Telefonica SA (TEF) 2016 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Telefonica's January to December 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 morning, and welcome to Telefonica conference call to discuss January-December 2016 results. I'm Pablo Eguiron, Head of Investor Relations.

Before proceeding, let me mention that financial information contained in this document related to the year 2016 has been prepared under International Financial Reporting Standards as adopted by the European Union. This financial information is unaudited.

This conference call webcast may contain forward-looking statements and information relating to the Telefonica Group or otherwise. These statements may include financial or operating forecasts and estimates based on assumptions or statements regarding plans, objectives and expectations that make reference to different matters.

All forward-looking statements involve risk, uncertainties and contingencies, many of which are beyond the Company's control, and all of which may cause actual results, planned objectives or expectations, to differ materially from those expressed or implied herein.

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: 3491 482 8700.

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

Thank you, Pablo. Good morning, and welcome to Telefonica's fourth-quarter 2016 results conference call.

With me today is Angel Vila, Chief Strategy & Financial Officer, and during the Q&A session, you will have the opportunity to address us with any questions you may have.

We are positioning Telefonica for future sustainable growth after closing out a year in which we performed notably well, with top-line OIBDA, EPS and free cash flow increasing year on year. Thus, we are reaping the benefits of our transformation initiated some years ago.

There are many examples of it. One is that we have reached the peak in CapEx having the best infrastructure, which gives more value to free cash flow expansion. This is reflected in strengthened balance sheet reinforced by recent announcement in Telxius and the long-term financing [raise], thus supporting sustainable shareholder remuneration in 2017.

Slide number 4 shows how in 2016 we have consolidated and even accelerated the growth strength initiated two years ago: higher revenues plus widened margin growth, the robust 24.4% year-on-year increase in free cash flow; upgrades in the performance versus 2014 and 2015; and being more balanced despite including significant CapEx efforts. Again, we have laid very solid foundations for the future.

Turning to slide 5, we can see the consistent organic growth in service revenue of 2.6% year on year, improving to 4.7% in OIBDA, and 5.6% operating cash flow. Also, we continue to demonstrate how our fundamentals are steadily improving, as shown by our underlying EPS increase of 5.1% year on year to EUR0.75 per share, despite FX impact.

Let me mention that we have implemented different restructuring measures to improve efficiency, productivity and cash flows over the coming years, which affected our fourth quarter. Angel will explain this in detail later.

Turning to slide 6, our 2016 performance has been below our 4% guidance on total revenues, but service revenues have performed better; up 4% year on year. The gap then is explained by weaker and volatile handset sales, in line with market dynamics.

We exceeded the OIBDA margin target, as it was up 0.9 percentage points versus the guided stabilizing trend versus 2015, while CapEx over sales ratio was in line at 17%.

We confirm our 2016 dividend with the second tranche of EUR0.20 per share to be paid in cash in the second quarter of the year.

Our focus on attracting and retaining quality customers has to led to yet another quarter of strong double-digit increase in LTE, fiber, and cable and smartphones.

We've made progress in our selling/upselling strategies in both mobile and fixed, encouraging customer stickiness, which has led to Q4 churn dropping 0.5 percentage point year on year. A reflection of this, the growth of average per access accelerated in the quarter to 280 basis points to 4.4% year on year.

On slide 8, we highlight the quality of our revenues and how they are transitioning to a more sustainable mix.

Service revenues performed attractively, ramping up to 230 basis points on a sequential basis to 3.7% versus the fourth quarter of 2015, and with all business segments increasing, except Germany.

Total revenues returned to growth in the quarter, 2.7% year on year. Meanwhile, sustainability improved as broadband and services over connectivity represent already 47% of total revenues.

Slide 9 shows key data points on our data monetization story. LTE base continued to grow very rapidly, 77% year on year, and continued to push data usage per user up this quarter by 65%. LTE adoption is clearly an engine to boost traffic.

On top of that, [data] pricing strategies such as More 4 More, already in place in six countries, recurring prepaid plans in LatAm, or data-sharing plans among others, are proving successful tools to drive ARPU up in 4G, and 20% organic increase in non-SMS data sales.

It is also worth highlighting the pricing power and the usage increase seen in fiber users driven by superior quality.

Over recent years, we undertook a bold transformation of the Company with a long-term perspective. Firstly, we deployed ultra-broadband networks to differentiate ourselves and offer the best connectivity for the rocketing data traffic. By 2016, premises passed with fiber and cable expanded significantly to reach 39 million premises passed; and LTE coverage in Europe was extended by 28 percentage points.

Secondly, we've paved the way towards end-to-end digitalization, a key piece of the transformation that make us more agile, flexible, and in the end, more efficient. Full-stack projects went live in six countries, and simplification initiatives were reinforced: turning off applications, consolidating data centers, and increasing digitalization. At the same time, since 2014, the total capacity of our big data platforms was multiplied by 7 times to 27 petabytes.

Thirdly, we accelerated the change in our revenue mix from traditional services towards connectivity and new services.

Main accomplishment delivered by global resources in 2016, as shown on slide 11. Ultra-broadband deployment was accelerated to enhance speeds and capacity. On the access side, premises passed with fiber and cable increased significantly in HispAm, Spain and Brazil, and LTE coverage rose to 62%; while in the backbone, we transformed the transportation network and managed legacy.

In parallel, we continued to increase efficiency by the enhancement of our digital capabilities. Initiatives such as voice over LTE and voice over IP made us advance towards an all-IP company.

