Telefonica SA (TEF) 2016 Q1 法說會逐字稿

Ladies and gentleman, thank you for standing by. And welcome to Telefonica January to March 2016 results conference call. (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, and welcome to Telefonica's conference call to discuss January, March 2016 results. I am Pablo Eguiron, Head of Investor Relations.

Before proceeding, let me mention that financial information contained in this document related to first-quarter 2016 has been prepared under international financial reporting standards as allotted by the European Union. This financial information is unaudited.

This conference call webcast may contain forward-looking statements and information relating to Telefonica Group or otherwise. These statements may include financial forecasts and estimates based on assumptions or statements regarding plans, objectives and expectations that make reference to different matters such as the customer base and its evolution, growth of the different business lines, and of the global business markets share, possible acquisitions, divestitures or other transactions, Company results, and other aspects related to the activity and situation of the Company.

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: 349-1482-8700.

Now, let me turn the call over to our Chairman and CEO, Jose Maria Alvarez-Pallete.

Thank you very much, Pablo, and good afternoon to all of you.

I'm pleased to show on slide 3 this quarter means a very good start. Our sustainable growth profile has once again accelerated, with organic revenue growth of 3.4% and 5% -- 5.5% in OIBDA year on year. Levered on an expansion in their higher valued customer base, which is enforcing detailed experience and loyalty. All this, along with capture of synergies and in-house efficiencies, allow us to obtain margin of 31% level, expanding 0.6 percentage points year on year.

We have continued to enhance our differential level of experience through sustained investment. Spain has returned to simultaneous organic revenue and OIBDA growth for the first time since 2008. Brazil and Germany are delivering a strong OIBDA and operating cash flow growth on synergies, and Spain [expanse] is accelerating its top-line growth on its strong performance and value customers. This proves that our market position strategy is paying off. On the other hand, Telefonica UK has posted a continued strong profitability while continuing to lead the market in contract terms.

We start the year with a robust liquidity position after achieving historically low rates on financing. Let me highlight, we have EUR20 billion liquidity, including the euro bond issued in April, which covers all our maturities through to December 2017. And that's not taking into consideration any cash flow generation. Our mid-term net debt OIBDA target remains at below 2.35 times, and we reiterate our 2016 guidance and dividends.

To review Telefonica key financials, please turn to slide 4. Organic growth ramped up in the quarter, with revenues, OIBDA and operating cash flow accelerating the year-on-year growth trends versus the previous quarter. Reported figures were negatively impacted once again by the devaluation of Latin currencies, though this impact was partially mitigated by the positive contributions from GBT and DTS. It is important to note that the negative impact of FX at the OIBDA level did not leak through into free cash flow, as was offset by lower CapEx, tax, interest and other payments. So, as in previous quarters, FX impact is mitigated at free cash flow level.

Lastly, earnings per share stood at EUR0.14 versus EUR0.37 last year, which was positively impacted by EUR1.2 billion deferred [02 UK] tax assets. Excluding this impact, EPS would have grown 21.7%.

I am also pleased to confirm that we are fully on track to meet 2016 guidance, and so our Q1 figures are in line with expectations.

In terms of shareholder remuneration, on May 19 we will pay EUR0.4 per share in cash, corresponding to the second tranche of the 2015 dividend. Our proposals for the cash dividend budget with the receipt of 02 UK proceeds, our voluntary scrip dividends of EUR0.35 per share to be paid in the second half of 2016 and a 1.5% of purchase stock to be canceled are both included in the agenda of the annual shareholders' meeting which will be held on the [12 May] on second call. So, again, 2016 dividend is confirmed at EUR0.75 per share.

On slide 6, we show how the quality of our customer base is incrementally improving. The main pillars of growth continue to be high-value services that also drive data consumption, LTE, fiber, smartphones and pay-TV. The penetration of these high-value accesses in the overall base is also noteworthy, as can be seen in the bottom-left of the slide, with impressive growth across the board. This shift towards higher-value offerings has resulted in tangible growth in customers' value, its average revenue per access at [4.2%] and in customer loyalty, with churn down 0.6 percentage points quarter on quarter.

On slide 7, we explain the drivers behind our 5.5 year-on-year organic OIBDA growth. Let me highlight that OIBDA grew for the seventh consecutive quarter. And, more importantly, all of our regions are already growing, making this growth sustainable and diversified.

Revenues also proved their sustainable track record, expanding for the 12th consecutive quarter. New revenue streams are leading the way to becoming an online telco with a strong performance in connectivity. Organic growth is ramping up versus fourth quarter, mainly on HispAm and Spain.

It is also remarkable that revenue growth is driven by an acceleration of service revenues in the quarter of to 4.2%, which is partly mitigated by lower handset sales and regulatory effects, thereby increasing the quality of all our growth.

Operating cash flow accelerated to 3.6% year on year on the aforementioned OIBDA growth, deceleration in OpEx and margin stabilization. The latter has been driven mainly by the savings arising from synergy, delivery and efficiency from our simplification program and cost rationalization.

Slide 8 shows the continued evolution of main data monetization metrics. Smartphone traction continued, and average users per cash smartphone was up 13% year on year, while AT customers using 60% more data than 3G customers. AT penetration represents 50% of the total.

In addition, we have a strong upside in HispAm America, where prepaid smart phone penetration is at just 29%, and are to uplift once a customer starts using data is approximately 20%. All this translated into data revenue growth of close to 20% year on year, as a result of the double-digit LG ARPU uplift.

In terms of fixed data, we are starting to address the opportunity as traffic expansion lifts the increased demand for faster speeds.

Data services as seen on slide 9 are driving impressive revenue growth, 19% up year on year, accelerating nearly 4 percentage points versus the previous quarter. This boost is built on our key digital pillars: video, security, and machine-to-machine, which have all seen strong improvement.

