Telefonica SA (TEF) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Telefónica's January to December 2017 Results Conference Call. (Operator Instructions) And as a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Pablo Eguirón, Head of Investor Relations. Please go ahead, sir.

Good morning, and welcome to Telefónica conference call to discuss January-December 2017 results. I'm Pablo Eguirón, Head of Investor Relations.

Before proceeding, let me mention that financial information contained in this document related to the fourth quarter '17 has been prepared under International Financial Reporting Standards, as adopted by the European Union. This financial information is unaudited.

This conference call webcast, including the Q&A session, may contain forward-looking statements and information relating to the Telefónica Group. 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 risks, uncertainties and contingencies, many of which are beyond the company's control.

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 releases and slides, please contact Telefónica's Investor Relations team in Madrid.

Now let me turn the call over to our Chairman and Chief Executive Officer, José María Álvarez-Pallete.

Thank you, Pablo. Good morning, and welcome to Telefónica's Fourth Quarter Results Conference Call. With me today are Ángel Vilá, Chief Operating Officer; and Laura Abasolo, Chief Financial and Control Officer. And during the Q&A session, you will have the opportunities to address us with any questions you may have.

I'd like to start this call sharing with all of you my reflection after almost 20 months as a Chairman and CEO of Telefónica. More specifically, about the essential building blocks guiding our efforts.

If we look around, we see that the world in which we live is defined by one concept: connections. Across the world, economies and societies are being fundamentally transformed by digitalization. Far from decelerating, we should expect further technological disruption and digitalization across every sector to be one of the global trends determining the future.

To grab this huge opportunity, we need to be open-minded and ready to transform. We see digitalization as the key lever for this radical transformation and to unlock value for all stakeholders.

We articulate this purpose across 3 strategic priorities: first, to enable people with the power of connectivity; second, operate in countries where we can have an impact and create value; and third, optimize our capabilities for a sustainable digital future. With these actions, we want to bolster a strong financial performance and shareholder returns.

Looking at the 3 of them in detail.

Ultra-broadband connectivity tailored to each market is a key enabler, driving an integrated offer and the best customer experience, redefining the way we interact with our customers. And cognitive intelligence is a new tool to apply to this goal.

Operations will be center in markets where we can have an impact and create value, leaders in convergence, leaders in mobility and in having successful challenger positions with structural growth opportunities ahead.

In addition, we believe that the only way to successfully execute these goals is to do it in a sustainable manner, being sustainable for the long term. This is our commitment to our almost 345 million customers, our more than 120,000 employees, the citizens of the societies where we operate and our almost 100 years of successful history.

To do that, optimizing our capabilities is a must. Building a platform company, being pioneers in digitalization, pioneering the new technological wave, but at the same time, with a relentless focus on efficiency and maximizing group synergies. All in all, this has to be reflected in financials, in growing numbers. And 2017, we had a good start, as we will explain now.

Now let me turn to Page 4.

2017 was the year in which we achieved an excellent execution of our priorities, as demonstrated by, first, growth.

Revenues, OIBDA and operating free cash flow grew simultaneously in organic and reported terms, and free cash flow posted a double-digit increase.

Second, capturing the benefits of the digital transformation with significant investments in ultra-broadband to have the most innovative, smart and efficient networks. As a result, we are #1 in fiber deployment in Spain and Latin America, and we are pioneers in cognitive power. Moreover, we are monetizing the data traffic explosion, turning volumes into revenues.

And third, we have strengthened our financial position, addressing the debt level, which was reduced by EUR 4.4 billion through both organic and inorganic measures. As such, our free cash flow was EUR 4.9 billion, and we sold a 40% stake in Telxius.

Slide #5 shows the business accelerating growth in 2017, thanks to our efforts in the past years.

Services revenue surpassed 3% organic growth, with high single-digit growth in Latin America and a positive result in Europe if we exclude the negative impact of regulation.

