Telefonica SA (TEF) 2013 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to Telefonica's January-September 2013 results conference call. (Operator Instructions) As a reminder, today's conference call 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-September 2013 results. I am Pablo Eguiron, Head of Investor Relations, and before proceeding let me mentioned that this document contains financial information that has been prepared under International Financial Reporting Standards and that this financial information is not audited.

This presentation may contain announcements that constitute forward-looking statements which are not warranties of future performance and involve risk and uncertainties, and that certain results may differ materially from those in the forward-looking statements as a result of various factors. We invite you to read the complete disclaimer included in the first page of the presentation, which you will find 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's Investor Relations team in Madrid by dialing the following telephone number, 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 2013 third-quarter 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.

The results released today show how a strong operating and financial execution enables us to achieve full-year outlook earlier, as we have made significant progress in three areas. First, Q3 confirmed the acceleration of year-on-year organic revenue growth for the second consecutive quarter with sales up to September turning positive to 0.04%.(sic-see press release "0.4%")

Second, organic OIBDA stabilizes. Top-line growth, efficiency gains, and cost control have proven to be successful, limiting OIBDA margin erosion to 0.2 percentage points despite intensified commercial activity. The operational improvement, together with strong financial execution, allowed free cash flow, ex spectrum, to remain stable year on year in the first nine months, despite FX headwinds and changes in the perimeter.

The third key strategic pillar is on balance sheet improvements. Net debt decreased substantially in the quarter to EUR46 billion, or 2.30 times net debt to OIBDA. In addition, our focused portfolio management keeps progressing in the right direction with the Czech Republic transaction being the latest example.

Including post closing events, net debt would stand below EUR45 billion, implying a EUR14 billion reduction since June 2012 when deleverage was established as a priority. Finally, let me stress that we fully confirm our goals for 2013 and our dividend commitment, of which EUR0.35 was already paid on Wednesday.

Let me now start with a summary of key financials on slide four. In organic terms and in July-September period, revenues posted the highest growth for the last 12 quarters at 2.1% topping EUR14.1 billion. OIBDA reached EUR4.7 billion and reduced its quarterly decline to 0.3% year on year, while profitability stood at 33.3%, 0.8 percentage points lower than a year ago impacted by commercial investments linked to revenue streams.

From a cash generation standpoint, January to September operating cash flow stood at EUR9.1 billion, excluding spectrum, virtually flat year on year. It is important to highlight that reported headline figures and the year-on-year trends are negatively impacted by FX and to a lesser extent by changes in the consolidation perimeter.

July to September period is impacted by the sharply weaker Latin American currencies, especially Brazilian real, which deducted around 10 percentage points of revenues and OIBDA year-on-year change. Nevertheless, let me highlight that this negative FX impact is mitigated at free cash flow level as shown in the next slide.

Moving to slide number five, free cash flow generation before spectrum payments remains stable year on year in the first nine months at EUR4.7 billion, absorbing the mentioned adverse FX impact. This performance is driven by an improving free cash flow throughout 2013 supported by better operating results and strong management of non-operating results flowing directly to cash.

Free cash flow reached almost EUR2 billion in the third quarter and EUR3.4 billion in the first nine months after spectrum. Earnings per share up to September was EUR0.70 and free cash flow per share totaled EUR0.75, both providing strong comfort about our EUR0.75 cash dividend commitment for 2013.

Slide six shows the solid results delivered by our strategies centered around high-value customers. The accelerated growth of contract customers set the basis to keep smartphone uptake acceleration. Smartphone penetration is up more than 8 percentage points year on year to 25%.

As highlights, I would like to point out that, first, quarterly contract net adds were 1.6 times higher than a year ago and 1.8 times in the case of LatAm. Leverage of very rapid smartphone adoption. And, second, that our commercial proposition allows us to capture all profitable growth opportunities.

Our increased investments in ultrabroadband prove our commitment on quality growth with coverage reaching 32% and with 11% of customers already connected at the end of September. We are also advancing on LTE in our main markets.

In slide seven I would like to show the improved organic performance year on year from top line to OIBDA in Q3. Since the beginning of the year, group revenues are consistently improving on a quarterly basis, the combination of very good evolution at Latin America and very robust mobile data. In addition, Telefonica Digital maintained its accelerating growth trends, while Europe continued with its progressive stabilization.

This performance led good group revenues to show a sequential organic improvement of 160 basis points and 50 basis points in OIBDA. Good progress on profitability in the third quarter underlines the benefits of our best-in-class diversification, balancing the capture of growth opportunities in LatAm with the margin expansion in Europe.

Let me stress that if we exclude the negative impact of regulation our revenues would have grown 2% and OIBDA 0.7% versus the first nine months of 2012, or plus 3.9% and 0.9%, respectively, in the third quarter.

Please turn now to slide number eight for a fast review of some initiatives we are adopting to increase the benefits of our scale. On top of local and regional efficiency measures, Telefonica Global Resources further enhances business profitability and contributes to the fast and efficient development of networks and IT adapting to the current needs of transformation.