Our global centers design smarter customer equipment and mobile applications, and innovative software and technologies were introduced in the network. In addition, Full Stack projects are being deployed in nine additional countries, and the single online charging system is already available for 59% of our customers.

Lastly, let me stress that big data initiatives are delivering benefits at different levels: network management, video platform evolution, and real-time decisions.

Moving to slide 12. In digital services, we continued to growth revenues at double-digit rates as we bolstered our proposition in this space. Video continues to be the main pillar of this, [a proven] tool to monetize fixed data.

We have built a cutting-edge TV service on content, connectivity and customer experience, driving growth in both customers and ARPU. Adjacent services are increasingly contributing to overall growth, namely cloud, machine to machine, and security.

I'd like to highlight the launch this quarter, of LUCA, our big data unit aimed at helping businesses extract value from the inside.

Let me now outline the guidance for this year.

We are targeting for 2017 stable revenues. Despite negative impact from regulation of around 1.2 percentage points, growing OIBDA margin up to 1 percentage point; and CapEx-to-sales ratio around 16% after reaching the peak in 2016.

We confirm our divided for 2017 of EUR0.40 per share in cash. Let me remind you that the interim payment of EUR0.20 will be payable in the fourth quarter, and the final payment of another EUR0.20 will be in the second quarter of 2018.

Our objective for 2017 will allow us to maintain a solid investment-grade credit rating through growing cash flow and organic deleverage.

Looking to 2017, we have set clear strategic priorities; first, growth in main P&L headlines and cash flow. Second, as a platform and data-driven company, we will make targeted investment in ultra-broadband and 4G. Third, cash preservation and organic deleverage, complemented with a transversal asset review, leading to improved balance sheet.

Now I hand over to Angel.

Thank you, Jose Maria.

Moving to slide 16, fourth-quarter results reflected the strength of our business, as Group year-on-year organic trends clearly improved versus the prior quarter. This is particularly visible in the plus 6.3 percentage points in OIBDA growth rate and the easing of the negative FX impact.

Hispanoamerica, Spain and UK, mainly explained the acceleration in growth, while Brazil and Germany excelled in attaining synergies.

Our growth was reinforced through higher levels of investments, improving the quality of our networks and customer raise, driving data monetization, and setting the basis for future differentiation.

Free cash flow was very solid generating EUR2.1 billion in the last three months, and net debt progressively reduced to EUR48.6 billion at year end.

Finally, underlying EPS grew threefold versus Q4 2015 to EUR0.23.

Turning to slide 17, let me summarize the key financials for the quarter.

Reported P&L figures were significantly impacted by non-cash factors, including restructuring charges, capital gains, and goodwill impairments. In organic terms, revenues and service revenues grew 2.7% and 3.7% respectively, versus October-December 2015. While OIBDA ramped up to 9.4%, margin expanded 2 percentage points, and operating cash flow was up 5.4%.

The underlying increase in euro terms ramped up in the last three months as ForEx drag faded on the Brazilian real appreciation, and easier comps year on year. Underlying net income surpassed EUR1.2 billion, 2.5 times higher than a year ago.

Please turn to slide number 18 to see in more detail the effects impacting the quarter. These factors deducted OIBDA and net income by EUR1.3 billion and EUR1.1 billion respectively, with restructuring in Spain accounting for two-thirds.

Moving to slide 19, we have delivered a very strong and healthy free cash flow of EUR4.4 billion in 2016, exceeding our stated objective. As shown in the first graph, free cash flow improved throughout the year by EUR0.9 billion on better operating trends and savings in all items, and despite a lower contribution from working capital. As such, our free cash flow has accelerated, even with record high CapEx levels, which as we said, are expected to be lower starting in 2017.

As you can see on slide 20, operating leverage has strengthened. Organic OIBDA posted an outstanding performance in the fourth quarter, accelerating 630 basis points to 9.4%, mainly due to Spain and HispAm. Synergies and savings from different simplification initiatives drove efficiencies across the board. In addition, in the full year, there was OIBDA growth across segments.

Looking at OIBDA in more detail, if you turn to slide 21, you can see that while organic OIBDA trends have accelerated, the impact of FX has faded sequentially on the back of depreciation of the Brazilian real, and despite the depreciation of the sterling pound and Argentinean peso. This led to a positive net impact of both factors of EUR300 million in Q4 year on year, improving sequentially versus the minus EUR53 million posted in Q3 and versus the minus EUR323 million in Q1.

The negative FX effect in 2016 was neutralized at free cash flow level, as can be seen in the graph at the bottom-left of the slide.

Looking ahead, at current spot rates, FX should become a tailwind in the first quarter of 2017.

Moving to slide 22, CapEx intensity is paying off and has been the driver of our network leadership. Up to December, 79% of total CapEx was devoted to growth and transformation, and we are building the future using big data to allocate CapEx and to create a differential experience.

On the back of our OIBDA growth profile, and despite our consistent investments in CapEx to support the network transformation, operating cash flow is increasing at mid single-digit rate. Spain and Brazil are both contributing almost two-thirds of the total and are both growing.

In slide 23, we show the performance of the Spanish business.

New steps in the development of the More 4 More strategy continued to deliver positive results in terms of bundling, churn and value mix.

The enhanced Movistar Fusion, levered on the leading infrastructure in Europe, allowed us to attract more new customers and to foster the existing ones to move towards higher-end bundles.

By year end, more than one-third of total Fusion base had ultra broadband, and more than two-thirds contracted TV, a significant improvement versus the previous year, with significant upside ahead of us.