Video continues to drive traffic and ARPU growth thanks to our expanding presence in Latin America, with high-quality services and our own productions and exclusive content in Spain. We are also proud to continue to offer customers an increasing number of digital services bundled into traditional connectivity packages.

On slide 10, we demonstrate how TGR is adding value for the Company. We have continued to accelerate our rollout of future-proof ultra-broadband networks, with 32 million premises past with fiber up more than 25% year-on-year and fiber to the home and LTE coverage of 50% up 16 percentage points. Our current progression towards an all-IP network is solid, with voice over IP accesses at 5.2 million and VoLTE available in three countries after deployments in Peru and Colombia.

On the IP side, our end-to-end digitalization strategy is fostering transformation via full-stack projects. And our IP transformation are having a significant impact on business, providing us with new data capabilities.

Lastly, we deployed a new big data project to improve customer experience and a successful SDN IP trial in Peru.

Now, Angel will give you more details about our performance in the quarter.

Thank you, Jose Maria. Let me turn to slide 12 for a review of our business in Spain. Commercial activity in the quarter slowed down and reflected a momentary pickup in churn following Paris repositioning. However, commercial momentum progressively recovered as net adds and churn improved throughout the quarter and normalized in March. Fusion delivered a strong quarterly ARPU growth to EUR78 plus 14% year on year, underpinned by a better customer mix, tariff adjustment and the end of the TV premium promotion on December 31.

I would like to highlight that around 75% of customers who had subscribed to the promo have stuck to at least one TV add-on. Overall, this outstanding increase in customer value is the result of the strong effort devoted to building a leading proposal, placing us in a very solid market position. The fiber network now reaches 15 million premises passed. LTE coverage, 83% of population, and the quarterly offering is the most complete and competitive nationwide.

In this first quarter, Spain returns to a simultaneous year-on-year organic growth at both revenue and OIBDA levels starting a new growth cycle. Top-line posted a 0.2% year-on-year organic growth on the back of a strong transformation.

Turning to segments performance, consumer revenues are growing, underpinned by solid Fusion revenue, plus 26% year on year, while business revenues are improving, driven by a change in the mix from pure communication services towards a richer IT offering.

More significantly, OIBDA boasted a turnaround with a 2% organic increase, leading to a benchmark OIBDA margin of 40.5%, up 0.7 percentage points year on year organically.

Let me mention that the voluntary redundancy plan still did not show any positive impact in the quarter, as employees' leaves have started on April 1.

And finally, operating cash flow trend improved also significantly, being virtually stable year on year; in organic terms, up 7 percentage points sequentially from a decline of 7.5% in the previous quarter.

To review Telefonica Deutschland, please turn to slide 14. We are keeping our momentum in a dynamic environment with a focus on retention over acquisition, with continued traction from partners. In this context, partners' share of contract gross adds has been broadly stable, around 45%.

LTE is the main lever of positive data monetization, with customers up 10% quarter on quarter and usage 50% higher year on year helped by video and music streaming. Total revenues declined 2.3% year on year, affected by lower handset sales. Fixed revenues maintained trends sequentially with record [the DSL] net additions.

Partner progress on integration is shown in slide 15 with a repositioning of the O2 brand, customer base migration, network integration and IT transformation. These initiatives require significant investments in terms of OpEx in the first half of the year, with incremental synergies in the second half. In parallel, network improvements are recognizing customer survey-based tests.

On profitability, we captured EUR55 million of OpEx and revenue synergies in Q1, which are reflected in the 6.2% OIBDA growth year on year and a 1.8-percentage-point margin improvement. CapEx was down 1.2% versus Q1 2015, as costs of integration efforts are back-end loaded. And as a result, operating cash flow grew 16% to EUR173 million. Please turn to slide 16 for an update on Brazil.

In mobile, we continue increasing penetration in high-value products, leading to a ARPU growth of 14% year on year despite the weaker macro environment and integration impact. In the fixed business, our strategy is paying off. Fixed broadband ARPU increased 8% year on year as a result of the fiber network expansion outside Sao Paolo and the improvement of the legacy copper network. And pay-TV ARPU accelerated 13% year on year thanks to our differential value proposition. Let me also remark that Brazil finalized the successful execution of the brand unification in April 2016.

On slide 17, we continue outperforming the Brazilian market, posting positive revenue growth in both businesses thanks to our data-centric strategy.

It is worth highlighting the 7-percentage-point sequential improvement in year-on-year OpEx evolution despite inflation pressure due to, first, a more selective commercial approach; second, credit and collecting actions to improve the positive trend; and, finally, the RBC notice the Company has started to capture which amounted to EUR48 million in OIBDA. As a result, OIBDA growth accelerated to 8.2% and operating cash flow to 32.1% year on year.

Turning to slide number 18, let me summarize HispAm America's commercial performance. Commercial momentum was maintained in Q1 with the adoption of high-value services. As such, contract accesses grew by 7%, with net adds 8 times higher than in the first quarter of 2015. Fixed broadband and pay-TV continued to show solid growth rates and increasing penetration of our fixed lines.

In Argentina, smartphones posted strong net adds, boosted by LTE deployment and fixed broadband, maintained low levers of churn. Chile posted the best growth in contract accesses in the last four years while continuing to improve speeds on fixed broadband. Peru once again presented outstanding figures in fixed broadband and TV on the back of its differential assets and quality. Columbia posted strong net adds and low churn. And finally, in Mexico, contract net adds grew 4 times year on year despite the higher level of competition.

Moving to slide 19, the outstanding commercial performances is flowing into revenues. Revenue accelerated to 11% year on year thanks to the improvement experienced mainly in Mexico, Colombia and Argentina. It is worth highlighting the growth registered in strategic services like mobile data, fixed broadband and pay-TV.

