Telefonica SA (TEF) 2013 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Telefonica's January/June 2013 results conference call. At this time, all participants are in a listen-only mode. Later, we'll 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 Mr. Pablo Eguiron, Head of Investor Relations. Please go ahead, sir.

Good afternoon, ladies and gentlemen, and welcome to Telefonica's conference call to discuss January/June 2013 results. I am Pablo Eguiron, Head of Investor Relations.

And before proceeding, let me mention that this document contains financial information that has been prepared under international financial reporting standards and this financial information is unaudited.

This presentation may contain announcements that constitute forward-looking statements, which are not warranties for future performance and involve risks and uncertainties, and that future results may differ materially from those in the forward-looking statements as a result of various factors. We invite you to read the Company 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's Investor Relations team in Madrid by dialing the following telephone number, 34-91-482-8700.

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

Thank you, Pablo. Good afternoon, ladies and gentlemen, and welcome to Telefonica's first-half 2013 results conference call. Today with me are the members of the Executive Committee, so during the Q&A session you will have the opportunity to address to them any questions you may have.

Telefonica has released today a strong set of results, based on the execution of the management priorities established for 2013. Revenue picked up notably in the second quarter, returning to positive growth year on year, led by a significant improvement in Telefonica Latin America and mobile data. Our profitability continues to progress in the right direction, reflecting a limited year-on-year margin erosion and reflecting cost savings from efficiencies offsetting higher trading around smartphones.

In the last 12 months, we have reduced our net debt figure by close to EUR10b, demonstrating our focus on deleverage. As a result, net debt declined to EUR48.6b, including announced divestments pending closing.

Our free cash flow posted an outstanding improvement in the second quarter, to almost EUR2b, and also EPS improved sequentially to EUR0.25.

The transaction announced two days ago will allow us to crystallize value in the German market, as it will further enhance our growth profile, diversification, scale and cash flow, without increasing our leverage ratios.

Let me now start with a summary of key financials on slide four. Reported year-on-year performance is negatively impacted by ForEx effects and changes in the perimeter of consolidation. FX deducted around 5.5 percentage points to revenues and OIBDA in both periods.

Revenues showed in the second quarter an acceleration from first quarter year-on-year performance of 2.1 percentage points to reach EUR14.4b. OIBDA reached EUR4.9b, 0.7% lower year on year in organic terms.

Operating cash flow keeps growing in the first six months, exceeding EUR6.3b, 3.4% higher than a year ago organically. While net income surpassed EUR2b in the first half, roughly stable year on year.

Year-to-date results are fully aligned with our internal expectations, so we do reiterate our outlook for the full year.

On the next slide, free cash flow generation posted a very solid performance in the second quarter and grew 16% year on year, topping EUR1.9b. As a result, free cash flow in the first half improved to almost EUR1.5b. Let me mention that first-half figures include payments from spectrum acquisition of EUR1.1b. So, isolating this effect, free cash flow would have reached EUR2.6b, posting a remarkable growth of 19% year on year.

EPS also improved on a sequential basis and reached EUR0.25 in the period April to June and EUR0.46 in January to June.

In slide six, you can see how commercial activity is intensifying. In the second quarter, we have intensified our commercial efforts in every category to further focus on value and sustainable growth. As such, we have recorded a strong acceleration in mobile contract net adds that reached 2.1m, the highest since Q3 2011.

Especially worth mentioning is the rapid expansion of the smartphone base, with record net adds in the quarter and with penetration increasing 8 percentage points year on year to 24%. At the same time, fixed broadband and fixed line improved momentum, especially in Latin America.

Finally, we continue with the selective deployment of further broadband services. 30% of our fixed accesses are currently ready for these services, and out of them 10% are already connected.

Let's turn to slide number seven for the review of topline growth reacceleration. In the second quarter, we have returned to organic revenue growth year on year. Revenue trend is 210 basis points better than in the first quarter, improving simultaneously in our two regions of operations. It is worth mentioning that Telefonica Latin America performance accelerated its year-on-year growth rate to 10.4%, 360 basis points higher versus Q1, highlighting once again the benefits of our best-in-class diversification.

Excluding [impact] from MTR cuts, first-half organic increase would be 1%, turning also to positive growth.

By services, mobile data revenues continued to enjoy strong momentum, with a 10% year-on-year organic growth and already accounting for over one-third of mobile service revenues. Non-SMS sales ramped its performance on the back of a profitable data monetization.

Turning to profitability in slide number eight, I would like to stress the ongoing efficiency improvements delivered from key transformational initiatives in the commercial and operational model. These savings drove to flattish OIBDA margin versus the first half of 2012, to 33%, offsetting higher commercial spend in Telefonica LatAm during the quarter in order to capture market growth opportunities and transforming towards a more sustainable model. As such, OIBDA margin in the second quarter stood at 33.7% declining 0.4 percentage points year on year organically.

Telefonica Global Resources, on slide number nine, is consistently contributing to higher efficiencies, cost reduction and transformation driven by further execution of priority projects. In networks and operations, we are driving the deployment of LTE sites and we are launching the pilot test of a network virtualization in Brazil. In IT, simplification of our operative model is delivering results while we continue to progress in infrastructure consolidation.

In devices, we are advancing to a more balanced vendor map through strategic agreements with several industry players. Let me highlight that Telefonica Espana was first worldwide to launch Firefox OS device. Finally, on procurement, and thanks to our scale, our savings are on track.

Next I'd like to talk about a few highlights of Telefonica Digital during the quarter, demonstrating Telefonica's innovation as a digital telcom.

