line. Would it be possible that you repeat your question please?

Sure. Is it better?

Sure. Thank you.

So firstly on Spain, you seem to focus our attention on sequential improvements in this business. So my question is, in the mobile ARPU, ARPU has been flat in the last four quarters at around EUR21.5. Do you expect to be able to hold this level going forward or we should expect the usual drop in Q4? And similarly at the OIBDA level, you show sequential growth in Q2 and Q3. Is there any message for us for Q4??

And secondly, back to Latin America, if you could elaborate on the type of structure you are thinking in terms of a potential IPO? Do you plan to use Telefonica Brazil as a platform to drive this consolidation and how do you think about (inaudible) minority shareholders in this process? Thank you.

Thank you. You are right. I think the sequential improvement in EBITDA in the mobile business, it is a reflection of all the measures that we are taking from the very beginning refreshment of the tariffs to the handset subsidies changes and to the higher efficiency programs that we have across the operation. What is that giving us is a much better result with the satisfaction of clients, improved quality, reduction of claims, which at the end is an increase on the average margin per user.

What we are working from that moment is to say, okay, the refreshment of tariffs produced -- has produced a 56% penetration within our clients within the mobile business and there has been a deterioration or an impact on ARPU. So in the quarter, it is mobile service revenues affected by the ARPU declines, as well as interconnection declines. The slowdown decline that we see in mobile service revenue in the third quarter, there is a positive effect, as you know. There is a lower handset upgrade and related impact on the loyalty program. As you know, the contract handset upgrades is 32%, minus 32% lower than year-over-year.

The underlying mobile service evolution, as mentioned earlier, worsened in third quarter as the ARPU declined almost by 16% year-on-year. What we have in the contract, in the postpaid contract revenues, a very clear seasonality of third-quarter situation with respect to the connectivity. The seasonality effect seen in 2011 didn't happen this year due to the high penetration of the flat rates and the lower weight of the big screen to the multi (inaudible) or the tablets, etc. that we are seeing more recently. And just to mention again the continued increased penetration of the new portfolio with 57% residential segment.

Anyway, looking into what is happening today, the Fusion strategy I think it is the best strategy going forward to (inaudible) with some of these trends that we have seen in the third quarter.

With respect to the second question, as I said before, we are still analyzing various alternatives for the potential listing of our Latin American businesses. Different alternatives have different potential implications both from regulatory, tax and other implications. None of them are more clear or differential than others. We have not taken a decision with only respect to any structure, but with respect to whether the transaction would be performed or not next year. As soon as there is progress on this potential transaction, we would provide further clarity to the market.

Guy Peddy, Macquarie.

Yes, good morning -- well, good afternoon, everyone. Just a couple of clarification questions please. In your net debt calculation, you use a number of noncurrent financial assets and investments of just over EUR5 billion, but in the balance sheet you have a number of over EUR12 billion. So I was just intrigued to know what is the difference. And of your total debt, could you tell us how much of that is raised through Spain or through your Dutch debt vehicle? Thank you.

Hello, Guy. This is Miguel Escrig. The (inaudible) your question we have in the balance sheet EUR12.1 billion of assets. We are including their value -- the value of some of our associated corporate stakes. So if we just take from that what is really interest-bearing, which are essentially the mark-to-market of the (inaudible) for close to EUR5 billion and some other long-term deposits, that is it and the rest is excluded from that EUR12 billion.

And with respect to the second question, 90% of corporate net debt is held at the holding level, be it at Telefonica parent or through the subsidiaries that we have to issue that.

James Ratzer, New Street Research.

Yes, thanks very much. I had two questions please. The first one is just regarding your groupwide commercial costs. I think at the Q2 conference call, you talked about those coming down year-on-year in the whole of the second half and it is very clear that has happened in the third quarter. I mean if I look forward to the fourth quarter, you obviously have the launch of Fusion in Spain, you have got the TV relaunch in Brazil. There are going to be costs related to the iPhone 5. Is it fair to say that commercial costs in Q4 groupwide could be lower than Q4 last year as well?