This can be seen in the fast rollout of LTE and fiber, key tools to capture market growth and the virtualization process that further contributes to efficient digitalization. In terms of IT, we are also changing the way we operate and keep on taking transformational actions with 33% of servers virtualized -- 1,400 physical servers, six data centers closed, and more than 700 applications decommissioned.

Regarding devices we are proactively rebalancing operating systems by reaching agreements with key players. Finally, global end-to-end procurement transformation continued to provide very tangible results.

Next, in slide number nine I would like to talk about progress in our key product areas showing our traction as a digital telco. Firstly, we have successfully established products and services in new markets. In August, Telefonica was awarded with a GBP1.5 billion contract to deliver smart meter communication services in the UK, clearly demonstrating our strong position in the machine-to-machine market.

We have also made some important progress in the financial services space. The JV we are setting up with Santander and Caixabank has been cleared by the European Union antitrust authorities, paving the way for us to start to jointly create new digital financial services.

Secondly, we are continuously evolving our core communications proposition, building the best range of value-added services for our customers. Firefox OS handsets were already launched this quarter in Spain, Colombia, and Venezuela; in October in Brazil; and in November in Peru.

Meanwhile, in the UK we launched TU Go, our unique communication service, a commercial push with Telefonica UK's Be More Dog campaign reaching 161,000 active users. Lastly, we have made investments in partnerships like Rhapsody, Pinterest, and Evernote.

Please turn to slide number 10 to review our operations in Latin America. Commercial activity remains strong in the most valuable segments with contract mobile net adds once more reaching a record high this quarter. This is key to continue strengthening our regional leadership in smartphones. At the same time, fixed services improved once again this quarter.

The strong commercial effort developed in recent quarters is driving revenue and OIBDA acceleration. Revenue growth ramped up to almost 11% year on year on strong mobile service revenue performance, mainly boosted by data adoption. This improvement is quite widespread among different markets.

Regarding OIBDA, it is also starting to reflect the strong revenue acceleration, growing by almost 5% despite margin pressure mainly due to the more intense commercial activity.

The outstanding commercial performance is especially remarkable in Brazil, where we keep strengthening our leadership on high-value customers as shown in slide number 11. Thus, we captured 64% of market growth in the contract segment this quarter reaching 1.5 million net adds, the highest quarterly figure achieved by a Brazilian operator ever. This growth is further improving the quality mix of our customer base and accelerating smartphone adoption, which already reached almost 15 million.

On the fixed services, commercial turnaround continues with better operational momentum underpinned by improved quality and offers across services.

Turning to slide number 12, we provide more color on Brazilian financial performance. Mobile service revenue accelerated to 7% year on year in Q3, mainly driven by strong data growth and despite the 2 percentage points negative impact from regulation. In the fixed business revenue deceleration stems from the volatility on corporate IT projects and some specific factors negatively affecting traffic trends this quarter.

Finally, profitability is showing the effects of the strong commercial efforts.

In slide number 13 we review other operations in LatAm. In Peru, gradual revenue and OIBDA growth consolidated in Q3, maintaining solid commercial momentum. In Argentina, best-ever mobile net adds fueled top-line acceleration while OIBDA trend also improved on easier year-on-year comparisons. And, finally, in Chile, we are also posting enhanced trends as reshaped commercial data-centric offers are driving KPI's recovery, underpinning solid revenue and OIBDA growth.

Turning to slide number 14, in Colombia commercial activity remains strong. Revenue ramped up as a result of improved trends across services, while OIBDA margin reflected the strong commercial activity in the quarter. In Mexico, the progressive adoption of new commercial proposals had a negative impact on revenue performance this quarter as customer base is repositioning to new plans. In the meantime, the process to change the regulatory framework keeps fulfilling scheduled steps.

Lastly, in Venezuela, increased usage is the main driver of the outstanding revenue performance with voice traffic jumping more than 20% year on year and data traffic more than 40% in Q3. This growth is based on a differential quality proposition and is fueling revenue and OIBDA growth above 50% this quarter, ahead of inflation.

Turning to slide 15, we will review our operations in Europe. In the third quarter we enhanced our tariff portfolio with a clear focus on LTE, reinforcing our market positions. As such, we increased the value for our money proposition in Spain with a strong focus on fiber. We launched O2 Refresh in all direct channels in the UK and we further pushed on the O2 Blue tariffs in Germany.

In terms of financials, top-line performance improved sequentially, despite a higher negative impact from regulation, and profitability expanded year on year in organic terms for a fourth consecutive quarter, driven by sound cost control and efficiencies. Lastly, let me remark that we continue adopting ultrabroadband networks to capture the demand for higher speeds, leveraging also on our rational CapEx approach including network shedding.

Moving to Spain on page 16, Movistar Fusion, one year on consolidated as game changer in the Spanish market and one of the pillars of our commercial strategy, reaching 2.6 million customers. It is especially remarkable that 60% of gross adds in the quarter were from new customers and up-selling.