Firstly, there were financial services developments in LatAm and Europe. In Brazil, we've launched Zuum, a JV with MasterCard that provides banking services for the unbanked. We've also agreed to create a JV with Santander and Caixabank that will become a pioneering alliance between financial institutions and a telco to create new digital services.

Secondly, Telefonica Digital is investing in new information security capabilities. We've set up 11 paths which will act as a hothouse, driving radical innovation in security for Telefonica's clients.

In machine to machine, Telefonica signed an agreement with Dell to deliver Dell NetReady, a pay-as-you-go mobile broadband service for notebooks and tablets.

Finally, the first Firefox OS handset was launched in Spain on July 2 for EUR69. Next launches of Firefox handsets will take place in Colombia and Venezuela along the third quarter of 2013.

Please turn now to slide number 11, to review our operations in Latin America where our strategy based on capturing the most valuable customers is delivering very positive results.

We keep committed to our long-term growth strategy, as proven by the outstanding commercial activity in the second quarter. We reached a record high in contract gross adds, reinforcing our regional leadership in this segment. At the same time, we improved our performance in the fixed business with positive net adds in all services.

Thus, topline strongly accelerated in the second quarter, exceeding 10% year on year, showing a widespread ramp-up across the region and across services. Booming mobile data is the main growth driver and fixed businesses are recovering and returning to positive growth this quarter.

OIBDA growth of almost 3% year on year in organic terms lags revenue growth, mainly due to the higher commercial effort done in the quarter, as we are capturing value clients that have higher upfront costs but make revenues more sustainable longer term.

In Brazil, turning to slide number 12, commercial activity has been impressive in the most valuable mobile segments. Vivo captured almost 60% of the contract net adds in this market this quarter, mainly due to the explosion of smartphone demand as customers can find in Vivo's network quality a differential service proposition. Let me remark that Vivo keeps working in maintaining this quality gap, as shown by a recent launch of 4G in 22 cities.

The higher quality of our customer base can also be seen in the prepaid performance. Our stricter disconnection policy is driving prepaid base down by 5% year on year, while on the other hand top-ups grew at a healthy 12% rate year on year.

In the fixed business, our turnaround plan is on track. Broadband net adds benefited from the segmented approach of our strategy and doubled year on year, with enhanced quality in our DSL services and with Vivo fiber starting to gain traction.

As a result, the success of our commercial strategy is starting to flow into revenues, as shown in slide 13. Excluding regulatory impacts, revenue accelerated to almost 5% year on year in the second quarter, maintaining the solid growth in the mobile business while significantly improving the revenue trend in the fixed business as operational KPIs started to recover. On the other hand, profitability declined year on year this quarter by mainly two factors, the strong commercial momentum and the impact of some one-offs that positively affected Q2 last year.

Moreover, let me remind that following the roadmap of the integration of mobile and fixed businesses, the final step of the corporate restructuring has already been approved. This will lead us to capture additional synergies that will flow to the bottom line onwards.

Please turn now to slide number 14, to review other businesses in Latin America. In Peru, revenue and OIBDA continued accelerating while strong commercial activity remained, reaching a record high in contract gross adds this quarter. In Argentina, topline continued posting a solid base, while pressure on profitability was mainly coming from the strong commercial momentum and inflation-driven costs.

Chile posted a significant improvement versus the first quarter, as new commercial proposals launched in April started to gain traction. Revenue accelerated by almost 6 percentage points to 3% year on year, while OIBDA grew on the back of efficiency efforts.

In Colombia, turning to slide 15, revenues reverted their trend and grew 2.6% year on year this quarter, driven by solid commercial activity. In addition, OIBDA margin improved year on year as the benefits stemming from the fixed and mobile integration offset the higher commercial costs.

In Mexico, the new telecommunications law already signed will prove higher dynamism to the market and we will be an active part of that process. In the meantime, revenues slightly recovered while we continued our operational transformation.

Lastly, in Venezuela, the impressive operating performance remains. It is relevant to highlight that the main drivers for revenue growing at almost 50% are growing volumes. Contract base is increasing by 32% year on year, smartphones by 37%, while rising ARPU is driven by data traffic explosion and by voice traffic, which grew by more than 20%. The reason is that value customers demand quality of service, and there our service is the market reference.

Turning to slide 16, we will review our operations in Europe. Amid the challenging environment, Telefonica Europe continues executing its transformation strategy towards a more sustainable model to strengthen its market position and profitability. Contract mobile net adds increased over two-fold quarter on quarter, and smartphone adoption continued to expand, reflecting the value for money of a renewed simple and transparent portfolio built around increasing data usage.

In terms of financials, topline performance improved sequentially and margin expanded year on year for the third consecutive quarter, driven by further efficiencies. Especially worth mentioning is that despite expansion of LTE and fiber networks, operating cash flow up to June was stable year on year, leveraging targeted CapEx allocation.

Slide 17 provides more color on the Spanish business. Movistar Fusion's commercial traction remains solid, reaching 2.2m customers as of June, which means that almost 40% of consumer fixed broadband accesses in Spain are already in Fusion. It is also good news the sustained improvement in the mix of new customers and upselling to 56% in the second quarter, 9 percentage points more than the previous quarter. In addition, Movistar Fusion continues fostering a strong fiber uptake and some increase in additional mobile lines.

On the impact of lower value packages, Fusion Cero, let me mention that more than 70% of Fusion quarterly gross adds shows higher value packages.