This positive evolution in the customer mix, along with the tariff updates, drove a steady rise of 11.5% year on year in Fusion ARPU to almost EUR82.

Turning to slide 24, quarterly service revenues and OIBDA posted a sequential acceleration in the year-on-year growth rate of 1.2 percentage points and 0.8 percentage points respectively, which was especially remarkable given the tougher year-on-year comparison on net content costs. As a result, 2016 marked an inflection point in domestic financials. The Company recovered its profitable growth profile and proved how operating leverage is starting to work in this new situation.

In 2016, service revenues rose 1.1%, while OIBDA increased by 2.2% year on year, ex-factors, thanks to significant efficiency gains, which also drove a margin expansion of 0.9 percentage points to 41.1%.

Finally, and despite higher CapEx, cash generation was back to growth, up 1.8% year on year.

In summary, our Spanish franchise, which has invested steadily over the last years, enjoys a high cash conversion and a superior positioning in a constructive market landscape.

To review our performance in Germany, please turn to slide 25.

Telefonica Deutschland met 2016 outlook and maintained operational momentum in a dynamic fourth quarter, leveraging the successful launch and encouraging customer response to our new premium portfolio O2 Free. Additionally, there are signs of easing competitive pressure in non-premium.

Fourth-quarter mobile service revenue fell 0.9% year on year when excluding regulatory effects, being stable versus the prior quarter. Quarterly OIBDA accelerated to 3.9% year on year, and margin expanded 2.5 percentage points to 24.8%, leverage on incremental synergies.

It should be noted that we are upgrading our total synergy target from approximately EUR800 million to approximately EUR900 million of operating cash flow synergies in 2019.

Now into our UK business.

As you can see on slide 26, we have been outperforming the market, and the fourth quarter is no exception to this, with strong net adds, market leading customer loyalty, and accelerating ARPU.

All this has led to a solid financial performance in the quarter. Organic revenue growth accelerated to 2.5% year on year ex-Refresh, which coupled with robust cost control, led to an OIBDA increase of 4.1% year-on-year organic.

CapEx to sales was 13.6% in 2016 as we continued to invest heavily in our network to further reinforce this outperformance. Thus, our LTE network reached a coverage of 95%, up 16 percentage points year on year.

In slide 27, we show how our focus on value in Brazil and the superior quality of our assets are delivering successful results.

In mobile, our leadership in contract and the protection of the growing value in prepay are driving the double-digit ARPU year-on-year growth. In fixed, the average revenue per access is also growing at solid rates in both fixed broadband and Pay TV as we are steadily upgrading our customers on our enhanced network quality.

Let me turn to slide 28 to review the financial performance.

The outstanding commercial results are leading to a robust service revenues increase up 2.1% year on year in Q4, and to a consistent market outperformance capturing the full incremental market revenue growth along 2016.

In addition, the ongoing execution of efficiency measures and the capture of incremental synergies drove the expansion of profitability in a context of a strong OIBDA and operating cash flow increase, up by more than 8% and 26% respectively.

Finally, smart CapEx allocations and synergies led to beat initial target for CapEx over sales.

Turning to slide number 29, we review Telefonica Hispanoamerica.

Our focus on value, service bundling and continued network improvement, is reflected in the steady increase in quality access and ARPU growth.

Mobile contract customers were up 3% year on year, smartphones 15% and LTE 86%, pushing ARPU growth to almost 7%.

In fixed, fiber and cable, accesses up 48% year on year explained broadband ARPU expansion of 12% year on year, while Pay TV is also growing in both accesses and ARPU 4% and 6% respectively.

This positioning is driving year-on-year acceleration in revenues and OIBDA, both growing at double-digit rates in Q4 as seen on slide 30. By countries, Argentina is the main contributor to this performance, combining higher traffic volumes, tariff updates, and easier year-on-year commercial comps.

In Chile, top-line ramped up in Q4, while profitability was affected by higher commercial trading, which also plays to Peru where intense competition and promotional actions drove Q4 lower contribution.

In Mexico, after a tough 2016 on pricing pressures, Q4 is showing some improvement.

Let me now turn to the financial metrics starting on slide 31.

Since we reconsolidated O2 in June, net debt has been reduced by EUR3.6 billion to reach EUR48.6 million at year end. That is 2.95 times net debt to OIBDA.

The recently-announced Telxius transaction will reduce net debt further by EUR1.3 billion, bringing leverage ratio closer to 2.85.

A key factor in debt reduction has been strong free cash flow generation, EUR4.4 billion, up 24% versus 2015, of which EUR3.6 billion were generated in the second half. This free cash flow generation is due to growth in adjusted operating cash flow and declining financial and tax payments, with a lesser contribution from working capital. We expect cash flow growth in 2017.

We continue progressing in our objective of extending debt maturities while reducing interest cost. As slide 32 shows, the effective cost of debt in 2016 stood at 3.94%, 102 basis points lower year on year. European debt costs were reduced 109 basis point thanks to debt refinancing at risk below average cost, risk management measures and an exposure to short-term interest rates, including EUR5 billion of European commercial paper program at trades close to 0%.

We continued to strengthen our balance sheet with long-term financing. In December, we issued a bond with a 35-year tenure, the longest in the Company's history.

We keep on tapping different markets at historically low rates, further strengthening our liquidity cushion currently close to EUR23.8 billion, clearly exceeding maturities over the next few years.