Despite the negative impact of the depreciation of LatAm currencies, the intense competitive environment in some countries and the pressure of inflation in some others, OIBDA grew 1% year on year thanks to outstanding data growth, efficiency measures and a more rational commercial approach.

On slide 20, we give you a brief overview of our operation in the UK. Commercial traction continued, leveraged on a best-in-class customer experience and on successful propositions which resulted in sustained contract churn at market-leading level of below 1%. Quarterly contract maturations reached 115,000, driven by LTE and a penetration of 38%. All this from the foundation for the seventh consecutive quarter of mobile service revenue growth. That's 2.6% year on year ex refresh.

Lastly, profitability is worth noting. OIBDA and operating cash flow were up 5.5% and 16% year on year, respectively. And OIBDA margin -- OIBDA margin increased by close to 2 percentage points, reaching 26.3%. Let me now move to the financial slides, starting on slide 21.

Net debt at the end of the quarter stood at EUR50.2 billion, almost flat versus December 2015 figure despite seasonality impacts that usually take place in Q1, partly thanks to the savings related to the British pound hedging.

For the remaining of 2016 and beyond, our leverage will reflect the cash flow generation from improved operational performance combined with corporate actions. All in all, we are on track to achieve our medium-term leverage target.

On slide 22, we continued reducing the effective interest cost in the first quarter, which has moved down by 39 basis points year on year to 4.66%. Our liquidity cash after the last euro bond issued in April reached EUR19.9 billion, covering the full amount of 2016 and 2017 maturities without considering cash generation, additional financing nor credit lines extensions. Also, discussion has been strengthened through EUR9 billion long-term financing since November 2015 -- EUR5 billion year to date -- accessing different pockets of liquidity and benefiting from lowest historical benchmark rates.

Please turn to slide 23 for an update on Telxius, our infrastructure company, one of the leaders in the sector in Europe and the Americas. Telxius was created with a selection of Telefonica's well-diversified assets and includes approximately 16,000 towers in Spain, Germany and some countries in LatAm, plus more than 65,000 kilometers of fiber optic submarine cable, of which around 31,000 kilometers are owned.

Telxius' attractive proposition includes a high level of revenue visibility going forward, given the long-term contracted terms and the strong cash conversion based on the low levels of recurring maintenance investments and the strong profitability, around 45%.

In terms of financials, initial 2015 pro forma figures indicate that revenues would reach around EUR680 million and OIBDA around EUR300 million.

Now I hand back to Jose Maria for the concluding remarks.

Thank you, Angel. To recap, we have a solid start of the year. First, our growth is accelerating, leveraged on a strong execution in fiber, pay-TV and LTE, which are delivering a differentiated network experience. And, as such, OIBDA is growing across the board.

Second, Spain achieves both revenue and OIBDA growth while operating free cash flow is stabilizing.

Third, synergies captured and efficiencies led to a strong OIBDA growth and margin stabilization.

Fourth, operating cash flow is sequentially improving growth with targeted CapEx.

And finally, we confirmed our outlook and dividends for 2016.

Thank you very much for your attention. And now we are going to take your questions.

(Operator Instructions) Mathieu Robilliard, Barclays.

First, I had a question with regards to the potential UK transaction. If we assume for a moment that it may not proceed as expected, are you in a position to explore different strategic options right after that decision has been disclosed? Or would you have to wait, for example, in case your partner decides to appeal to the decision before you can take any action?

The second question has to do with Spain, where obviously they had a very strong performance. I was wondering if you could elaborate a little bit about how you think you can continue to differentiate in the fixed business considering that both Vodafone and Orange are expanding a fiber network and will also have access to content, notably [Soaker]. Thank you very much.

Well, taking your first question first, allow me to say that Telefonica's campaign that the remedies that have been offered for Hutchison, we think, address all commission concerns. We think that those remedies are unprecedented. And, therefore, nevertheless we cannot exclude the level of political interference that can afford -- that can affect the decision of the commission.

We have several reasons to think that the merger merits [our clients] decision. First, this transaction will have -- we think will have a positive impact on effective competition in the UK market. In particular, with regard to price competition, network quality and consumer's choice.

We think that the failed (inaudible) merger is not comparable and that this transaction is much more similar to the Austrian or the Irish or German cases. We also think that there are -- the preliminary concerns that were exposed by the European commission in the statement of projections are not materially different from the concerns that we are embracing in those previous cases which, by the way, were cleared. I think that they are very similar to the German or the Irish case.

I also think -- we also think that the remedies that have been offered by Hutchison are unprecedented in terms of divestment in [Tescamo Y], which is 5% of the market share, offering a fractional omission of the combined network on a perpetual capacity-based deal. And other capacity deals that will amount to more than 40% of the combined networking hands of the (inaudible).

All those remedies are substantially larger than the ones that were given by Telefonica in Germany. Which, by the way, the commission was simply described as (inaudible) structural in nature and conceptually close to an M&O.

So, basically, we think that the remedies that were proposed by Hutch were more than enough to address those concerns. The decision of the commission should be coming in May, and we think that this transaction was designed to really benefit the UK consumers.

Having said all of that, we think that the strictly legal analysis will justify a clear decision. But a negative decision cannot be disregarded, probably due to political reasons, especially in the context of [Rexit], which is basically contaminating all debates. Also, the stronger position showed by the national regulatory authorities.

Our UK asset is a very attractive asset and has been, by the way, continuing to outperform our competitors on most key metrics.

Regardless of the final decision taken by the commission, we enjoy, as we have been stating, a very comfortable position in terms of liquidity because of the long-term financing that we have been achieving throughout this year. And, therefore, we are ready to face a decision in whatever direction.

We have put in place all the initiatives to strengthen our financial flexibility. And, in order to cover those, I hand over the question to Angel.

Hi, Mathieu. This is Angel. You had a very specific question which was would we be bound by the contract when Hutchison would be appealing if the decision was negative. The answer is that we would only be bound until the moment that contractually there is what is sometimes called a drop-dead date. That does not stretch beyond the end of the second quarter.