I would like to highlight the higher rationality seen in the market, with focus on tariffs rather than on handset subsidies. In this context, new mobile tariffs launched in April led to a significant reduction in the contract net loss in Q2, although aggressive conversion offers continued impacting portability trend. Finally, convergence is also allowing us to continue improving churn levels and customer satisfaction across services.

On slide 18, we can see the details of financial performance in Spain. Revenues ex-handset sales improved sequentially its year-on-year trend, as in the previous two quarters. Especially remarkable is the continued improvement achieved in profitability, driven by the ongoing benefits of the new operating model coming from disruptive initiatives.

As such, along with progressive new savings, OIBDA margin in Q2 stood at 48.4%, expanding 3.6 percentage points year on year. Let me remark that this is the fourth consecutive quarter with margins above 47% and significant margin expansion year on year.

Operating cash flow in the first half of the year remained flat year on year, with CapEx focused on fiber rollout acceleration, which ensures our commitment to capture a new wave of growth.

In a nutshell, Telefonica Espana Q2 results evidenced the sustainable benefits of our transformation strategy, which led to a meaningful improvement in the Company's operating leverage.

Please turn to slide 19 for a review of our operation in UK. From a trading standpoint, strong momentum continued in the second quarter, with contract churn maintained at historical low levels and healthy contract net adds.

O2 Refresh proved to be a successful proposition, with a 20% uptake among contract trading, despite it is only available through the direct channel and for high-end devices. The benefits of this commercial approach are starting to be redirected towards a more sustainable distribution model based on increasing the direct mix. Even though the upfront cost of transactions through the direct channel has a negative impact in the short time, lifetime value of the customer is significantly higher, making the model more sustainable.

It should be highlighted that mobile service revenues improved their year-on-year performance for the third consecutive quarter.

Lastly, let me give some detail on the impact of O2 Refresh. In the second quarter, it has contributed with 5.5 percentage points to revenue growth, with no relevant negative impact in mobile service revenues. Part of this positive contribution has been offset by the higher upfront costs of increasing activity in direct channel. And as a result, the net positive impact in OIBDA margin was 2.3 percentage points.

In Germany, commercial dynamics reflect accelerated market transformation towards data monetization, with practically all handset sales being smartphones. As such, the new O2 Blue offers position us in this direction and we continue to focus on LTE deployment to address the upselling opportunity. LTE is starting to get traction, representing 40% of handsets sold in Q2 and two times the ones in the first quarter.

In this context, mobile service revenue continued decelerating, as growth in data services does not offset yet the pressure of tariff renewals, lower SMS traffic and the lower base growth. The positive trends in data resulting into non-SMS revenue growth of 25% year on year in the second quarter, which already represents 65% of data revenues. We are seeing increasing evidences of LTE monetization, with more than 60% of customers showing higher data usage after migrating to this technology.

Revenue pressure is partially mitigated by the Company's focus on efficiency measures, with OIBDA margin at 25.5% in the second quarter. The recently announced transaction will provide us with the opportunity to further generate synergies and to be able to face from a much stronger platform the market transformation towards data.

Now, in slide 21, let me briefly summarize the offer we have launched for E-Plus for creating a leading digital telco in Germany. Total consideration for the acquisition is EUR5b and a final stake in the enlarged entity of 17.6%. The structure of the payment is composed of two consecutive steps. First, the rights issue of Telefonica Deutschland of EUR3.7b.

Let me remark the better scale and diversified profile, with Telefonica becoming the second largest European mobile operator by customers. In terms of revenues, Germany will end up representing 13% of Group sales at 5 percentage points on 2012's pro forma, improving our geographical diversification.

All of this will be financed without increasing leverage. Of the required EUR4.1b, 50% to 65% will be financed through hybrid instruments, 20% to 30% from mandatory convertible, and therefore there will be only the incremental debt of 10% to 20% of the required amount. The incremental debt plus the debt component of the hybrid is estimated to be around two times the incremental OIBDA from E-Plus.

Finally, let me wrap up the key value creation points for our shareholders. The announced transaction will unlock significant synergies for Telefonica, will better position us to capture future growth. It will reinforce geographical diversification, increasing exposure to an attractive market. It will have a positive impact on Telefonica's cash flow generation profile. It will be EPS and free cash flow accretive from year one. And it will be credit friendly, with a financing structure designed for leverage ratios to improve.

Let me now move to the financial side on slide 24. Telefonica is making substantial progress on its deleveraging process by taking decisive actions. Net debt, including post-closing events, decreases by more than EUR3.5b compared to December 2012 net debt adjusted by the revaluation of Venezuela. If we look back one year, we have made remarkable progress in debt reduction for around EUR10b.

Positive free cash flow pre-spectrum has contributed with EUR2.6b. This has been complemented with additional portfolio management initiatives such as the sale of our Irish business, 40% of Central America and a stake in Inversis. Again, we reiterate our target to reduce our net debt below EUR47b in 2013.

On slide 25, I would like to highlight how efforts to strengthen liquidity lead us to show recurring maturity coverage in excess of 24 months. Telefonica's financing activity has been intense during the first half of the year through bond and loan markets. Several long-term financing operations have allowed us to raise nearly EUR8b year to date and to increase our average debt life while smoothing the maturities profile. This successful financing has contributed to an additional improvement in our liquidity position, reaching EUR21.7b as of June, above the level of March 2013.

It is also worth mentioning the decreasing effective interest cost during the last 12 months, almost 25 basis points to 5.23%, close to the bottom of the range of our guidance and despite the strong liquidity position.