OIBDA accelerated to mid-single digit, with Latam growing by double digits and Europe ex regulation, 2%. This growth, fueled by a lower capital intensity than previous years, has enabled operating cash flow to grow 12%, with both regions growing at double-digit ex regulation.

And free cash flow reached almost EUR 5 billion, 13% more than in 2016, and leverage ratio decreased 0.3x.

Moving to Slide 6.

Revenues and service -- revenues and service revenues accelerated growth in the fourth quarter to 4.8% and 4.3%, respectively, in organic terms, with both Europe and Latam yielding improvements ex regulation.

Total revenues for the year increased 4.5% ex regulation.

We continue to improve data monetization as mobile data revenues improved sequentially to close to 20% organically, contributing to the change in the revenue mix. In 2017, more than 50% of our revenues came from broadband and service beyond connectivity.

Revenue flow, cost actions, efficiencies across different lines and merger synergies all explain the strong profitability we posted in 2017.

On Slide 7, digitalization is at the core of what we do. Our operating model is center on 2 broad initiative, which will propel us forward on this journey: data monetization and our digital transformation.

We are improving monetization and seizing the opportunity presented by the explosion in data traffic. We are attracting more high-value customers. We are bundling, and by doing so, protecting our revenues and increasing customer loyalty. And we are also up-selling across many elements: speed, allowance, additional lines, content, value-added services, data services, devices or elements of the data home.

To fully capture the digitalization opportunity, we are building leading smart networks to allow for the radical automation of our processes. This means we are creating a world-class data customer experience through AURA and Novum and a distinctive data value proposition built on real-time offers respondent to customer needs.

Monetization opportunities are ongoing, as shown on Slide 8.

In the speed and capacity wave, we are obtaining a price premium from the ultra-broadband networks deployed and ARPU accretion from innovative tariffs launched like O2 Free in Germany and flexible data YoYo tariffs in the U.K.

In the service beyond connectivity wave, ARPU uplift continued to be key with [TV] as the main driver, along with other service like security in the B2B segment.

In the cognitive power wave, AURA is the new customer relationship model based on trust with key experience principles: natural language, single point of contact and personalized answers. Moreover, it will be launched in 6 countries during the Mobile World Congress.

Over the last years, we focus our efforts on transforming our business into a digital company, identifying new market conditions and adopting ourselves as the technological evolution presented new opportunities and requirements. As a result, we have been carrying a targeted and return on investment based CapEx investment to secure future growth, and now the CapEx peak is behind us. As an example, we have the largest ultra-broadband footprint owned among peers, and Spain's private to the home deployment is more than 75% of 2020 target. Once again, we are ahead.

Turning to Slide 10.

We can see growth across all fronts, highlighting double-digit growth in euros versus 2016, in operating cash flow, EPS and free cash flow.

Revenues topped EUR 52 billion. Underlying OIBDA of 66 -- EUR 16.6 billion. Underlying EPS of EUR 0.75 per share. And net financial debt down to EUR 44.2 billion. Leverage ratio came down to 2.66x after a 40 -- a EUR 4.4 billion reduction in net debt.

We have comfortably beaten our outlook for the full year 2017, as you can see on the Slide 11.

Revenue grew 3.4% despite a 1.1 percentage point drag from regulation. OIBDA margin expanded 0.6 percentage point. And CapEx to sales reached 15.8%. The second tranche of the 2017 dividend, EUR 0.2 per share, will be paid in June 2018 and complemented the first tranche of additional EUR 0.2 last December. Calendar payments in the year amounted to EUR 0.4 per share.

And now let me hand it over to our Chief Financial and Control Officer, Laura Abasolo.

Thank you, José María.

Moving to Slide 12.

Fourth quarter results were solid, strengthening trends versus Q3 in main metrics. Our relentless focus on operation execution led to an expansion in our user margin year-on-year and into an outstanding growth of more than 20% year-on-year of operating cash flow, boosted by OIBDA and lower CapEx intensity. Reported P&L was affected by noncash factors, including restructuring charges, contingencies and capital gains. FX and European regulation also dragged on top line growth and profitability.