Our average debt life was 6.35 years at the end of December, and it has increased to 6.77 years, including additional refinancing activity over the last two months.

I will now hand it back to Jose Maria to recap.

Thank you, Angel. To finish, please move to slide 33 for final conclusions.

2016 was a year of strong execution and growth for Telefonica, one in which our free cash flow has accelerated. In the fourth quarter, we delivered our promises -- a promising earnings momentum, while also being strong on infrastructure via our NGN networks. And we have de-risked our balance sheet. We entered 2017 with confidence based on further growth, consistent organic deleverage, and sustainable shareholder remuneration.

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

(Operator Instructions). Mathieu Robilliard, Barclays.

First, I had a question with regards to your revenue guidance which you guide for flat for 2017, and I wanted to understand a little bit better what were the drivers.

So I understand that there is a negative impact from regulation, but in 2016, you did deliver 2.6%, which is much higher than 0% plus 1.2%. And I wanted to understand, therefore, where you think there could be a deterioration sequentially, because when I look at Spain, it looks to be in a good position, certainly in Q4. And also, Latin America, it was a nice rebound in Q4.

So maybe not sustainable, but basically I wanted to understand why you're just going for flat in 2017 despite all these positives.

And then second, in Spain, you point out to -- well, you have a big restructuring charge. Could you maybe elaborate a little bit in terms of the cost savings you expect from this restructuring exercise?

Thank you very much.

Thanks for your questions.

In terms of the revenue guidance for this year, for 2017, we are including, as you were mentioning, some significant regulatory impacts, as some of our units have already shared with the market. Both Brazil and Germany, but mainly Germany will have a significant impact in terms of the roaming and termination rates, and that's also affecting other units in our perimeter.

On top of that, we'll have some trends contributing to soften the revenue trends, namely wholesale in some markets. But overall, we do see mobile service revenues net of regulation, and namely in both residential, the B2C and B2B segments, with a strong momentum.

So it's a mix of effects and the overall of those effects, namely including these trends of regulation, are calling us to guide on those stable revenues.

In the case of Spain, in the case of the impacts of the restructuring of Spain, basically, I would refer also to margins in Spain. I think that you should take into consideration several facts.

First, the redundancy program has been extended to 2018, and that has allowed us -- that has forced us to include another provision. It's affecting overall 7,000 volunteer employees. The direct cost savings at a run rate of -- will be at a run rate of [EUR370 million] in 2017, and the extension will allow us to have another EUR100 million going on.

So far, leaves have been close to 4,000 people. OpEx savings in 2016 has been now EUR207 million. And cash flow payments in 2016 have been EUR156 million.

So those are the numbers that we can share in terms of the voluntary suspension plan, and allow me to highlight as well that there are already cost initiatives in Spain that are allowing us to significantly control margins. I would include the network simplification, all the central office closure, all the retail distribution simplification as well.

So overall, including the labor force effort that we are doing in Spain, and in spite of our significantly high impact -- higher impact of content cost, we have been able to perform robustly in terms of OIBDA in Spain. And that means that we are continuously pushing for efficiency in all fronts and that we feel that we can control the impact of a higher content cost.

If I may just follow up on the revenue question, is there --? Can you give us a sense of where you see Spain revenues moving to that guidance in the sense that do you expect the improvements to continue in 2017? Or your guidance implies that it doesn't move much from where it is now.

Well, regarding the Spanish performance, I would like to highlight that -- again the improved [trends] that has been showed in 2016 with service revenues growing, OIBDA growing and operating cash flow growing, despite record high CapEx levels. The focus now is on accelerating operating cash flow.

Give me get back -- allow me to get back in time a little bit.

Going back to 2015, most of the questions were about revenue trends and the stability of revenues. Three years later, we can say that revenue trends are solid and we have small ups and downs in quarters affected by year-on-year comparisons because of the calendar of promos, the anniversaries of tariffs repositioning, or other seasonal factors. But with all this, revenue trends are solid and outperforming other European markets.

In 2016, the questions were mostly about our ability to maintain margins in a context of increasing cost, and we have been able to do that and even improve margins.

In 2017, we will focus on all those strengths, and on top of that, accelerate operating cash flow.

So as you know, we don't guide on specific guidance per business, but I hope that I give some light to your questions.

Thank you very much.

Mandeep Singh, Redburn.

I had a couple of questions, please. One was on the balance sheet.

Can you just give us a little bit more disclosure on the total liabilities, including hybrids and mandatory convertibles, plus also workforce commitments, just to give a better picture of the total indebtedness?

And I notice that you gave some greater disclosure this particular quarter on net derivatives position. Could you just give us a little bit of color on why you've done that and, obviously, it wasn't -- I don't see it being disclosed. Before, it was a EUR3.4 billion positive.

So that's the first question on the balance sheet.

The second question is on the free cash flow. Towards the very end of the presentation, you said free cash flow should grow in 2017. Maybe you could just give us a little bit more color on some of the moving parts.

Whilst I notice that the working capital contribution was significantly lower you say year over year, it's still a very important contributor towards your free cash flow; about EUR1.5 billion of your EUR4.3 billion cash flow is working capital. Do you expect to be able to continue working capital to contribute that order of magnitude towards your free cash flow over the medium term? I just wanted to get some -- how sustainable is that positive working capital?

Thank you.

Hello, Mandeep. Thank you for these very thorough questions.