With respect to what could be, the financial implications were that deal to fall apart. First, you have to take into account the strong free cash flow generation that the Company is going to produce.

Second, that while consolidating in that case of the deal not going ahead, the UK activities, our debt service and our dividend coverage would be improved.

Third, we have already announced financial measures for that eventuality, including the voluntary partial scrip dividend in the November tranche of EUR0.3.

Fourth, we are executing portfolio management measures regardless of the outcome of the UK. For instance, releasing capital through transversal businesses like the potential Telxius IPO. We continue to review our geographic portfolio of assets. We are looking at potential investment of non-core assets, and we are also evaluating minority stakes like [Mediaset Premium], which has been dragged along by Mediaset.

And, finally, we would have several alternatives regarding the UK asset once the EU the decision would become clear and final.

And taking your second question on Spain and our strategy in order to differentiate our offer, first allow me to say that we do think that we have a best-in-class platform in Spain compared with our local competitors and namely at the level of European competitors. We have the most extensive ultra-broadband network in Europe and the most complete comparable to any of our competitors here in Spain. We have seen 83% of LTE coverage. We have one of the strongest, if not the strongest, TV platform in terms of technology guide capabilities, catch-up TV, video on demand, last seven days recording. And, on top of that, we have the best content of all the markets. Because remember that in terms of premium content, we are bound by the remedies out of the DTS transaction to offer 50% of the content premium to our competitors. And, therefore, they need to choose between the different ones. That's why we think we have best-in-class growth and also best-in-class churn and customer loyalty around the Spanish situation.

So you should expect from us to bid on those -- on our technology capabilities of the platform, of the network. And, therefore, features like symmetric speed upstream, downstream. And upgrading our offer is the strategy going forward in order to upsell to our customers and therefore to keep growing momentum on ARPU and customer base in Spain.

So we feel in a strong situation. We acknowledge the very strong competition -- infrastructure-based competition, which we would think is the sound of competition. But we still feel that we have a very unique set of assets that allow us to be positive for the future.

Thank you very much.

Mandeep Singh, Redburn.

I'm really focused on developments of trends in Spain. Clearly, you had a slow start to the quarter due to price changes. You said commercial activity picked up. Just want to get a picture of how the rest of the year will develop. I'm not looking for quarterly guidance because I appreciate you don't give that.

But when do the extra content costs kick in? When do the headcount savings kick in? Is the revenue trend -- now that we are positive, is it sustainable? Is the OIBDA trend now that it's positive? As you refer to the slide as a start of a new cycle, which suggests to me you think of it as sustainable. Can you just sort of map out when the extra content costs kick in, when the extra labor cost savings kick in and how the year could pan out, please? Thank you.

Well, thanks for your question. In terms of the trends that we foresee, we think that those trends are going to be confirmed all around these years.

In terms of revenues, we highlighted at the end of 2015 on the last quarter that we were aiming to have growth combined with EPS; we are already there. We have had to offer upgrade in terms of putting more value for slightly a little bit more of price in the last 12 months. In spite of that churn, it's relatively stable. And, in fact, the performance of churn in the last month of the quarter in March and what we have seen so far in April confirm a better performance.

And also, in terms of competition, we see a competition in Spain being much more focused on value than on price. And, therefore, we think that the trends that have been built all along the last four to five years in Spain are sustainable and should be going into this direction.

In terms of OIBDA impact namely on content impacts, and in terms of the efficiency plan that we have put in place in Spain, remember that this first quarter already includes an extra cost of the Champions League that were not there in the last quarter of 2015. Therefore, the first impact of content costs has already been there. And we have been able to neutralize that in spite of the fact that we have been having no savings coming from the voluntary retirement plan in Spain because that was the exit time from (inaudible) was starting on 1 April. So the first quarter of 2016 includes an extra cost of content and has no impact of positive impact from efficiency coming from this voluntary retirement plan.

As a result, we do think that OIBDA trends are also -- are going into the right direction. Next stage is operating free cash flow growth, and we are targeting to get there.

So, overall, more positive trends in the Spanish market. The overall environment in terms of competition is much more focused in value, not selling customers, than in price overall. And, again, I think that infrastructure-based competition is motivating all of us to put more value on top of the table and that the customers are appreciating those attributes like speed, connectivity, content, technological attributes of the platform, and we think this is the right market dynamic.

Thank you, Jose Maria.

Luis Prota, Morgan Stanley.

Two questions, please. First is on Fusion and the broadband market. Your net growth in broadband clients is just below 1%. And you have now 70% of the broadband base, which is already in Fusion. So what I want to understand is what are your expectations in terms of the total broadband market growth in Spain.

And also, in terms of the migration of non-Fusion clients to Fusion clients -- whether you could give us the ARPU of the non-Fusion clients now. And what are the dynamics in the migration of non-Fusion to Fusion? What I mean is whether you expect reaching 100% of your broadband base in Fusion, or this is not realistic for whatever the reason, and maybe it's just 80% or 90% and how fast that could happen. Your thoughts in this would be very helpful.

And the second question -- I'm sorry for a long first question. The second one is on the refinancing opportunity you have. I would like to understand what are your expectations in terms of lower interest costs in the next few years. You have about EUR7 billion of upcoming maturities annually. So what could be the potential extra cash flow coming from this area, taking into account the average coupon of those maturities and the potential new coupon of the new bonds? Thank you.

Thanks, Luis. A pretty complete first question; let me try to address it. First, we still see growth in terms of penetration of Fusion customers on the total bundle. And, therefore, we still see growth ahead of us in terms of bundling more customers and, therefore, bringing more customers from the competition to a bundled service from Telefonica. So we do not give up in terms of organic growth in terms of number of accesses. In fact, remember that during this, we have been growing Fusion right now. Customer base is 4.2 million. It has been growing 9% year on year, and with 1.4 million of additional mobile lines which have been growing on double that 9% year on year as well.