To wrap up, we are returning to revenue growth, leveraging diversification and strong commercial push. We are exploiting our strong execution and transformation capabilities to deliver targeted efficiencies and reinvesting them in increasing customer lifetime value, allowing us to maintain [community] for OIBDA year-on-year trend practically stable.

We have posted a very solid free cash flow generation in the second quarter, leading to a sequential improvement of both free cash flow per share and earnings per share. We have made a significant step forward in debt reduction, decreasing EUR10b since June 2012. We have announced two days ago a transaction that will allow us to crystallize value in the German market.

So, all in all, we are progressing in our transformation strategy.

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

(Operator Instructions). Our first question comes from the line of Paul Marsch from Berenberg. Please go ahead.

Yes. Thank you very much. I think your domestic OpEx fell by EUR500m in Q1 and I think it was EUR400m in Q2 compared to the previous year, but as I understand it the comp gets tougher into the second half. So do you think you can sustain that run rate of cost reduction in the range of EUR400m to EUR500m per quarter through the second half? And, if not, can you give some indication as to what level of OpEx reduction we can expect to see through the second half?

And then secondly, just while your contract churn fell in Spain, it looks like you still churned about 815,000 contract subscribers in Q2. That's a similar level to Q4, when you launched the Fusion product. So it looks like you still need to do a lot more on contract churn and gross additions. What more can you do and have you actually got the cost flexibility to do it? Thanks.

Thank you, Paul. I think that, on your first question, as we have stated in the last few quarters, we are confident we can maintain similar levels of cost reductions and moreover to sustain our current margin levels. We feel confident we continue with our simplification, in-sourcing and other of our projects in the Telefonica Espana operation.

Secondly, with regard to the contract churn, we have agreed with the investor community that we needed to continue working on that. We believe we have set up the right tariffs and we are covering all the segment perfectly well now. And just to say that what we have noticed is more equilibrium in the market, so that we are looking more into both the fixed and the mobile as opposed to just looking at the mobile. We have seen some improvement on contract net adds and obviously we will continue working on this part of the business.

Thank you.

Thank you, Paul. Next question, please.

Our next question comes from the line of Mandeep Singh from Redburn Partners. Please go ahead.

Thank you. I've got two questions, please. First of all, just a quick one on your position regarding Telecom Italia. A couple of your partners in Telco SpA have indicated they want to exit Telecom Italia, so I wanted to understand if you're willing to take up their shares, or what your future intentions were regarding Telecom Italia. That's the first question.

And the second question is really about your full-year EBITDA. I appreciate you guide on an organic basis, but you've done EUR9.4b of EBITDA in the first half and market expectations are about EUR19.7b for the full year. That requires significantly more than doubling your first-half EBITDA. Are you comfortable with market expectations? Or, if you can't answer that question, what do you think could actually drive an absolute increase in H2 EBITDA versus H1 EBITDA?

Thank you. This is Angel Vila, with the first question regarding Telecom Italia. We believe that there is value in keeping the investment in Telecom Italia under a joint vehicle that has a substantial stake which has significant influence in a major European telecom operator. So we are talking to our partners about the merits of preserving this ownership structure, and that is still an ongoing dialogue. So we are not contemplating taking full control of Telco, but we are talking to our partners to convince them on the merits of extending such structure.

Taking your question on OIBDA for the full of the year, as you know, we have not been guiding on OIBDA; we have been guiding on OIBDA margin and we have guided on revenue growth. So I will focus my answer on revenue growth and on margin, if you don't mind.

Revenue growth, we announced that will be improving sequentially throughout the year, and as we have seen quarter on quarter. The second quarter has been better than the first one. We think that, according to the trend that we are seeing internally, this is going to be the case in the third and fourth quarter, namely in Latin America very strong commercial activity, namely in contract, allow us to see better trends in terms of ARPU. And therefore we feel comfortable that the challenging profile of growth that we have in our own budget and that we have shared with the market is going to be met.

And in Europe it's been a bad year, as you know, overall, namely in Spain, but we are seeing progressively a stabilization of the growth, of the rate of growth, and a slight improvement in some cases. So, overall, in revenues we feel comfortable with the trends that we have seen.

On top of that, in the places where revenues have been weaker than we expected, the cost contention has been higher because we are significantly matching both things, revenue growth and subscriber acquisition costs, so to say. And therefore the overall thing is that we feel comfortable and we reiterate our guidance of revenue growth and a better performance of OIBDA margin for the full year.

Thank you.

Thank you, Mandeep. Next question, please.

Our next question comes from the line of Luis Prota from Morgan Stanley. Please go ahead.

Yes. Thank you. I have two questions, please. The first is on fiber regulation in Spain, where I've heard about a public consultation regarding a potential mandatory wholesale offer for fiber based on competitive levels by region. So I don't know whether you could elaborate a bit on what's going on, give us an update in this regard and what could be the potential outcome.

And the second question is on Argentina and what's your current cash position in the country and whether you have any kind of hedge ahead of a potential currency devaluation in the country. Thank you.

Thank you, Luis. With regard to your first question, I do believe you are referring to a pre-consultation, a process that -- it was before analysis of the market, but we cannot give you more information as such.

Hello, Luis. This is Angel. Regarding our cash position in Argentina, the net cash is around EUR100m equivalent. It's regulated at 15.5% and we don't have special hedges on that position. What we have is a positive cash position in solid currencies and some debt position in local currencies.

If I may add on my previous question, just to clarify that our deployment of fiber in Spain is currently related to the current regulation. So if there's any other regulation or new regulation, we will adapt to it.

Okay. Thank you.

Thank you, Luis. Next question, please.