Net debt, financial net debt at the end of 2016 amounts to EUR48.6 billion. This will be reduced inorganically during 2017, at least with the announced Telxius transaction; and arithmetically, it will be reduced with excess free cash flow over the dividend and over the early retirement payments.

Hybrids, you were asking, we have an amount, outstanding amount of hybrids of EUR6.5 billion, including EUR0.5 billion in Colombia.

Regarding the mandatory convertible, it's EUR1.5 billion. This expires on September 25 of this year. It will be, obviously, settled in shares. Around 3% of outstanding capital bear in mind that we have in treasury shares 2.8% already so this is not part of our debt.

The payments corresponding to early retirement programs in the year 2016 have amounted to [EUR7 billion], and this increase debt as they get paid in 2016 has been EUR738 million. For 2017, we're estimating around EUR760 million; 2018, EUR730 million; 2019, EUR720 million. In 2020, that it would go lower to around EUR660 million.

When you aim to do your projections on free cash flow for 2017, first, as per our guidance, with stable revenues and growing our OIBDA margin by 1 percentage point, CapEx on revenues 1 percentage point down from [17%] to [16%], this translates to operating cash flow growth.

Other elements into the free cash flow estimation would be spectrum payments. These have amounted to EUR345 million in 2016. In 2017, especially if there is a UK auction, this figure would be higher.

Working capital, positive contribution in 2016 has been EUR382 million positive, much lower than what it was in 2015. For 2017, we expect it to be positive as well but lower than 2016, so lower than the EUR382 million we had this year.

On financial payments, we are aiming to financial cost below 4%, and you should expect payments to decline, both on reduction of cost and reduction of the net debt figure. On taxes, we expect to have a cash tax lower than 20% for 2017. And dividend leakage to minorities would be similar to what we had this year, maybe slightly higher.

So if you do the math, and we don't guide on free cash flow, you can conclude that we will see free cash flow growth, although we expect, especially if there is a UK auction, that the spectrum figure could be higher.

Thank you. That's a very comprehensive answer. Thank you.

Giovanni Montalti, UBS.

If I may, just as a very quick follow up on the guidance. The revenue, I guess now you're talking of service revenues flat in 2017. Is it correct, or you are still talking of total revenues?

We are talking about total revenues on the guidance.

Okay. So I guess on service revenues, we should expect a slightly, let's say, stronger trend compared to the total revenues. Is it a correct assumption, or --?

We don't open that on the guidance, the guidance level, so I am afraid I cannot comment on that.

Thank you, Giovanni. Next question, please.

Keval Khiroya, Deutsche Bank.

I've got two questions, please, both of which are related to LatAm.

Firstly, Argentina was obviously very strong this quarter. Can you talk around the sustainability of that into 2017? And how do you feel around the change in the [next Alasa] in terms of ownership, and also spectrum position?

And then secondly, when we look at some of the other LatAm markets, namely Chile, Peru, and Colombia, as you highlighted, some of the LatAm -- sorry, some of the EBITDA trends do remain still quite weak there. Do you see any signs of improvement at all in the competitive backdrop, or should we still expect the EBITDA trends to be quite weak in 2017 in those markets?

Thank you.

Thanks for your question. Overall in Argentina, what we see is a healthier competitive environment. We have been having tariff updates from mostly all operators on the mobile side. We have been having positive net additions in contract. We are having as we speak better recharges trend in prepaid.

Overall, we see better consumption patterns, and those tariff updates have allowed us to have ARPU growth year on year. And on the fixed side, we are basically upselling the customers at higher speeds and, therefore, been able to introduce this More 4 More strategy.

We have been having a very strong acceleration year on year in revenues, more than 30%, and even handset sales has been up as well. And that has allowed us with the tariff update that we have been able to carry on finally in Argentina to have a significant impact in terms of OIBDA.

OpEx is up 15% because inflation is still high, but also on that side the trend is improving because the comps are becoming easier and inflation is heading down. So as a result of all of that, OIBDA has almost doubled year on year; and almost -- and OBIDA margin has improved 11.5 percentage points.

So we see a better outlook for Argentina, macro economically and also from a market standpoint, and we think that those trends should be sustainable. So overall in Argentina, we are much more confident.

In terms of other markets you were mentioning, for example, Peru. In Peru, we are facing a very tough competitive environment, namely, mobile. Our country taxes have been down 1% year on year.

It is true that we have been in this quarter having [portability] positive numbers for the first time in the year and that we are moving our customer base towards more value-added services like LTE, and so on.

So on the mobile side, it's a very tough competitive environment, both in the high end of the market, with one competitor, namely Intel, and with the low end with another one, [Beta].

So we need to focus on Peru. We see -- we need to focus on Peru in order to improve the overall Hispanoamerica metrics.

We are much more confident in Colombia; and, in fact, we feel stronger because we have better mobile trends in Colombia. So the effort that we have been doing in Colombia in the last year is starting to pay off. And also, we see some slightly better trends in Chile where our operation there is performing better.

So overall, we are heading for -- we think we are heading for another year of strong growth in HispAm as a whole.

Lastly, Mexico. In Mexico, the trends were very worrying in the last -- in the first three quarters. We've seen some better signs in the last quarter, and mainly in these first two months of the year. It looks like some of the, I would say, not very rational pricing points are starting to become more rational, and that's having already an impact in the fourth quarter, and it's already having an impact in this third quarter.

So overall, if you ask me in terms of the rank of -- the ranking the priorities, I would say Peru should be the first priority to focus; Mexico as well. And then the others are getting better. Overall, we see a better -- we expect a better performance.