It is true that this first quarter has been negatively impacted by the tariff repositioning and by the TV promo benefit that ended in December -- at the end of last year. But also remember that there is no retention process anymore. And, therefore, now the market is much more dynamic.

Remember that in terms of the gross adds of this quarter, 51% of those were totally new customers, which is 13 percentage points of growth year on year. And 91% of those were bringing new accesses, which is, again, 9% growth year on year. If you add on top of that this organic growth, the fact that we see a huge amount of possibilities in terms of upselling the existing customer base, high-value mobile has been 74% versus 3% in the first quarter. Ultra-broadband is also doing significantly better. We are also upgrading our TV customers.

So we see growth on the Fusion part of the residential revenues coming from both the organic additional new customer base and also from upselling our customers. And in terms of calculating the ARPU of the non-Fusion customers, I think that we have disclosed the number of non-Fusion customers. And you have also the figure of revenues -- of non-Fusion revenues. So we can help you through the IR department to calculate those numbers. I think that those numbers have been disclosed.

Angel is better to answer for the second part of your question.

Hi, Luis. Our guidance of effective interest costs is well of 5%. On a declining trend at the end of the first quarter, we are at 4.66%. This 4.66% is a weighted average of the cost of Latin Europe and the rate in LatAm. Latin Europe, our cost right now is around 3.6%; in LatAm, around 8.7%. So an assumption that you can make is, from that 3.6%, a reduction of 1.5% to around 2% cost. You can apply these two EUR6 billion refinancing average that we have every year of this type of debt. And also, this can lead you to some substantial savings on interest costs.

Okay. Thank you.

Ivon Leal, BBVA.

Just two questions again on Spain. The first one is I would like to understand if there is still some potential revenue erosion from the all Digital Plus pay-TV subscribers migrating to your platform. So I don't know if you can share with us how many pay-TV subscribers are still Digital Plus subscribers, what is their ARPU and what kind of ARPU we should expect from them when they migrate to Fusion pay-TV offer.

And the second one maybe on football. Has your approach to the football rights changed at all since December? Or you think that football rights have the same value that you agreed to pay for in the summer of 2015?

Well, in terms of your first question on the potential revenue erosion of customers coming from the former DTS customer base, let me tell you that the initial overlap has been mostly covered in terms of customers moving from the Movistar Fusion bundle, or customers just exiting or quitting the Telefonica group perimeter.

So, most of this process has already been made. And in spite of that, if you go to the reported figure of Telefonica, overall pay-TV customer has been growing year on year, which means that we have been adding more customers than the ones that have been leaving us. And as a result, what I can share with you in terms of overall number of customers, this overlap has been mostly been covered. There is still a minor -- a significantly minor part of the customers that haven't decided yet. We read out of that the some of them will reserve both platforms because it might be their second residence. So basically in our estimates, most of this process has already been covered. And in spite of that, we have been able to grow pay-TV customers in Spain and to grow pay-TV ARPU.

So I think that this migration, once both databases have been combined, has been proactively managed in terms of our bond -- our downed call center calls. And I think that we can read out of that that this negative synergy coming from the DTS integration has almost been covered. So we have -- in order to give you an idea, we have -- out of the total number that we have initially, we have something in the neighborhood of 15% of the customers are still -- 15% to 20% of the customers are still pending of a decision. But most of them, we read that they will not be giving up both services. We will keep you posted, but what we can share with you is that most of that migration process probably has already been completed.

And in terms of the content, you know that we signed with Mediapro an agreement for the next three years. These extra content costs would start to flow starting from mid-August, with the new league championship for the 2016, 2017. And all the other content that we have, Formula One or Moto GP, we have also those rights signed for the next two years.

So I think that overall this year, you will have a full picture of what could be the extra costs. Allow me to remind you that both Vodafone and Orange have decided to buy this league content from beIN as well and that we have one of the packages, which is El [Partidado]. And therefore, I think that all along this year, you will have a full picture of what could be this impact going forward for the next three years, both in terms of extra costs, but also in terms of extra wholesale revenues for Telefonica going forward.

All in all, what I can share with you is that this extra content cost we think is less than the savings that we are going to be able to generate for the efficiency plans that we have put in place. And therefore, I think that the equation is sustainable at least for the next three years.

Okay. Thanks, Jose Maria. I thought you had to renegotiate your agreement with Mediapro because a regulator had -- for those eight matches per week.

No. I mean, I -- first piece of information.

Okay. Thank you. Thanks so much.

David Wright, Bank of America.

Hello, guys. Thank you very much for taking the questions, and congratulations, Jose Maria, on your new appointment. I'm just trying to understand the commercial activity in Spain with the Fusion adds rolling significantly below run rate. You have said that that was restored in March, but clearly [backdoors] correspond to poor adds when there were no promotions, and then better adds when you relaunched the promotions at the beginning of March with the EUR65 package for 2015.

So how should we read this? Does this mean dropping promotions means commercial momentum falls and churn ticks up? And in which case, how confident does this leave you feeling with the midterm monetization of content costs, given it was somewhat predicated on promotional spinoff?

And then just my second question, just to clarify, you said a moment ago extra content costs should be more than offset by cost savings on the suspension plan. Do you mean OpEx savings, or do you mean the actual cash cost savings if we assume the pre-retiree payments or the suspension plan payments? Thanks.

Thank you very much for your first part of your question. In terms of the commercial activity, we think that we need to read the Spanish market in a way that we will need to combine promotions with upselling of the offer. And therefore, now that the market has become more value oriented, I think that there is a strategy that we should follow in terms of adding new customers and at the same time trying to upsell those.