Quality differentiation is another pillar to strengthen our market leadership as reflected in our decisive bet on fiber. Fiber adoption has doubled year on year and is contributing to foster revenues as well as reducing churn. Potential is huge, as reflected in our target to reach 8 million homes passed by 2015 if current regulation is maintained.

In mid-September Telefonica Espana enhanced the value of its offer leveraging on its differential advantages, namely fiber, 4G, and TV, widening the quality working gap of its portfolio. Let me note that first positive signs of improved trading were already seen in October and the first week of November.

Turning to slide 17, we will review Telefonica Espana financials.

Total revenues, ex handset sales, maintained its gradual improvement trend in the third quarter once the regulation impact is excluded. In Q3, OIBDA margin reached a record level at 50.2%, more than 3 percentage points higher year on year, reflecting the deep business transformation. Margin improved also from previous quarter, reflecting further cost reduction and the moderate commercial activity, which I said before was intensified from October.

On top of that we continued taking decisive actions on priority projects, such as the in-sourcing of activities, the redefinition of CRM, and the reshaping of distribution channels aimed at improving the quality of the sales while delivering further savings in the coming quarters. On CapEx, and despite intensive efforts in deploying LTM fiber, the high level of efficiency is flowing to the operating cash flow, which is stable year on year in organic terms with an operating cash flow margin close to 40%.

Turning now to slide 18, Telefonica UK maintained commercial momentum supported by the success of O2 Refresh. This is a promising trend considering that LTE was only available from the end of August. We are now accelerating the speed of LTE rollout with 11 cities covered by now. Initial figures show encouraging results with customers opting for higher value offers and a visible ARPU uplift.

We continue to gain high-value customers with contract customer base expanding by more than 9% year on year and on top of that market-leading contract churn. The strong commercial traction flows into financials with mobile service revenues posting a stabilizing trend year on year despite the negative impact of Refresh.

In terms of profitability, OIBDA margin grew 0.2 percentage points year on year benefited by the new commercial model. Finally, let me remind that the Company continues working towards a more sustainable business model, based on increased direct distribution activity and optimizing investments through the execution of network sharing agreement.

To review Telefonica in Germany, please turn to slide 19. With LTE gaining traction as a differentiating tool in a very dynamic market, we are optimistic on the increased opportunity to monetize data ahead of us. We are seeing very positive signs of LTE adoption with 55% of devices sold being LTE enabled and 3 times higher data usage.

Main metropolitan areas are already covered as we are doubling LTE-related CapEx year on year. Mobile service revenue declined by 1.8% year on year in Q3, affected by a combination of trading momentum, tariff renewals, and lower SMS volumes. On the positive side, we managed to improve the tariff mix, and as a result, ARPU decline stabilized. At the same time, OIBDA and OIBDA margin evolution reflect increased commercial efforts.

The announced transaction to acquire E-Plus is on track. KPN shareholders voted in favor and we are confident that merger clearance will be granted by the second quarter of 2014. This merger will give us the right scale to become an even more competitive player in the market.

Let me now move to the financial side on slide 20. Telefonica continues to harvest the benefits of bold actions towards deleveraging. Reported net debt as of the end of September stands at EUR46 billion, already below 2013 year-end targets on both net debt figure and leverage ratio. If we were to include announced divestments pending closing, such as Czech Republic and Ireland, but we were to exclude the hybrid link to the E-Plus acquisition, net debt would stand at EUR44.6 billion.

Let me summarize how we have reduced EUR7.5 billion of net debt figure compared to December 2012 net debt adjusted by the Venezuela devaluation. Half of this figure, EUR3.8 billion, stems from free cash flow and FX savings and the other half, EUR3.7 billion, comes from portfolio and financial management.

On slide 21 I would like to emphasize how we continue smoothing our maturity profile. So in 2014 and 2015 debt maturities are slightly above EUR5 billion per year.

We are also increasing our average debt life to close to seven years, more than half year longer than in December 2012. All contributing to an outstanding liquidity cushion. Telefonica's extended and diversified financing activity year-to-date has been an important pillar in reinforcing our financial flexibility. We have raised in excess of EUR10 billion including hybrids.

Again, this quarter I would like to point out that effective interest cost continued its downward progress within the bottom of guided range, 18 basis points below December 2012.

To conclude, let me highlight that in the third quarter we have delivered solid financial and operating performance, meeting full-year targets in advance. We continued recovering growth with organic revenues accelerating and flowing directly to OIBDA stabilization. Free cash flow posted a strong performance on the year and is stable year on year before spectrum acquisitions, despite the currency's volatility.

We are strongly reinforcing the quality of our balance sheet progressing in our deleverage priority. Moreover, by actively managing our portfolio we are improving our financial flexibility while enhancing our growth potential at the same time.

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

(Operator Instructions) Singh Mandeep (sic), Redburn Partners.

My question is actually on Telecom Italia. I have got two questions on Telecom Italia.