And in terms of the spectrum in Argentina, you know that we have some disagreements with the government in terms of the spectrum being reformed [of requalify] for one of our competitors; as well about the allocation of the spectrum that we bought months ago, quarters ago, of the 700 megahertz that we need to have as soon as possible.

So we are addressing those issues with the Argentinean Government, and we hope we can reach an understanding with them. But as you said, we are not in agreement with those conditions of assuring these kinds of entry levels for the [false] competitors in Argentina.

That's clear. Thank you.

Georgios Ierodiaconou, Citi.

My first question's around the net debt and the financial cost. Obviously, we had some of the LatAm currencies appreciate quite materially in recent months. Are you at all tempted perhaps to shift some of the weight of your leverage away from euro and spread it more evenly across the different currencies you are exposed to with your asset?

And how should we think about the financial expenses if that's the case? I think you mentioned in answer to the first question you expect the financial cost to come down, so I'm wondering if that will come down in spite of raising some debt in LatAm?.

And linked to that, actually, if you could comment at all on [cold calls] financial position and any thoughts of recapitalizing there; whether you could save some financial expenses from doing that.

And then my second question is just on the business trends in Spain. It's been very volatile during 2016; weak in Q1, better in Q2, worse in Q3, much better in Q4. So is it possible to give us any indications of what you should expect in 2107?

Thanks.

Hi, Georgios.

On the financial cost, as you can see on slide 32, we have reduced 102 basis points in 2016. We're already below 4%. Our guidance for Group-wide cost is for 2017 to be below 4%. And all the financial expense and financial payments should decline, not only because of cost reduction, but also due to debt reduction.

In the mix of debt according to currencies, we have a benchmark of 2 times net debt to OIBDA in our European operations. Basically, it is what applies to pound in the UK. And then 1 times net debt to OIBDA in our LatAm portfolio. And we take a portfolio approach to this because depending on the depth of the markets of different currencies and different countries, we don't want to be exposed to the volatilities and limits on certain markets, so we take a portfolio approach where we will look at units like Brazil/Mexico/Colombia. And we have more than the benchmark debt in Colombia that you were asking about and we have a bit less in Brazil.

We are taking a dynamic approach at the position we have of debt in each one of these currencies, taking into account the FX evolution, but also the evolution of interest rates. And Brazil is improving in this sense and we recently issued some debentures in Brazil, and we may do some additional refinancing. All in all, again, below 4% and declining on the interest cost.

With respect to Colombia, as Jose Maria was saying before, it's a very attractive market. The economy, the telco market and our operation, which is as you have seen in our results, performing nicely and a strong potential. And we are in talks with our partner, the Colombian Government, to implement the best way to finance and strengthen the balance sheet of f the Company. These conversations are underway, and when there is a result on those conversations, we would inform accordingly.

Taking your question on the Hispanic -- Spanish outlook in terms of revenues, again, we do not provide guidance for business line. I have already commented that we expect 2016 of being a year in which operating cash flow will accelerate. But in order to try to give you more color on expected trend, I can reiterate that we are not expecting big changes in trends versus 2016.

Consumer and business revenues are expected to perform similarly to what they did in 2016. There might be small ups and downs in terms of specific quarters that might be affected by the basis of comparison, seasonality or others, but -- as we had in 2016. But again, in general terms, in consumer and business, improving trends.

In the others line, which includes mainly wholesale, as you saw already in the 4Q numbers, it is affected by different factors that are dragging the growth in the business, such as lower Pay TV wholesale revenues, regulation, termination, the lower pace for ULL accesses, indirect access, and lower revenues from MVNOs. Most of these factors we foresee them to continue in 2017.

Having said this, we remind that some of those factors, wholesale TV or interconnection, do not impact OIBDA, and that's why we are confident and so focused on operating free cash flow for the Spanish business in 2017.

Thank you.

Akhil Dattani, JPMorgan.

Just two questions, please, if I may.

So firstly, just on the Spanish pricing environment, I just wondered if you could share some thoughts around the price changes that you've put through year to date, both on the Fusion side and the postpaid side, and I guess specifically, just keen to understand how you think those scale of price changes compare to last year.

And secondly, just in terms of the strategy around that pricing, for example, I see that, if I've understood correctly, you're not putting those price changes through on the back book; it's just on the front book. The way in which you've scaled up data allowances, I think that has also changed.

So just to really understand your thought process and also how you see your competitive environment in terms of how operators are reacting.

And then the second point, I guess, just following up on a number of the prior questions around the guidance. You've talked about operating leverage and that being a driver of EBITDA and operating cash flow growth. But obviously, in the mix, the revenue guidance is for stable. So just wondered if you could maybe just clarify a little further around the margins; maybe call out a couple of markets specifically in terms of where you're seeing the upside. And I guess particularly keen on any thoughts around Spain.

Thanks.

Thanks for your question.

In terms of the overall environment in Spain, we foresee a rational market, basically. So what we are trying to do as the leader of the market is trying to upsell our customer; trying to make sure that the new attributes of the network, like speed or capacity, or the new features like content or technical features on the video platform, we are able to capitalize on and our customers are able to appreciate and value those new attributes. And this is namely as well for the whole of the market.

It's precisely because of that that the first number that I would like to stress is the average ARPU of Fusion. It has been up significantly over the year. And if you ask me which part of this increasing ARPU is coming from tariff upgrades and which part is coming from upselling customers, customers that have been invited through a promo to enjoy those new attributes and after the promo [is dead], I would say that roughly 60% is coming in 2016 from tariff upgrades and 40% is coming from upselling our customer base.