Our next question comes from the line of Georgios Ierodiaconou from Citi. Please go ahead.

Hello. I've got two questions, please. First one is around leverage. Your target for the full year is to go below EUR45b of net debt, and you're currently on reported numbers around EUR3b short of that and there is an interim dividend which is just in excess of EUR1b, so you more or less need to generate around EUR4b in the second half to deleverage to that level. So I'm not sure if Ireland will close in time for that. So my question is to clarify whether the target is for the reported net debt or the one with the closing events is the one which we should be focusing on. And perhaps, if it's the reported number linked to that, if you'd give us any color as to how you expect to deliver that target.

My second question is on consolidation. With the announcement of Ireland last quarter and Germany this week, there is limited room for consolidation in Europe, at least with your direct involvement, but I wanted to extend perhaps the discussion about Latin America. Are there any markets in the region where you believe returns need to improve for investment to be viable and sustainable and where the market structure is currently sub-optimal? And do you believe it is feasible for consolidation to be delivered or are there any barriers which could prevent that? Thank you.

Hello, Georgios. With respect to leverage, our net debt at the end of June stands at EUR49.8b. If you were to include the transactions that we have already signed, some of them, like Central America, already all the conditions to closing have been fulfilled, so it is going to be closed around August 2. And we are aiming to close Ireland, really, in the last quarter of this year, maybe in the first quarter of next year. So with these divestments, we would be at EUR48.6b.

We have a target of EUR47b net debt by yearend and, as you rightly say, we are going to pay a dividend in November which is around EUR1.6b. So we are estimating that with the free cash flow that we are going to generate in the second half plus the closing of these transactions we should be reaching that objective.

Having said this, you should expect us to continue being active in our strategy of active portfolio management, not so much here to achieving this debt figure by yearend but because we really feel it makes sense. Our approach has been, all along this year, to try to strengthen the operations in the markets where we are present. We have been very pragmatic. So in some places like Ireland, we have allowed ourselves to be consolidated, while in other places such as Germany we are aiming to be the consolidator.

This type of approach to the markets, trying to get a better position in those markets, be it in market share, be it in potential to create value, will continue. And we will explore opportunities for doing so in each one of the markets where we operate and potentially also in Latin America.

If I may complement the answer, I would say that for us consolidation is not just corporate deals, but also about network sharing. We think it doesn't make sense, the amount of network that we have in some places. Namely in Europe we think that having 60 players is not the right number so I think that consolidation is going to happen. We have already shared our network in the UK. We are doing network sharing deals in Germany, the Czech Republic and here in Spain. We are doing exactly the same in Latin America.

So, for us, it's becoming much more pragmatical in terms of allocating our capital and in terms of looking for other sources of differentiation, namely on the business intelligence and customer insight and products and services. So, yes, you should expect from us to be very active on this kind of consolidation and in this kind of making sure that we set up the right differential -- competitive differential points in our value chain.

Thank you, Georgios. Next question, please.

Our next question comes from the line of Tim Boddy from Goldman Sachs. Please go ahead.

Yes. Thanks. It's been another quarter with a lot of volatility in currencies, obviously later in the quarter so you haven't yet felt the full impact in EBITDA. I guess the question on that is have you thought any more about your ability to reduce your exposure to LatAm currencies? Obviously, given your debt is nominated mainly in euros, is there anything you can do? I appreciate hedging costs are very high, but anything structurally you can do to change that?

And then, related to that as well, do you still have in mind a target leverage goal for the Group, because obviously, while the deleveraging has been very strong, the net debt to EBITDA ratio hasn't materially reduced?

Second, I just wanted to ask a bit about the timing in Germany, and obviously this is a transaction that's made sense for very many years. What changed which made you think that this was the right time to take on that transaction? Thank you.

Hi, Tim. With respect to our ability to reduce exposure to LatAm currencies, we have a hedging policy which is for LatAm currencies 2 times free cash flow pre interest on those currencies. Our aim is not to have a specific percentage of debt within different geographies, but to protect the solvency, so releasing the sensitivity of leverage ratios to FX movements. So, for instance, some of the weakness that we have seen in the Brazilian real translating into our OIBDA is offset by the reduction of -- the exposure of the Brazilian debt in our balance sheet. So our hedging policy is aimed to protect solvency, reducing the sensitivity on leverage ratios.

With respect to a target ratio, if you look at slide number 24, at the end of June we're at 2.4 times net debt to OIBDA. If you were to contemplate the figure after divestments announced still pending closing, you will see that the ratio is 2.36 times, which is closer to the target that we have for the year.

With respect to the timing on Germany, I'll pass to Jose Maria.

Why now is the right timing even though this idea or this potential transaction has been on top of the table for several quarters, so to say. Well, first of all, right now there are some elements that are brand new and that has aligned the elements to make this transaction doable right now. First thing is that commercial momentum is heading into the right direction. Second, we have an asset that is differential like the spectrum that we have in Germany, the 800 for LTE purpose. Third, I would mention the IPO that we did of our German business last quarter of last year allowed us to have another currency, an attractive currency and attractive platform to develop the different sections.

So, overall, I think that today, right now, we can present to all shareholders, KPN and Telefonica and Telefonica Deutschland shareholders, but mostly to the customers of Germany, a very appealing proposal. And therefore I think that right now we have all the elements aligned to make a very sound and robust case for this transaction to go through.

And just a quick follow-up, if I may. Could you remind me on your long-term leverage target for the Group?

We have a target of leverage by yearend of 2.35 times. We have not moved the year target, but you should assume that our aim is going to be to continue deleveraging both pre and post closing the announced transaction.