The first one is in terms of the mandatory convert. Can you confirm what the Telecom Italia management said last night that you participated in the transaction and, therefore, have increased your exposure to Telecom Italia? That is the first question. And the second question is can you sort of give us a bit more color on your medium-term intentions regarding your TI position? Thank you.

Thank you for the questions. This is Angel Vila. Yes, we participated last night in the mandatory convertible issued by Telecom Italia. We are undoubtedly the largest individual shareholder of TI and we decided to express our support to the new plan issued by Mr. Patuano and his team.

The amount that we invested in the mandatory convertible was EUR103 million that allows us to mitigate dilution of our indirect stake. And for this, a waiver was granted by our telco partners just for this specific purpose.

With regard to our intentions in Telecom Italia, and as we said in our previous conference call, we believe that it was important to provide stability to the Company with telco as a [reference] shareholder and that is why we reached an agreement to recapitalize telco.

Being indirectly the largest shareholder in Telecom Italia, we are the most interested in the company's value creation, so our final goal as the largest individual shareholders to support the management, to unlock TIA's value potential. Yesterday, TIA top management defined a new strategy which is in the right direction in terms of strengthening the domestic business and investing more in broadband in Italy.

Also, there are actions to delever and regain financial flexibility. We believe that this plan, as I was saying, is in the right direction and we decided to show our support to it by participating in the mandatory convertible.

Luis Prota, Morgan Stanley.

Yes, hello. Two questions, please. First, on Brazil.

When should we expect the investment for growth to slow down in that country and maybe margins to pick up again? Or in other words, do you still see growth opportunities in that market going into 2014, which part of those growth opportunities, and should we expect top-line acceleration going into next year?

And the second question on Spain. With the big tariff cuts that we saw in the fourth quarter 2011 and then launching this year on the fourth quarter 2012 and with customers progressively migrating to the new tariffs, should we expect a big delta in terms of year-on-year growth in the fourth-quarter revenues in Spain thanks to an easier comparison in terms of average pricing?

Do you see -- you were mentioning in the presentation some positive evolution in KPIs thanks to the new tariffs launch in September. Can you elaborate a bit more on what are you seeing there? Thank you.

Hi, this is Santiago. On the Brazilian question, two observations. One is that we manage Brazil for growth and transformation. Growth in the better part of the mobile world where we are making, we think, good progress all to be stabilizing at a very sensible and healthy level going forward.

And the transformational part comes from the transformation of the fixed line in which we have longer period, longer duration investments that are being made especially in fiber that are going to be slower to bear fruit but that we think will eventually prove for themselves to be the right things. So we will continue to invest in the Brazilian business in 2014, although the final numbers have not been put together yet, because we do perceive that there is a lot of value in transforming the prepaid on to the postpaid base and accessing the data opportunity as we have been doing this year.

Thank you for your question, Luis. I think that with regards to how we see the offer, the market now is moving towards increasing the value of the offer. So what we call value for money. And price repositioning is actually expected to be less intense and we are seeing that already from September.

I think that when you ask about the repositioning we believe it is pretty much done and we are not seeing any new repositioning. In fact, we have seen very much stability in that and I have a lot of details I could give you off the line.

Regarding the new commercial portfolio, as you know, we have focused a lot on two items. One, the convergent offer and the second one in the only mobile offering.

In convergent arena, including 4G in all product, including TV, Mini, and (inaudible) fiber bundles, and increasing mobile minutes allowance in the band, that is already showing an increase in the take-up. Especially when you look at the fiber, which is not only since September doing really well, but just to anticipate that we have had record fiber net adds in October compared to September.

When you look at mobile-only space, we believe we have completed the portfolio with the Movistar 20. As you know, it is also getting 4G. Including 4G also in the Movistar Total, the EUR35 offer, and removing the mobile commitment in all the new and existing customers and also the (inaudible).

Another thing that might be interesting for you is we have improved the handset financing program, so we don't have any financial cost to customers and we have a better pricing.

With regards to trends, we believe revenue trends are to continue into the fourth quarter. And we have seen, as in previous quarters -- we said in previous quarters the positive impact of the loyalty program already facing off and in the third quarter the impact is smaller than in previous quarters. This impact probably will be diluted, as we already stated, when we start the comparing on a like-for-like basis.

I hope covered all the questions.

Fabian Lares, JB Capital Markets.

Good afternoon. Thank you for taking my questions. With regards to the Fusion evolution in Spain, I would like to know a little bit more with regards to what the tendency has been with clients demanding, if any, the offering more in between. If there is demand for this, if you are thinking about doing something about this, given that you are positioned both in the 10 megabyte range in ADSL and in the fiber to the home 100 megabyte range. That would be my first question.

With regards to the deployment of fiber to the home in Spain, I see that you are maintaining your target for 2015 of 8 million homes. Are you in any way considering that this target could fall short if the dynamics or the costs should change, or if in the review by the [CNMC] new obligations are made on fiber access?