And therefore, you should expect from us to combine both things. Practical promotions are the ones that we have been putting in place just for new acquisitions, for new customers, starting last month and that we have been extending, and also in terms of upselling the offer, in terms of putting more value for the existing customers or more optionality for the existing customer. Also remember that, again, there is no more retention clauses, and that we keep deploying fiber to new zones in Spain.

Therefore, I think that going forward, there is a smooth way of trying to combine new covered zones, new coming customers with a reshuffle of the offer in order to try to upsell our customers. That is why we think that combining both things -- commercial aggressiveness in order to attract new customers, namely to the bundled product, with trying to monetize the new network that we are deploying -- should help us to keep the revenue growth momentum in Spain, and therefore to cover the extra costs coming from content costs.

And in terms of my previous comment, in terms of the content costs being more than covered by the efficiency, I was talking about OpEx. But I have also highlighted that we are approaching a point in which operating cash flow in Spain -- OIBDA minus CapEx -- is going to start to grow. So we are going to be putting in place other cash efficiencies. We are putting in place other cash efficiencies that should allow us to be able to transfer this growth into a sounder or an increasing cash flow generation in Spain. So we are not giving up in none of the fronts, at the OpEx level nor at the cash flow level.

I see. Just for the purposes of our understanding the modeling side, when you say operating cash flow, OIBDA minus CapEx, that clearly does exclude the 68% payments out to the suspension plan employees, correct?

Correct, at this level, correct.

Thank you. Okay, thanks very much.

Giovanni Montalti, UBS.

Going back to the UK, just trying to understand how we should think about these assets. Assuming that the deal with Hutch doesn't go through, what would be your plan? Are you staying in the UK and let's say eventually seeking let's say some strategic options so they could give you a convergent asset base, or Plan A is still leaving the UK market? Thank you.

Hi, Giovanni. First, I should reiterate what Jose Maria said at the beginning of the call. This is still pending our decision. In any case, the UK asset is a very attractive asset. As I was saying in my -- when I was doing the presentation at the beginning, mobile service revenues 2.6% up, margin is up 2 percentage points, above 26.3%. Cash flow generation is very strong, can be even improved through working capital measures.

So it's a very attractive asset. In addition to these, the whole discussion of remedies that has taken place with the Hutchison process has made everyone's priorities or intentions quite clear. So this provides good visibility on what could be feasible alternatives. And again, the asset is very attractive.

So we have plenty of alternatives. Some of them would allow us to combine the UK cash generation with a partial divestment. Some other alternatives would imply loss of control. We can have either capital markets or M&A solutions. And you should expect us, in the case where this does not go ahead and once we are released from the contractual obligations, that we would be expeditious, but we would be in no rush. We have plenty of alternatives.

Sorry. If I may hold up, no I don't want to push you into let's say discussing things you cannot say because the deal is still on. But again, assuming a scenario in which it doesn't go through, would an option of staying in the UK and looking for building up a convergent asset base be an option that you would consider? Or again, the other scenarios are just implying, as you were mentioning, remaining, eventually selling a part of the asset, eventually selling it as a whole. But, I mean, staying and developing a different business model more comparable to a certain extent to what you are doing in Spain or in Brazil, this is an option you are considering? Does that make sense, to consider this scenario? Thank you.

The answer is yes. If the transaction was not to be approved, we would be opening a strategic reflection of the UK. And because of the performance that we have been having in the UK and because of the information that we have right now about the different remedy packages that have been offered by the different places, we would not exclude any possibility.

Thanks very much. Thank you.

Justin Funnell, Credit Suisse.

Yes, just follow-up questions, please. On pricing, you've done a great job of getting pricing up in the last year in Spain, probably the best in the sector. But it becomes a bit of a problem, obviously, as you hit the anniversary of the price increases. I guess May 2015 was a big one. Do you think that's it for price increases, or can you do more? It's just a nice, simple question.

In terms of the CapEx, you're pointing to the fact that ICF growth -- EBITDA minus CapEx -- can grow faster than EBITDA, perhaps. Are we starting to get to the end of the peak in the fiber CapEx in Spain? Is this a new trend that we are going to see actually over the next few years, that CapEx starts to come down a bit?

And then just finally, in Brazil, can you give a sort of view on your outlook for the business over the next two to three quarters? There's obviously, on the one hand, economic pressures and a bit of pricing pressure. On the other hand, your strategic advantages in the market; you are ready to take share. How do you see that playing out? Is it going to get worse, or is Q1 the low point for your revenue growth in that market? Thank you.

Well, thanks for your questions. In terms of the anniversary of the year-on-year comparison of our upselling strategy in Spain, remember that we are putting significantly more value for a little bit more of ARPU, and therefore the average price per unit of value is decreasing as we speak in Spain.

But having said that, we have been able to do that [intentionally] and, again, with no retention closes with very low levels of churn. And therefore it looks like customer loyalty is there because they appreciate the new product that we are putting on top of the plate.

Now we have more than 50% of homes passing Spain with the best fiber-to-the-home technology. We think we are the single player in Europe that is ready to offer massively the highest fixed broadband symmetric speeds. And I am talking about symmetry of speed at some point, which will be included in our offer, more than 300 megabits per second. And we can even upgrade that speed without significantly peaking CapEx.

And we have one of the best 4G mobile networks, which covers already 83% of the population. And we think we have the best nationwide TV content offer in the market.

So I think that you should expect from us to keep upselling to our customers, to keep proposing our customers, the ones that are ready to do that, to enjoy more attributes in terms of either more speed, more capacity, or more features on the technological TV platform, or more content.

So I think that we will be strategically improving or proposing upwards of the offer for the customers going forward. And we do see competition in Spain going broadly into the same direction because they are also deploying fiber. They are trying to catch up with us, but still they are significantly behind.

So I think that you should expect from us further upgrades on our value proposition. And therefore, I think that this is the trend, probably.