So that explains why we are running some promos, and why we are running some promos in which we incentivize the customer base that we already have, and also the new customers to enjoy the new features.

Out of the promos, I can share with you that roughly 58% of the customers that have been coming to the new promos were new customers, so they are also helping us to increase the customer base.

So overall, I think that you should expect from the Spanish market first to stay rational, and second to move into this upselling of customers and improving the overall ARPU.

As a summary for 2016, Fusion is up 18% year on year, and one-third of that is increase in subscriber base, and two-thirds of that is the ARPU increase of 12% year on year.

So increased penetration of TV is the next move. Increased penetration of fiber, we keep expanding fiber. Increased data usage; increased number of mobile lines per Fusion line; so those are the features that we are using to drive our revenues in Spain.

So I think that you should expect this market to keep going into that direction. We might be having new features during 2017 that should allow us to keep going into the same direction. So overall, on the B2C business in Spain, the trend is accelerating and we think it's sustainable.

And in terms of the guidance, we don't guide by geographies, but as I have been sharing with you, I think that we will have some significant revenue impact through regulation, namely in Germany, and some of the Latin American territories, some wholesale effects in Spain as we have mentioned. So that's why we are -- and it is hard for us to have a reading of the handset revenues going forwards, so that's why we are guiding for stable revenues.

And in terms of the margin, the overall guidance in margin, the simplification efforts are going as we speak all across the board. The digitalization of the business that we have tried to describe during the presentation in terms of basically [driving] a full IP network and switching off legacies and switching off IP platforms; and in the case of Spain, we are starting to switch off central switches as well.

And the synergy case in Brazil and Germany; the German case has just been upgraded; the Brazilian synergy case has been upgraded three times. So we are pretty confident that we can keep building on efficiency all over 2017 in all geographies.

Joshua Mills, Goldman Sachs.

It's just a follow-up on the B2B question earlier, actually.

So in the report, you're highlighting that the communications revenue, to which I presume a higher margin saw a lesser decline this quarter versus last quarter, could you give some color on what that is as an absolute figure? Is it a mid single-digit decline you're seeing on the legacy B2 revenues, or less than that?

And then secondly, just if you can talk a bit about inorganic de-levering opportunities, as in how many towers do you think there are potentially that could still be sold to Telxius. And is there any opportunity to potentially assets in LatAm? Are there willing buyers there for some of those assets?

Thank you.

Taking your question -- thanks for the question.

Taking your one on the B2B trend, it is true that comms are under pressure, and in fact they are going down like 3%. Basically, we expect low single-digit decline going forward. But what we are doing is bundling our comms services in our offers with IT, and IT is growing 13% year on year nd will keep growing.

So what we are trying to do is digitalize in our offers as well. And at the same time that we foresee a decline in comms, we are having a very strong boost in terms of IT revenues.

And in terms of the margin impact, we are trying to control that by using value-added services on top of IT like security, cloud, Internet of Things, of others that are all growing double digit.

So those are the trends that I can share with you on the B2B business so far.

Regarding the second question, we are very focused on organic cash flow generation, organic de-leverage, so that our free cash flow is EUR0.86 above dividend of EUR0.40 per share. So you should expect, as we stated in the previous quarter and we reiterated it now, to continue delivering on organic de-leverage. And we are really committed to maintaining a solid investment grade credit rating.

You also saw that M&A can play a role in all these efforts. We just announced the Telxius transaction. And M&A, if conditions are right, if it creates value and makes strategic sense, will also play a role in our efforts, but we would rather not discuss specific situations.

Julio Arciniegas, RBC.

My question is regarding the competitive environment in Spain.

I see that for [Campalaurant], they continue in being very aggressive in the low end of the market with [Jazztel] brand. Vodafone has claimed that they are going to become more active with their low-end brands. Do you see that this is a dynamic that might drag this good momentum of pricing in Spain?

That's my first question.

And the second question, you mentioned that [FTTH] in homes in Hispanoamerica, there were an extra 5 million homes. Can you give me some color of which countries did the Company invested?

Thank you.

Thanks for the question.

Overall in Spain, environment still rational, and I would say very focused on upselling customers. Again, all competitors are going on to this More 4 More strategy, and it is true that some of them are making promise but they're becoming also more rational.

To give you some color, Orange increasing convergent prices from EUR2 to EUR5. Just in February, Jazztel increased EUR1.65 the fixed-line fee; or Vodafone capitalizing football contents, or started to charge for some services. And even MASMOVIL is removing some discounts.

So I can give you a lot of examples in which we think that all competitors are willing to capitalize the features of both - technological features of the network, like speed or capacity, or content, or services.

It has taken us a while, all of us in Spain, all the players in Spain, to invest and to transform Spain to the most advanced European market in terms of ultra broadband. Heavy investment has been made in terms of fiber deployment and LTE coverage. And I think that educating the customers on these More 4 More things and the customers being able to value speed capacity and value-added services is essential.

So we may have some ups and downs in promos but I think that those are all promos focused to upsell customers. And again, our reading is that the market is rational and is likely to stay rational in Spain.

And in terms of your question around the fiber deployment in Hispanoamerica, apart from Brazil that is becoming -- has already more than [70] million premises passed with fiber and more than getting close to 4 million of connected houses, Peru is increasing. We are basically upgrading our cable network in Peru. And all across the board in terms of Chile, Colombia, we are also growing.