Thank you very much. Let me start with the first question, and I think you know what the evolution of Fusion has been so far. Continues being the pillar of our offering here in Spain. We have reached to the expected levels of total customers with 2.6 million at the end of September, and also we have seen, as Angel and Pablo mentioned earlier, that we have the right mix with regards to the new up-selling customers in their gross adds.

When you asked me specifically about Fusion Mini, the lower end of our offer, we have seen limited impact. At the moment we have more than 56% of our convergent growth adds opting for the standard Fusion product. Or if you look from the customer base, 10% would be Fusion Mini and the rest would be at 90%.

Again, I would highlight, like I would always continue to highlight, that the fiber continues to show strong commercial traction and we expect to accelerate deployment into the fourth quarter. We believe there is a strong upside potential at the moment. We have around 12% of Fusion customers in fiber bundles, so you can see what the potential upside is.

I pointed out that the third quarter had strong adds, net adds of 63,000 versus 59,000 in the second quarter and anticipated that October had record fiber net adds at the moment.

I think that in terms of the fiber plan, we have committed greatly to our established 8 million households by 2014 -- sorry, 2015. And always we are happy to evaluate based on the take-up and the regulation situation. We believe we are on track and doing quite well there.

Akhil Dattani, JPMorgan.

Good afternoon. Can I ask two questions, please? Firstly, on Spanish mobile.

If you look at the CMG data that has been provided over the last year we seem to have seen quite a strong improvement in the net add momentum. The market was losing about 300,000 customers a month at the beginning of the year and now the market seems to be relatively stable.

So just quite keen to understand from you what you feel is driving that change and weather within that you think there is any signs that, either from this or any other metrics that you seem to be tracking, whether you feel that there is signs here that economic or customer spending behavior is now starting to inflect?

Then, secondly, just in terms of the whole theme of consolidation, if I understand correctly a couple of quarters ago the suggestion or the feeling from yourselves was that the Irish deal would close by year-end. So I guess just keen to understand if you are surprised that the deal has gone to phase two and whether you see that having any significant implications.

And from that any other color and commentary around when you expect the TEF Deutschland E-Plus review to be completed would be useful as well. Thanks.

So if I start with this first question; on the mobile trading environment the contract net adds are still a concern for us due to the number portability deterioration which is a result of a strong competition in the quarter. But the Spanish market as are seeing it is about convergence and we believe we have a strong position there.

With the launch of Movistar 20, we believe we have filled the gap at the medium level and now we address the customer needs with a complete and competitive portfolio we believe. Additionally, as you know, we have enhanced our only mobile portfolio and we are giving more value for the same price. We are seeing positive preliminary results in October and overall we believe we have a very complete offer there.

With regard to the macro environment that we are tracking very closely, we are seeing a very slight improvement in some of the macro parameters. To start seeing a positive impact on our business we believe it is necessary that the disposable income show a recovery trend that would foster the private consumption which is so key for our sector.

We believe that the recovery consumption to the precrisis level will take much longer, and in the meantime what it is clear to us is the Company is very well positioned with the fiber and a very solid convergent offer to capture the growth when those households start getting more consumption or they can improve in consumption levels. Hope this is answered.

Taking your second question on the consolidation and the Irish and the German transactions, we are not surprised that Irish one went into phase two. That could happen.

This, as you know, is being headed by Hutchison Whampoa being the buyer. They have submitted the case. I think that we think they have a solid case for approval because it really makes sense in the Irish market to consolidate based on the fact that the joint entity will have more financial power to invest more heavily and more rapidly and, therefore, to increase competition of that market.

And exactly the same case applies for the second one, for the German transaction that we are heading as being the buyer in the European Commission. Our case in the Germany I think is very solid in terms of presenting a joint entity that is going to be a much more stronger third player and, therefore, being able to compete more fiercely and more intensively. It's probably the best or one of the best mobile networks in Germany and, therefore, would be much more competitive namely on the SMEs and corporate markets.

So we are not surprised things are going on track. We keep having the same message -- there is no room for so many players in Europe, therefore, consolidation makes sense. And I think now it is to the European Commission to rule and to finally clear these transactions when the time is convenient. So everything is on track and, therefore, both transactions are going into the direction that was foreseen when it was structured.

Giovanni Montalti, UBS.

Good afternoon. May I ask you if you have had discussions with the Brazilian regulator to assess the viability of your market consolidation there? Thank you.

There are no discussions going on at the official level. Everyone is using the spreadsheets and understanding what might happen there, but there are no official or unofficial open conversations about that. We can all make our assumptions. We certainly think it is not impossible that the market eventually consolidates, but there is no movement at this point in that direction.

Should you have a time horizon for such a scenario would you look for 2014, 2015? Do you think there is still a lot that has to happen before we can see a materialization of a consolidation in the market? Thank you.

We have no time horizon on anything like that. The rules are quite clear. The laws have been written and they could be changed, but certainly not by us. And that is not something we think is necessary for us to continue doing business the way we are.