In terms of CapEx, it is true that it's going to be depending on the new regulation coming in Spain. Competition zones have already been declared. Also, the way the wholesale offers are going to be calculated in terms of retail minus also offers a possibility in terms of wholesale revenues, depending on what's the level of those prices. But it is also true that the back of the deployment has already been done.

So clearly still a few more quarters to go on CapEx, but yes, at some point, CapEx intensity should start to go down. And therefore, by the way, including the current -- the existing levels of CapEx intensity, we are very close to reach OIBDA minus CapEx growth in Spain.

And getting back to David's question before, including the retirement costs that are being carried out for the last years from the previous retirement plans, the retirement cost impact in terms of cash flow in 2016 is going to be lower than in 2015, despite the new plans. So we do think that next pending issue in Spain is cash flow generation, and I think that we can keep going.

In terms of summarizing the answer, we think that we can still outperform our competitors. We think that the economy -- economic situation in Spain is also helping. The customers are focused more on value than on price, a significant amount of them. And we think that we can handle that. We have contained cost impact, and therefore, with a sound OIBDA.

In terms of our Brazilian outlook, we are more positive than the market in terms of the situation of Brazil. We think that the macroeconomic trends, once the political situation is cleared, would recover probably sooner than what most people in the market is expecting. And by the way, we keep being very confident on the Brazilian market.

During the bulk of the crisis, and remember that the year-on-year comparison is going to start to ease, namely in terms of currencies, because the next quarters, the Brazilian [currency], mainly in the second half of this year, comparison should be more in our favor, because the bulk of the impact on the reais occurred in the second half of the previous year.

Operational trends in the middle of the crisis have been outstanding at the level of Vivo, and I'm talking about both Vivo, the former GVT and the former Vivo, including the wireline business. The underlying trends are pretty sound. And it is true that revenue growth had decelerated, but it is also true that part of that deceleration is coming from ourselves stopping gross adds in order to control bad debt and also coming from a regulatory track of a drop of MTR and FTR that have an impact, and of course, the macroeconomic situation.

Even excluding all of that, synergies of the GVT transaction are flowing. And that is why we are outperforming our peers in Brazil, both in terms of revenues because of growth synergies and because of the fact that we have the best customer base in Brazil, and because of the integration effort that we are doing in terms of taking the best out of both worlds, the former GVT world and Vivo.

So we are pretty confident on the future of our Brazilian unit. I think that our team headed by Amos is doing an outstanding job. And it is precisely in times of recession when you check the quality of both your assets and your management team. And on that part, I think that we are clearly beating our peers.

Thank you.

Georgios Ierodiaconou, Citi.

First question is on Mexico. Looking at your numbers, clearly a very good performance, especially compared to some of your competitors. However, I was just wondering how sustainable what we've seen in the first quarter is for the rest of the year. I noticed you mentioned there's been some agreements regarding previous disputes with other operators that benefited the results. I'm guessing also there's been some incoming benefit. So perhaps if you can talk us through those effects and what to expect for the rest of the year, given the price pressure there.

And my second question is more around the options for deleveraging you have beyond disposals. So some of the rating agencies are talking about the [option to some more] hybrid. I was just wondering whether you can update us on the magnitude of this hybrid insurance room you have, whether you would feel comfortable with that. I know the rating agencies could allow it, but it's still, to a certain extent, debt. So if you can talk us through how much of the shortfall if the UK deal doesn't go through can be breached in hybrid. Thanks.

Thanks for your question. In Mexico, our results have been solid in this first quarter. It is also true that competition has significantly intensified in Mexico.

It is also true that our first quarter has been impacted by the reduction of interconnection fees of the nondominant players, which means that the symmetry of interconnection has been also in our favor, but is less in our favor than a year ago because it has been also dropping. But it is as well true that we have been impacted, positively impacted by the agreement we reached with other players over this period on the interconnection fees, so fees over -- of previous periods.

How do you sell all of that? That's why commercial momentum in terms of revenue growth has declined. We see several trends going on on the Mexican market. Some of the most aggressive promotions that were there during the Christmas campaign and in the first three weeks of January are starting to be removed. And therefore, even though there is still a high level of price aggressiveness, this is still a little bit lower than at the beginning of the year, though it's still very high.

It is also true that we have our own differential features. I think that those are positive ones. In terms of -- we have for the first time had some continuous positive momentum in contract. We have been multiplying by 4 times [than ADAS] in contract year on year. And contract accesses have been growing 25% year on year, and that should provide us, in spite of this commercial aggressiveness, with a little bit of more momentum going forward.

Smartphones have almost reached EUR11 million on our customer base in Mexico, and this is 47% year on year. And a smartphone customer has significantly more data consumption than a feature phone customer. Smartphone already represents 44%, but just 44%, of our customer base in Mexico. And our LTE accesses have reached 2.2 million, and this is more than doubling the number of customers that we have a year ago, but it is still just 9% penetration of our customer base.

So commercial aggressiveness is there. It is still a little bit lower than at the beginning of the year, but still there. There is some trends that are going to take a while to recover in terms of rebuilding the value for our customer that we used to have in November in Mexico. But we see some positive trends on our own business that allow us to be slightly more an optimistic than the overall trend of the market. Having said that, we will keep you posted quarter after quarter.

Regarding deleveraging, let me give you some elements. In the case that the deal were not to go ahead, debt service and dividend coverage would improve while consolidating the UK or OIBDA free cash flow. And this OIBDA and free cash flow from the UK helps to have a debt service to the tune of EUR5 million-ish or a bit higher in terms of euros.

Then, you have to think also in free cash flow generation. We have OIBDA and operating cash flow growing organically, and the FX headwinds will be lower in the second half. Please bear in mind that the big devaluation in Brazil and Colombia was in the third quarter and Argentina in the fourth quarter. So the second half is going to provide for better comparisons. And all our units all are simultaneously growing in OIBDA with a sequential acceleration.