Thank you, Tim. Next question, please.

Thank you very much.

Our next question comes from the line of Ivon Leal from BBBA. Please go ahead with your question.

Hello. Good afternoon, everybody. I have two questions. The first one is I don't know if you could help us to try to figure out how mobile ARPUs are going to perform in Spain in second half and 2014. I guess despite of the repricing of the base and lower prices coming from Mobistar Fusion has held to the subscriber base. I don't know if you have some numbers on the third quarter which can help us to try to see if that is decelerating or not.

And on that sense, it would be very interesting if you could give us an idea of what kind of mobile ARPU you're getting on the Mobistar Fusion Cero contract, which I guess is where the risk of mobile voice cannibalization is more evident. That's the first one in Spain.

And the second one, in Brazil, you're blaming the margin pressure on two issues, one which I guess is more temporary, which is postpaid growth. And the second one, which I guess is maybe more structural, which is redressing your fixed line business. So I don't know if you could give us a figure on how long can it take [to address] that fixed line operation and what cost it may have in terms of EBITDA margin in the country.

Thank you, Ivon. I think that with regard to Spain and in particular what is going on with the ARPUs there, what -- I think that I have stated earlier some new situation. First of all, the market is moving more towards a more balanced fixed and mobile market model. So the convergence seems to be the key driver in fixed business and in mobile business. So that is moving more toward a SIM only model.

We have seen stabilization in revenues. It's handset sales. And I have to say that we believe we are moving towards improvement at the end of the year. So we will see some improvement in the second half but more at the end of the year. And we believe that will continue being part of the commercial traction coming from Fusion and the new mobile portfolio, despite or considering the negative impact of the MTRs drop in July.

With regard to your question around Fusion Cero, what I have to say is that something that Angel mentioned earlier in his presentation is that despite having that lower level, the lower possibilities of Fusion Cero, most of the takeups in Fusion go to the higher value package. So more than 70% are moving into that direction, without being able to be more specific. I think that is a very good trend for Fusion.

Okay. And the improvement that you're mentioning is already visible on July trends?

I think that we will see more towards the second half of the year, as I mentioned earlier, but we are seeing the right trends in the takeup.

Okay. Thanks, Eva.

Ivon, this is Santiago. On Brazilian margins, two statements. One is that we're happy we're making the progress we thought we could make on capturing data growth and upgrading customers from prepaid to contract. Our share of net adds is about 10 points or so better than our market share, so this is working.

The second thing that is working, as you mentioned, is the improvement in fixed line. It's still not enough. It's still not out of the water. But certainly it is pointing in the right direction. We have great confidence that slowly but surely this will be the trend over the coming couple of quarters.

And about the stability of margins or long-term numbers, we certainly do not have one, but we think we continue to have benchmark numbers for the industry in Brazil. And to the extent that the industry consolidates, stabilizes or stops growing, which it is not showing any sign of doing, maybe cost could be managed differently. But we think that the sign of the times today is capture that growth, the growth that there is, rather than be very aggressive on cost management. Of course there is always a balance, but at this point we think that capturing the growth is the priority.

Okay. Thank you, Santiago.

Thank you. Next question, please.

Our next question comes from the line of Giovanni Montalti from UBS. Please go ahead.

Hello. Good morning. Just two questions. There's been some acceleration in the line losses in Spain. I just was wondering if you could give us the trends behind this and what you expect for the coming quarters.

And on Brazil, I don't know how much can you answer to this, but looking at the political and regulatory environment, would you see feasible, let's say, a breakup of one of the four mobile operators among the three ones that will remain? Thank you.

Giovanni, sorry, could you repeat the last part of your second question?

Yes. Again, just assuming a breakup of one of the four operators in Brazil among the three that would remain, would you see this as a feasible scenario considering the regulatory view, government view about the evolution of the industry? Just wanted to understand what's your opinion about how the regulator will see such a scenario. Thank you.

Thank you, Giovanni. I think that with regard to your question on the fixed line business in Spain, it's true the net loss has increased during the month of April specifically because it was affected by the connection fee increase. That was specifically 2.9%. That increase was finally postponed to June, which impacted in lower gross adds.

Giovanni, in terms of what the future shape of Brazilian telecoms will be, all the options can possibly be open. We of course have a few views, but let me say just one thing. It will not require a change of regulation but a change in the rules that the government has set up to control and direct the industry to attack a thing like the one you mentioned. And I think it is of no use that we share our views.

But certainly we have seen in other geographies that things can change. We're trying to do just that in Germany, but that is not necessarily a lead on what would be good for Brazil. So I think you're probably as well placed as any of us to have a view on what can and what cannot happen. But it is not only a regulatory issue. It is a highly charged political and industry -- shape industry view.

Sorry, if I may, just a very quick follow-up. Would you consider the current framework as, let's say, [tolerable] providing some ground? Would you see some margin for this to happen, I don't know, over the next two years, let's say over the short, medium term, let's say? Or do you see that there's still too much that has to happen?

Look, there is still growth and there's a lot of growth coming from the segments that I mentioned, contract, upgrade and data. But Brazil is a large market and all of us have reasonably close market shares. It is highly competitive and so there's no obvious need for it to disappear as many other smaller markets might be. We have large markets with two or three players and very small markets with five players, and this is the shape of the industry that's [morphing them]. We don't have a strong view about what is best. We should tell you we'll try to adapt to whatever the conditions are.

Thank you, Giovanni. Next question, please.

Our next question comes from the line of James McKenzie from Fidentis. Please go ahead.