So should conditions change we would have to adjust our behavior and so far we think that the rules are quite clear.

Justin Funnell, Credit Suisse.

Three quick questions please. I think [Justo] was rest recently saying that it was encouraged by its experience with its fiber JV with Telefonica that it would like to do more than the original 3 million shared households. So are you open to [Justo] extending the footprints given that you seem to actually be perfectly capable of going to 8 million on your own?

Secondly, obviously very successful at deleveraging and that starts to raise question marks on where you are heading over the next 12, 24 months. Do you want to continue to delever so fast, or could we start to think about dividends rising from the current level at some point? Is a dividend increase totally off the table?

And, thirdly, I think Mr. Alierta met with the President of Italy recently. I was wondering if there were any takeaways; does Telefonica feel welcome to proceed in Italy?

I start with the Spanish question. With regard to our current agreement, we are quite happy with it and we are happy with our commitment on initial 3 million. Obviously, if there is a need we will be happy to discuss.

Regarding debt reduction deleveraging and dividend, we have already achieved our 2013 leverage target. We have committed to continue in the direction of deleverage, while at the same time strengthening our operations and fostering growth. And as such, for instance, we have structured us in the E-Plus transaction in such a way that it would improve leverage metrics, while at the same time we are expanding and strengthening our position in Germany.

We don't have any urgency regarding execution of new deals for any deleverage. We have many opportunities to keep improving if that is the case. Regarding dividends, after we suspended it in 2012 we will resume shareholder remuneration. 2013 we have set a firm commitment of EUR0.75 in cash. We already paid EUR0.35; the second tranche is going to be paid in cash in the second quarter next year.

At this stage we are not announcing a new remuneration policy, because we prefer to implement our strategy is to keep an attractive shareholder remuneration and to have a reasonable level of debt. So this future dividend will be announced when we do the full-year results presentation at the beginning of next year.

Regarding Italy, what I can say is that we have proven to be a loyal and stable shareholder of Telecom Italia. We believe that it was important, as I was saying before, to provide stability to [Telecom's reference] shareholder. We have shown our commitment by investing even in last night's mandatory convertible and we are supporting new management's plan, which is showing in very few weeks clear ideas and is showing execution.

And it has moved, which we believe are in the right direction. So we are supportive of Telecom Italia and we feel that we have been a loyal shareholder in the company and we will continue to be.

Robin Bienenstock, Sanford Bernstein.

Thanks very much; two questions if I may. First, I'm just wondering if you can tell me, Brazil specifically but Latin America more generally where I saw margin weakness, how much of that is being driven by increased commercial investment and how much of that is being driven by wage inflation. So to what extent do I have to worry that you were suffering from the effects of inflation in Latin America?

Separately, are you worried at all that Telco could dissolve as early as June 2014 and do you think that would be a risk or a potential problem for you? Thanks.

Hi, Robin. This is Santiago. If I understood your question correctly, you were asking about the breakdown of wage inflation and the other costs. I would say it is about 50/50, although it is very uneven depending on the country you are talking to.

The further you go into the more inflationary economies the more difficult it is to pass costs on to prices, but more than happy to entertain further details offline.

Regarding telco, when we renegotiated agreement back in September none of the shareholders requested a demerger. We set up a window in June 2014 and then the shareholder agreement expires in February 2015. We don't know what is intention of the partners. My assumption, my personal assumption would be they would rather look at February 2015 than June 2014.

And would it be a problem for you if they changed their minds?

No, no, no, I don't think it would be a problem.

Frederic Boulan, Nomura.

Good afternoon. Two questions from me. Firstly, on the UK, if you could explain the full-year benefits on the EBITDA of the change in handsets accounting. Handset revenues were up about EUR100 million Q3 year on year; is this a good guide of the positive impact on EBITDA for this quarter and, therefore, suggesting a full-year run rate of EUR500 million?

On cash, maybe we can ask the question the other way, looking at how much negative working cap we should expect for the UK business this year and next. And, secondly, just then as you realize could you just update us on how much cash you have there in euros and just to confirm that you used the rate of VEF8.45 per euro in this calculation? Thank you very much.

If I understood correctly, and I can explain our EBITDA performance in the UK and specifically because of Refresh, is right now impacted by two important issues. Of course, the launch of Refresh and our commercial decisions to move volumes into the direct channels.

As you understood correctly, the Refresh proposition allows our customers to change their device whenever they want without penalty and enhance our competitiveness in the market. But that at the same time has an accounting impact for the full recognition of handset sales upfront instead of a monthly recognition into the MSR as part of the tariff.

Also, and at the same time, as we are moving more volumes to the direct channel you well pointed out that on one hand improved efficiency of our distribution model, but also the direct channels have higher upfront costs than the indirect. Going forward, and I think I said this in the previous quarter, we expect that the positive impact of Refresh will normalize and we will just see the impact of moving volumes to direct channels increasing efficiency of our distribution model.