And then the second question I have is just regarding Mexico. I mean AMX in Mexico continued to be a very strong competitor. They continue to outperform you on service revenue growth and again, in this last quarter, they saw a stronger pickup in their service revenue growth ex-MTR. I mean what do you think you need to do to kind of start turning that around? Do you need to rely on the current regulatory review to help you? I mean is that necessary or are there other commercial actions you can take to improve the revenue growth and if so, by how much? Thank you.

Thanks for your question. On the commercial cost trend and the potential outlook for the fourth quarter, let me tell you that we are anticipating a similar trend as in the third quarter. Some of the trends that we have been observing in the group, namely in the case of Spain, as Eva was mentioning, are here to stay, are already sustainable because there we have radically changed the structure of the offer and therefore we have already been somehow educating the market. On top of that, we have been working very intensively on the quality side of our business and therefore, we have been significantly and structurally changing the number of calls that we get and the claims. We have reduced by half the number of claims in Spain.

The situation is pretty similar in other European countries like Germany or the Czech Republic and with the simplification process, it is paying off significantly. The only uptick that we may get is from the iPhone 5 activity in the UK, which might tick up a little bit in the fourth quarter. But, overall, in Europe, we see the similar trends and in Latin America, we see similar trends as Santiago was mentioning as well because we have high commercial activity, but we haven't been having significantly high commercial activity as well during the year.

So the outlook that we have for the fourth quarter in terms of commercial costs overall at the group level is pretty similar on the third quarter. We are working intensively to expand the model that we have been able to -- we are trying to create in Spain to other regions. Namely in terms of subsidies, we are basically out of subsidies in Germany, the Czech Republic and here in Spain and it has not been affecting our contract commercial activity. So we think that we have a lot of room to improve and to go even more ambitious, but, for the fourth quarter, you can -- we are contemplating similar trends that in the third quarter of this year.

Hi, James. Santiago again. On Mexico, we are pretty happy with the progress we are making. It may not look like a lot from the outside, but we are making progress on quality perception, on coverage, on reliability and on the tariffs, most preferred tariffs for the customers. So we changed the game. What we are trying to do is make people -- make customers alert that we have not only viable, but a good product and our targets are very difficult to beat by anybody else in the market. This is not going to be a one-off event; it is going to be a trickle-down phenomenon, but we are quite happy the way that all these things are progressing.

We are not going to put the blame of our possible shortcomings on the regulation, but essentially a more level playing field would be beneficial in that market as it might be in any other where the distance between the first and the second player is so large as to be nothing short of outstanding.

Time for the last question please.

Luigi Minerva, HSBC.

Yes, good afternoon. My questions are on the fiber strategy in Spain. I was wondering if you can tell us, of the 2 million that you cover, how many of those are with fiber to the premises and how much is fiber to the street [cabinet]?

Also I wanted to hear if you expect any other operator to join the co-investment agreement on the vertical so that you have signed with Jazztel and lastly whether you would consider a co-investment agreement for the horizontal infrastructures. Thank you.

I think on the first question, it is just to confirm it is 100% to the premises. With regards to the agreement with Jazztel, as you know, this is an agreement that is part of our strategy of seeking for network-sharing agreements. This potential agreement or disagreement with Jazztel as it was the first comer to sign the agreement. It is, as you can imagine and you know, efficient on CapEx versus being a standalone and permit us to access the -- we already have deployed 1.5 million of the fiber to the homes and the other 1.5 million Jazztel will do the in-building development and it will be up to 3 million customers.

We'll start in March and as you know, this agreement is open for other competitors in case they are prepared to join us. It is also following the (inaudible) requirements and we feel this strategy is similar to the one we have in other European countries and across the firm globally.

Well, before concluding this call, I would like to make an announcement regarding the position of Head of Investor Relations. After several years of very successfully leading IR, Mrs. Maria Garcia-Legaz is being promoted to run the offices of the Executive Chairman and of the COO. I want to expressly thank Maria for the excellent work done heading the IR team that has won numerous industry awards. The position of Head of Investor Relations will be occupied by Pablo Eguiron and I wish both Maria and Pablo success in their new roles.

Thank you, ladies and gentlemen, for attending this call and look forward to seeing many of you in Barcelona next week.

Telefonica's January-to-September 2012 results conference call is over. You may now disconnect your line. Thank you.