Hi. Good afternoon. Just two very quick questions. Firstly, there's been a lot of press comment about an agreement with Yoigo in Spain. I don't know if you could give us any detail on that or if there are indeed any negotiations going on.

And then secondly, I wonder if, Santiago, you could give us your view of what the new telecoms law could mean for you in Mexico.

Thank you. I think that if we look into what is going or what's happening in the press, what I'd like to say and to clarify, as we said in other moments, is that we are quite open minded to reach agreements in sharing infrastructure. We've done it everywhere in Europe and we have done it in Spain, so we will maintain that open minded objective. I think that if it is a rational movement that improves the market economics and optimizes capital investment, it's always good to look at it.

When we look at LTE specifically, we believe that the massive or the potential massive launch will depend first on market demand, on technological maturity and on spectrum availability. As we have mentioned in other occasions, the usage of the 1800 spectrum and the 2600 spectrum band can maybe provide service in a temporary measure until the 800 is available. So, for us, really the band in which we will focus the quality and the attention will be on that one, when it is released in Spain. So we will have to offer quality and we will have to offer the best service to our clients, and that will be our goal.

Okay. Thank you very much.

James, and in terms of the Mexican law, you know that the most interesting things are still to be written. The bye laws and secondary laws are in the process of being put together and those will show the details. The highlights are, however, very well known.

The highlights are that the Government of Mexico wants and has written in the constitution to limit market shares down to 50%. It's obvious that some of the dominant players or predominant players are way above that, and so there a number of known ways to get from where they are to the neighborhood of 50%. That includes asymmetric pricing, that includes caps, that includes other things, which are going to be in the details. We think this is going to be healthy for the Mexican market and we will try to take advantage of whatever opportunities present themselves to do that.

There are no longer going to be any restrictions about the ownership. That's the second feature. We think there is a third line that is the strengthening of Ifetel, the new regulator, that is likely to have an impact on how fast any dispute is resolved and how easy, or rather how difficult, will it be to bring it to the legal courts, which has been a feature of the Mexican market, slowing down quite dramatically the thing.

So the most interesting things are still to come, but limited market share through any of the known means and strengthening the regulatory power, regulatory body powers, and the lifting of all restrictions we think are going to be quite healthy and interesting for the Mexican market.

Okay. Any idea of a timeframe for when you might start to benefit from this?

We think that the interesting details will be known before the end of this year and it will be somewhat in effect -- and this is just a guess -- in the first half of 2014. But of course we will all be updating the market on the likes of this, as the Mexican government will be doing.

Yes. Thank you very much.

Thank you, James. Next question, please.

Our next question comes from the line of Jerry Dellis from Jefferies. Please go ahead.

Yes. Good afternoon. Thank you for taking my questions. First question has to do with capital intensity. You noted in the slides how capital investment in Spain was heavily reduced this quarter. In general terms, CapEx across the European footprint seems to be trending at around about two-thirds of D&A, and I wonder to what extent that might be sustainable going forwards. How should we think about that, please?

And then secondly, just in terms of Spanish mobile, you alluded earlier to the onset of EUR0.01 termination rates in Spain from July. Obviously, in other markets such as Italy that has been the precursor to quite aggressive pricing activity at the retail level by competitors. I wondered if you're seeing any evidence of that and what initiatives you have in place to prepare the way and defend yourself in the event of any competitor activity. Thank you.

Thank you very much. I think that with regard to the CapEx position, to clarify, we are accelerating definitely our fiber investments and obviously the LTE across Europe. So what you might have seen is just some trends or that towards the end of the year we will adjust to those targets. So, nothing strange there. Moreover, the opposite, because we are targeting fiber and LTE very importantly. So capital allocation and making sure that we do the right thing on prioritization has been key, but maintaining targets and maintaining definitely our objectives in all across Europe and in Spain as well.

The second question, I'm not sure if I understood it altogether. I didn't hear the whole thing. But with regard to the mobile business and with regard to specifically what is going on in the market, I think that there is an MTR effect that we will see in July more specifically. And secondly, what we want is to make sure is that we focus on data monetization, and that data monetization should be the focus for us in all across Europe. In the case of Spain even more so, as convergence is also helping us to focus on it. We are seeing that coming also from other of our competitors, but what we wouldn't like to see is other competitors jeopardizing these data opportunities, these data monetization opportunities.

Thank you, Jerry. Next question, please.

Our next question comes from the line of Will Milner from Arete Research. Please go ahead.

Thanks. Just had a question on Telefonica Deutschland and the acquisition of E-Plus. Would you expect, going forward, assuming the merger completes, an increase in the Telefonica Deutschland dividend that would cover the incremental interest costs on the EUR4b of debt that you're taking on to finance that deal?

And the second question is Spanish mobile. I think this quarter you'll lap the launching of Fusion last year, and as a result you'll annualize the benefits of lower loyalty point discounts, which I think looks like quite a headwind in the third quarter. Should we expect the mobile service revenue trend in Spain to deteriorate as a result of lapping lower loyalty point discounts, or are you confident, as you seemed to suggest earlier, that the service revenue trend will accelerate and improve in Spain?

With respect to the first question on the dividend of Telefonica Deutschland, first thing I have to say is that this is a matter that corresponds to Telefonica Deutschland and its governing bodies. But what I can comment is that there are two stages. One is pre closing of the deal and the other one is post closing of the deal.