And just to clarify, can you just confirm the numbers (inaudible) [by 400 million] for the year? Is it a good [ballpark]?

I think that also regarding your question of the Refresh effect on the working capital, and as I said last quarter, we expect to factor the handset receivables as we have done in other quarters. And the affect on revenues that we have disclosed goes down to the EBITDA levels as we also pointed out in the previous quarter. We will see higher upfront of direct volumes as we are moving more into the direct channels. I hope it is clear.

Regarding Venezuela, our cash position in euros equivalent at the official exchange rate amounts to EUR2.4 billion. This figure is not included or has been excluded of the liquidity figure that I previously presented on slide 21 of the presentation.

So is this included in your net number?

It is in the net debt number.

Okay. Thank you very much.

Georgios Ierodiaconou, Citi.

I've got two questions please. The first one around Telco. I was wondering regarding the conversion of the Class C shares to voting shares, if I am not mistaken you have not yet asked (inaudible) for approval. Is there a reason for that, and should we expect that will happen between now and January? And based on the conversations you had with them, would there be any problems for the status quo at Telco to continue after the conversion?

Then, secondly, on hybrids can you give us an idea of the capacity you have left to raise hybrids after the transaction, whether you would be looking at this option in case of acquisitions and if you would make any adjustments to your leverage ratios to reflect the use of these hybrids?

With regards to Telco, we have not started the discussions with authorities regarding the potential conversion of the C shares, the non-voting shares into voting shares. We have just, as we announced in September, announced a transaction which has gradual steps and those gradual steps are at Telefonica's option, obviously subject to regulatory approvals. They are not an obligation.

And as we see fit, and depending on the [environment], we will be requesting the possibility to exercise such options. But I can confirm that as of now we have not entertained discussions with the authorities towards that conversion.

With respect to hybrids, we have issued this EUR1.75 billion transaction as part of the financing of the E-Plus transaction. At the time of the transaction we announced that 50% to 65% of the financing of the transaction would be done via hybrids. We still have, therefore, up to EUR0.5 billion regarding this transaction that could be issued in other currencies potentially different from euro, and we are monitoring where would be the right market windows to go ahead.

Apart from this, we are not contemplating at this stage any other hybrid issuance for the time being.

Will Milner, Arete Research.

Thanks. I have got a couple of questions. Firstly, on the OIBDA and free cash flow composition.

I think in the quarter you quoted 50% organic OIBDA growth from Venezuela and 25% in Argentina, and every quarter I guess it seems as though those two operations contribute more and more to your quoted organic trends. I just in that context wouldn't mind understanding how much cash you have been able to repatriate from those two markets over the last 12 months. I know Venezuela I think is zero, but I would like to get a view on both of those.

Then, secondly, internally do you consider those cash flows when you strike the dividend that you have struck?

Then the second question is just a bit on Mexico. AMX obviously called out economic weakness in that market and I wonder if you could give us your thoughts on the outlook in Mexico and the prospects to returning to OIBDA growth there? Thanks.

Regarding the first question we have not repatriated money from Venezuela or Argentina so far this year. Repatriation from Latin America in the nine months have amounted to EUR757 million, up from EUR677 million last year. And for the full-year repatriations we are aiming over EUR2 billion, in line with last year.

When we analyze the coverage of our dividend we do not need the free cash flow from Argentina or Venezuela to be able to pay such a dividend.

This is Santiago. On the Mexican outlook it is true that the market is a bit weaker than it was. Not substantial, but a bit weaker. We do not attribute toward market weakness the numbers that we have. We are continually repricing our prepaid base. We are not done yet, but we will in the next five to six months I hope.

We are all expecting the details of the constitutional reform that has now become in secondary law, and this is going to be substantial for the future developments of the Mexican market. We do expect to make significant progress in the wholesale market over the next couple of months. I think all these three things together should make us be hopeful that we will return to positive growth sometime next year.

James Ratzer, New Street Research.

Thanks very much. I had two questions, please. The first one was just going back to the question earlier on the UK business.

I was wondering if you could give us just two specific numbers please. In the Q2 presentation you said that the margin uplift from the new commercial model was 2.3 percentage points in Q2. Can you please just give us the number that that is for Q3?

And, secondly, you also reference in your documentation a one-off in Q3 last year, a positive of the court appeal ruling. Could you quantify how much that was please?

Then, secondly, had a just had a quick question on China Unicom. It was a small investment you made recently; you kind of increased your stake. I was wondering if you could just explain the rationale for that transaction. And is that still a core holding? Thank you.

Thank you, James. I think that continuing with the question earlier to confirm that the affect on revenues that we have disclosed goes down into EBITDA. And that obviously we need to consider the higher upfront costs coming from the direct volumes.

So the 2 point -- 3 point margin in Q2 that you quoted, do you have that in Q3, please?

I think that is a combination of the two effects, and as you can imagine, there are many moving parts in this moment so I cannot disclose that number now.

Okay. Did you have the court of appeal ruling from Q3 last year, please?