We are waiting in Argentina. We are not deploying in Argentina because you know that we have been refrained from competing. We have not been able to give [4-play] offers in Argentina until next year. So 'til we have a clear revelation in front of us that allows us to have a more accurate calculation of returns on the investment, we will be refraining.

So basically, the number is going up in Peru, Chile, and Colombia and stable in Argentina.

Thank you.

Justin Funnell, Credit Suisse.

Just another follow-up question on the revenue guidance, please.

I guess Brazil is still something we're slightly in the dark on. The Company didn't provide an awful lot of guidance on its revenue outlook. Your business is growing about 2% at the moment; regulatory effects of 1% going into this year. So there's a 1% underlying slowdown you're implying. Is Brazil part of that trend as well? Are we expecting Brazil to slow down?

And then secondly, when you look back at the UK and Germany, obviously, they're performing reasonably well, but seem to be trailing a bit on network on some measures. Vodafone seems to be pushing harder in the UK, but is there a concern O2 is falling behind a bit? And have you thought about a project spring type of strategy for the UK and Germany now that you've hit peak CapEx in Spain?

Thank you.

Thanks for your question.

In fact, in Brazil, we feel pretty strong and pretty solid in our performance in 2016, and we think that we will keep going into that direction. So we do not expect major weakness in Brazil revenues in 2017.

We have the best network; we have the best distribution network, the best brand. We have been able to grab 100% of the growth of the market in 2016, and we have no indication that this is -- our positioning is weakening. And in fact, we are also accelerating in LTE coverage. So you should not read out of the guidance any weakness in Brazil.

Again, I am stressing that we are just including the impact of the regulatory effects, mainly in Germany; and also in the UK because of the roaming regulation in Europe, termination rates in other countries. But overall, underlying trends, we feel pretty confident. So please do not read any weakness in Brazil through the guidance.

In fact, in Brazil, we expect double-digit growth, for example, in mobile data, and data and fixed ultra broadband revenues. So we will not foresee any major change in trends in Brazil.

In terms of the UK, in fact in the UK today, we have the lowest churn of the industry and the best network perception, quality network perception. So our target for 2017 in the UK is the spectrum auction, making sure that we have the right share of the spectrum. And we are actively participating in the consolidation period with Ofcom and government officials, and we have a clear view what should be the framework of that spectrum auction.

So if you ask me our priority in the UK for 2017, it's making sure that we have the same trends in terms of customer quality, lower -- the lowest churn levels of the industry, and making sure that the spectrum auction is structured in a way that is fair for UK plc.

So we do not feel the need of accelerating; and, in fact, we have the network sharing with Vodafone, which is in good shape. So we are -- that contract is in place. So we do not expect any major change in network investments in the UK, apart from the spectrum.

And in Germany, on networks our strategy has not changed. We think, and as [Marcos] was sharing with the market yesterday, that we have all the ingredients to achieve the best customer experience in urban and suburban areas. We have the best spectrum and we have the most dense network. And I think that the integration effort that has been carried out in 2016 and the effort that we are doing in 2017 is not just allowing us to have greater synergy case, but it's also allowing us to have or to build the best mobile network in Germany in urban and suburban areas.

So we are not lagging behind and we think that we can achieve that [base] network in the next two years.

Thanks.

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

Thank you.

Fernando Cordero, Santander.

Also related with the Spanish market, and particularly with the mobile-only business, although I recognize that the vast majority of your retail business [is converging], but discussing on the recent offer update, where you are increasing data allowances while maintaining the prices, I would like to know what is your view at [weakest] tender limit the future mobile data growth monetization. And also to get a clear view on the dynamics of these kind of offers.

And looking into the costs, at which extent these efforts of simplification and the utilization of the business are being translated into the cost, or the unitary cost per giga or per unit of data related with mobile business. Also trying to understand if these new offers, even maintaining prices, are margin accretive or not.

Thank you.

Thanks for your questions.

The revamped portfolio that we have done in mobile has two tranches, I would say. It has a first tranche in which we've More 4 More in the low end, so we are trying to raise the value per gig at the entry level; and [more the centimeter high]. So it has been structured in two tranches. And in fact, it had a very good performance in Q4.

As we are expanding our LTE coverage, and we have now 96% geographical coverage under [competitors'] criteria, and we have more than 6 million LTE customers in Spain, and more than 81% is smartphone penetration, we are able to capitalize this investment effort through those tariffs. But again, keep in mind that we are trying to do several things at the same time: upgrading the offer by giving More 4 More, and trying to give the sense or the position for the customer that the speed and quality are attributes that should be valued.

We have been increasing our entry level by two years, and at the mid and high, we have been giving basically the same for -- we have been giving more for the same amount of money.

As a result of all of that, we have been having record highs in contract mobile net adds and [new adds], and we are having more loyalty, which again is speaking to the fact that your calculation should include the churn effect of those offers and not just the extra gig that we are giving to those extra layers of customers.

Overall, the numbers that we are running allow us to say that we are able to capitalize the investment effort that we are doing in network, but again, read through the promotions or through these offer upgrades, the two tranches, and read the churn target that we are pursuing.

Many thanks.

At this time, no further questions will be taken.

Well, thank you very much for your participation. We certainly do hope that we have provided some useful insights for you, but should you still have further questions, we kindly ask you to contact our investor relations department.

Good morning and thank you.

Telefonica's January to December 2016 results conference call is over. You may now disconnect your lines.

Thank you.