Then we are going to proceed with transactions like the potential Telxius IPO. And then with respect to financial measures, the voluntary scrip dividend for the tranche EUR0.35 in November, if it has the same take-up as it did last year, would provide a cash preservation to the tune of EUR1.5 billion-ish.

And finally, specifically to your question, in addition to the partial voluntary scrip, if needed, we could consider other measures like hybrids. We have now EUR5.5 billion outstanding. Capacity could be included into that at a return of 5 to 6]. If needed, we could consider, but not to exhaust that figure at all. What we are not planning is any measures that may have dilutive impact.

If I could ask a follow-up (multiple speakers)

Thank you, Georgios. Next question, please

Keval Khiroya, Deutsche Bank.

I've got two questions, both of which are related to Spanish football. On the slides, you had it at 52% of pay-TV customers take an add-on. Last quarter that was 53%,. And if I've looked at DTS disclosure correctly, the absolute subscriber number taking TV add-on hasn't really grown. Within that, can you tell us or give us an indication of how many customers take football today and what trend you've seen in terms of growth in that number, if at all, for the past two or three quarters?

And then secondly, with the new agreements you have with Mediapro, can you tell us how this content cost will be split over the three years? Will they be split evenly, or is there a formula of how you split them over the three years? And are you able to tell us how much you have booked for Champions League in Q1? Thanks a lot.

Thanks for your question. In terms of the number of customers that have DVD add-ons, as you were mentioning, 52% compared with 53% a year ago. But also remember that we have been putting some football rights on the basic offer. And we might be inclined to do so going forward in order to increase attractiveness of our offer and at the same time reduce churn. So the value should be judged not just on the pure football right customers, but also on the value that provides in terms of lower churn on the basic offer of some of those packages. Therefore, I think that we should consider the football rights as an overall impact on the revenues of Telefonica de Espana than that specifically on the football package.

We do not disclose, for commercial purposes, the different customers that we have on the different premium packages. But allow me to say that the ARPU expansion that we are having on the overall of Fusion year on year on that -- out of that ARPU expansion, football rights are a significant driver.

But in terms of the agreement with Mediapro, they are not exactly linear, but they are mostly -- I mean, there are some differences. We have not disclosed that in terms of the split. But again, allow me to stress the fact that in the next few years, including these extra costs not being put as completely linear, we think that the savings that we have put in place more than compensate the extra cost of content going forward. Sorry for not being able to be more specific.

Keval Khiroya That's okay, thank you.

Thank you, Kevin. We have time for one final question, please.

Jonathan Dann, Royal Bank of Canada.

Two questions. One, do you see any benefits from the EC debt purchase? Could you issue debt at very low rates straight to the European Central Bank rather than, say, expensive hybrids?

And then a second one is, I guess with a clean sheet of paper, it looks like basically two of the main assets have a lot of fiber, and then in Germany there is a credible wholesale alternative. But in all of -- pretty much all of HispAm America, there's no fiber at all. Is there an ambition at some point to start to add fiber in Latin America ex-Brazil?

As Angel said on the first one, the answer is yes. We are issuing at the lowest costs ever across the range on commercial paper. We have been issuing at negative rates on midterm bonds, we are issuing at the lowest rates. On the ECB bond purchasing program of corporate bonds, Telefonica is one of the entities that is going to benefit the most. So, yes, we're going to be continuously using this possibility.

Is it worth revisiting the credit rating to a higher --

Sorry.

Why be so rigid about the 2.35 times net debt EBITDA if funding so cheap? It's clearly causing a lot of stress. Why not have 2.3 times leverage?

Not a matter of -- well, I don't know if I would call it rigidity. What we have a commitment is to have a rating of [BBB stable]. And this is what triggers this ratio. It's a midterm objective that we commit to. And we are working towards that.

But our liquidity is very high. The cost of debt is at historic minimums. OIBDA is growing. [Our debt generation machine] is firing on all cylinders. The five geographies are all of them simultaneously growing in OIBDA. And these [levels] has to look at debt service in a way that does not concern us. But we have a commitment to our rating, and we're going to be working in that direction.

Okay.

And taking your question on potential broadband in Latin America, well, you excluded Brazil from your question because you know that we are doing exactly that in Brazil. But we are going to be applying in the overall of HispAm America the same criteria in terms of we are going to be mixing fiber-to-the-cabinet with fiber-to-the-home. In fact, 55% from our customer base in HispAm America have already split at or above 4 megabits per second, which is significantly more than what we have a year ago and significantly, significantly more than we had two years ago because we have been significantly investing in shortening the loops in most of our territories.

In Chile, for example, 46% of our customers in Chile of the fixed broadband customers already have speeds that are between 10 and 50 megabits per second. Remind that in Peru, we have the cable operation, and therefore we are combining cable with weaker broadband, and we are also trying to do the same strategy in Colombia and in Argentina.

So the answer is yes, we will go there in terms of significantly improving our fixed broadband offer in Latin America. We are already doing that, but you should expect from us to be more pragmatic in terms of the solution, mixing fiber-to-the-home, fiber-to-the-cabinet, and in some places, a pure IP approach because of the topography of the region.

But we are already building on that. And take a look at the performance of the former wireline business in Latin America. You will see that they're increasing revenues. We have revenue growth precisely because our fiber offer -- or our broadband offer is being significantly proved as we speak. And that's where we are devoting a part of our CapEx intensity during the last four years.

So the answer is yes, but we will be pragmatic with the technological solution.

Thank you very much.

At this time, no further questions will be taken.

Thank you very much for your participation. And we certainly do hope that we have provided some useful insights for you. Should you still have other questions, we kindly ask you to contact our Investor Relations department. Thank you very much again, and good afternoon to all of you.