Hi, James; this is Pablo. We will give you this later on on the telephone. Thank you.

Regarding China Unicom, in September we increased from 4.99% to 5.02%. The rationale is that we were diluted involuntarily due to the issuance of new share capital of China Unicom due to conversion of some convertible securities. So we were just readjusting to the previous situation.

Then on November 4 our percentage has decreased to 5.01% due to a new exercise of options. For us, and looking at potential future scenarios, to hold more than 5% would have better tax treatment than if we were to be below 5%.

Jonathan Dann, Barclays.

It is a question around midstream regulation in Spain. Could you just explain what is happening? I think there is something going on with digital plus as well. And also I'm slightly confused how the deal with Yoigo operates. And then a second question; has anything moved on renegotiating debt in Colombia? Thank you.

With regards to Yoigo, if I may start, the program it goes in four parts and I don't know if you want me to expand a lot. But first of all, we have an LTE rollout and this is purely a shared [radio] access over Yoigo's LTE network on the 1800 with a national roaming agreement until Telefonica deploys its own network, which, by the way, we are deploying.

As you know, we also have a wholesale agreement with them on the renewal of the current national roaming agreement until 2016. We have a retail agreement to commercialize Fusion through Yoigo and Yoigo distribution channels, and we have also a portion of tower sales.

That is functioning well and we believe that, if you refer to the claim of two of our competitors, the regulator has the way to open procedure. It is what they've done at the beginning of the week -- and these do take probably a year -- and we will explain to the regulator why this is a commercial agreement that make sense for customers.

With regards to the current regulatory framework, that regulatory framework is providing [a full] fiber specifically that for speeds above 30 megabytes Telefonica competitors have to deploy their own infrastructure, which had established the [automatic] obligations of civil infrastructure access and sharing symmetrical fiber verticals in buildings.

So the opening of tax guarantee the ability of any investor to undertake new projects. Then, and according to market trends and the outcome of the inquiry to the market, Telefonica expects that CNMC will confirm the limits of the current offer.

Regarding Colombia's debt and the big transaction that led to debt reduction took place last year when we combined the fixed and the mobile activities and some of the liability was reduced. We continue to see, as I said before in the presentation, very good growth in the Company and we continue holding talks with the partner, the Colombian government, to see what is the best way to capitalize and exploit that growth and potentially provide them some liquidity. But those talks are ongoing and there is no progress to report, and when there would be we will report it.

James McKenzie, Fidentiis.

Got a couple of questions on Spain, if I may. Firstly, just looking at churn; I wonder if you can give us any qualities they are feeling as to where churn on your Fusion product is. Is it below the 1.5% that you are reporting on fiber or is it closer to the 1.8% on contract mobile? And its tendency, if it is going up or if it is going down.

Then just looking on your cost base in Spain I see that subcontract costs continue to fall very sharply. Now we have now lapped the elimination of subsidies and I was wondering -- one, what exactly is driving this in the third quarter alone, and are we going to continue to see big year-on-year quarterly reductions going forward?

Thank you, James. With regards to your first question, yes, the churn is way below those levels. And with regards to the anniversary of Fusion we are not seeing any issues at all.

With regards to the second question, I think that what we can say is that the OIBDA margin will be maintained high on the back of the continued effort and the cost discipline that you know that we are able to do in the operation, although we expect it to be impacted by higher trading activity and some more commercial push into the fourth quarter.

This is an ability of the margin going forward. Actually I can give you many more of the measures that we are going to take and some of the benefits, but we continue doing simplification of call centers. We already have 64% of traffic in (inaudible) and more than 70% of positions are already transferred to the regions.

But that we are optimizing the distribution model. We are focusing a lot in there and we continue doing in-sourcing in new capabilities.

Thank you, James. I think we have time for just one question more, please.

Ivon Leal, BBVA.

Good afternoon, everybody. Two very quick clarifications on Spain actually. I think you have said that you have seen success on the mobile-only Movistar 20 tariff. I don't know if you are also being successful on attaching more than two SIMS per Fusion contract.

The second one is on the loyalty products you mentioned, I think you mentioned the impact on your growth is ending on the fourth quarter of this year or reducing. Am I right to say that reduction of that impact is going to have a negative effect on share-on-share revenue growth?

First of all, to confirm that what we call [Fusionitos], or those additional lines, are now 1 million and the trend continued being a positive into the fourth quarter. So what we are seeing is correct and you see that.

With regards to the loyalty, I think that there is two issues we need to take into account. First of all, and we said this in the previous quarter, the positive impact of the loyalty program is trailing off. The third-quarter impact is smaller than in previous quarters and we believe also that this impact will be dilutive as we start comparing a more like-for-like basis.

We are preparing, as you well mentioned, the long-to-renew loyalty program, which is called (inaudible) Movistar with lots of benefits for our customers which we have a positive effect in customer satisfaction and churn evolution going forward. So we believe that to be positive.

Thank you very much, ladies and gentlemen, for your participation. We certainly do hope 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.

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