So, pre closing of the deal, the 2013 dividend that should be paid in early 2014, this should be fully aligned with what is stated in the IPO prospectus and in line with the dividend that has already been distributed recently. And then, after closing, the structure that we have designed will result in Telefonica Deutschland being a very well capitalized company. So, as such, it would make sense that it should have a very high free cash flow payout of dividend and Telefonica will continue to hold at least 65% of that company, and as such we would be a major beneficiary of those dividends.

That's clear. Thank you.

Going into your second question, I think in Spain now and going forward the market is moving towards a more balanced fixed and mobile market model. So convergences as a key driver in both fixed and mobile businesses are going to be the key for our focus.

And as stated in previous call, the positive impact of the loyalty program, it will be fading off and it's already fading off. In the second quarter, the impact is lower than in the previous quarter and will be even more diluted towards the end of the full year 2013, when you will have a more like-for-like, more homogenous comparison basis because subsidies in mobile come from March 2012 and will be fully in place also for retention from third quarter 2012. And then the negative impact the subsidies removal had on the ARPU will also trail off going forward, so you will have a more like-for-like and more homogenous comparison. I think that's basically what I have to answer.

Thank you, Will. Next question, please.

Our next question comes from the line of Fabian Lares from JB Capital Markets. Please go ahead.

Hi. Good afternoon. Two questions, please. With regard to the Irish deal, considering that this is a transaction that reduces the number of players, do you believe that there could be any difficulties in getting regulatory approval? And if so, could this somehow compromise your objective of reaching the EUR47b by yearend, as you seem to be counting with the cash in from this transaction already, even though officially it hasn't closed? So perhaps maybe some visibility on the kind of timeline you believe this may have.

And then second, on the E-Plus KPN deal, I was keen to know your thoughts over the statements made already in the press by people from the German antitrust regulator and other authorities seem to point to a rather negative stance on the transaction. Thanks.

Thanks for your question. First of all, on the Irish deal, we think that the proposal that we're making in Ireland by the sale of our business is very solid and attractive for the Irish market as a whole. I think that the level of competition in the Irish market is high enough to make sure that in spite of this transaction there is significant tension. And in fact, we will be an even more robust third player and therefore to offer much more attractive offers to customers in the different segments. So we do think that the proposal to the customers and to the Irish market is solid enough to justify the transaction, so we are not expecting major hurdles on that.

And taking your question on the German transaction, it's very similar. Let me make a very bold statement in terms of saying that again it doesn't make sense. There are too many players in Europe. But if Europe as a whole, as a region, wants to play its scale, it needs to consolidate. That consolidation is going to be in the interest of European consumers and therefore it needs to happen. We think that we have already a strong and compelling case in the case of our German business. Let me try to detail that a little bit better.

First, on an infrastructure point of view, competition is going to accelerate because right now you have a third and fourth player that because of our entry has been later and the other two we are lagging behind, and therefore we are just trying to be competitive against two very strong players. So the consolidation of the third and fourth should create an infrastructure based player that is going to accelerate competition. And therefore we think we have a solid case in terms of adding competition into that market through this transaction.

But if then we approach this transaction through the eyes of the customer, having a stronger player with a lower, in our case, namely, by the combination of O2 Germany and E-Plus, to have a much more competitive offer to some segments to which we have not been able to be competitive today in the German market, like the corporate segment.

So, whatever your approach, the transaction is going to create more intensity and a better proposal to both the consumers and the society as a whole because it will accelerate investment, CapEx, and it will accelerate more attractive offers to the customers. So in both cases we think that we have a compelling case.

Let me finalize by saying that even at the end of the transaction, if the transaction was to be completed, when the transaction is going to be completed, we still have more than 100 brands in Germany because we have more than 100 MVNOs through the German market. So I don't think this is going to reduce significantly the competition, rather the opposite. It will help us to be much more competitive.

Thank you very much.

Okay. Thank you, Fabian. We have time for one just final question.

Our last question comes from the line of Jonathan Dann from Barclays. Please go ahead.

Hi there. Two questions. One, have you begun to think about partners for fiber beyond 3m homes?

And then secondly, in Latin America, apart from Brazil, are there any other low frequency spectrum auctions coming up in the next two years?

Thank you, Jonathan. I think that our aim is to continue accelerating our fiber deployment, and as such we have the Jazztel agreement. And to remind you that our objective is quite aggressive already, and it's to reach 8m households passed by 2015. We are seeing good traction and the most important here demand is there, so that we are seeing demand coming from our customers especially to Fusion. So we believe we're well positioned, we have the right partners and we're signing the right agreements.

Yes. Jonathan, in terms of the upcoming spectrum auctions on low frequencies, understanding 700 by that, the upcoming Chilean auction in Q3 is the one we expect. There is strong talks that Brazil, Colombia, maybe Ecuador, even Peru, might do something next year. This is more talk. You know that these frequencies tend to be heavily occupied and very noisy and so it's not easy to clean them up, but they might come in 2014. No strict plans that we know of are there yet. Then Mexico and probably Uruguay will come sometime in 2015. Those are more expectations than plans.

Does an auction in Brazil -- does it mean -- does it open up the scope for consolidation? I guess there isn't enough for all five players.

It's difficult to answer, because the rural part is still pending and the full deployment of LTE and the upcoming sporting events are likely to concentrate the regulatory and industry auction for the next year.

Thank you very much.

At this time, no further questions will be taken.

Thank you very much for your participation. We certainly hope that we have provided some useful insights for you. Should you still have further questions, we kindly ask you to contact our Investor Relations department. Good afternoon. Thank you.

Telefonica's January/June 2013 results conference call is over. You may now disconnect your line. Thank you.