On Slide 13, you can see the details of how the different factors affected the quarter.

I would highlight specifically the restructuring charges. It will finally improve future profitability and cash flow. This factor deducted EUR 317 million and EUR 319 million, respectively, from OIBDA and net income.

Moving to Slide 14. Here, we detail how FX is impacting our different levels on the numbers and how its impact is structurally neutralized.

FX is having a negative impact in reporting figures in recent years. But the more you go down on the free cash flow ladder, the lower impact you have. So the negative impact in OIBDA is naturally hedged due to lower CapEx, taxes, interest, minorities and others. And at the same time, our debt is also reduced in a multiple of free cash flow reduction.

To provide more color on the currency exposure, in the graph of the bottom left side of the slide, our free cash flow per share in 2017 totaled EUR 0.97, with cash flow from Europeans operations representing EUR 0.9 before interest payments. The conclusion is that European free cash flow significantly exceeds dividends and total interest payments. Therefore, we can consider Latam all upside, and again, currency exposure is well managed.

Let's move now to the financial metrics on Slide 15.

Net debt has been reduced by EUR 4.4 billion to reach EUR 44.2 billion at year-end. And the net debt-to-OIBDA ratio has come down to 2.66x as of December 2017. That is a 10% ratio improvement in 1 year. The main driver for our leverage improvement has been a strong free cash flow generation, nearly EUR 5 billion, up 13% versus 2016. On top of that, Telefónica has successfully complemented its deleverage with inorganic measures, Telxius partial disposal and other levers, the hybrid issuance.

Slide 16 shows how Telefónica continues to strengthen its balance sheet with long-term financing.

Our average debt (inaudible) life was 8.1 years at the end of December, up almost 2 years from December 2016. We keep on tapping different markets at historically low rates, maintaining a significant liquidity cushion, currently close to EUR 20.9 billion to face comfortably next 2 years of maturities. The interest payment effective cost stood at 3.32% as of December 2017, 62 basis points lower than December 2016. This positive evolution is mainly due to refinancing in Europe at very attractive rates and lower costs in Latam currencies. Additionally, in 2017, we increased 20 percentage points, up to 71%, our debt with fixed rates. As a result, as of December 2017, we have reduced by more than 50% the potential impact of a 100 basis points increase in interest rates compared with December 2016.

I will now hand back to Ángel to explain in more detail segment performance and transformation.

Thank you, Laura.

Starting on Slide 17, Telefónica Spain improved operational momentum in the fourth quarter amid the usual promotional activity of the period.

Fusión net adds recovered previous volumes. Fixed broadband was back to growth, and mobile contract maintained a strong performance. Our leading assets have become key levers to increase returns. Fiber wholesale accesses are accelerating their growth and have strong potential as they account yet for just 20% of the total wholesale base. At the same time, the focus on quality and the increase in the average number of services per Fusión customer resulted in more high-end customers, 27% of the base, and a 6% year-on-year growth in Fusión ARPU. There are already more than 20 million accesses in Fusión, growing double digit.

In 2018, we continue to make progress in our More for More strategy, with more data and higher speeds.

Continuing with Spain, let's move to financials.

Service revenues accelerated sequentially in the quarter to 0.7% year-on-year, with a clear improvement throughout the year, as we have highlighted several times. Continued cost containment led to an improvement in OIBDA trend quarter-on-quarter, growing 0.5% versus fourth quarter 2016, while margin reached 40%, up 0.2 percentage points year-on-year.

Having rolled out the largest NGN network in Europe, 2017 CapEx is falling 9% year-on-year to 13% of sales, supporting a 3% year-on-year growth in operating cash flow to EUR 3.4 billion.

Turning to Slide #19.

Telefónica Deutschland continued to drive strong operational momentum, with O2 Free and the partner business. The O2 Free portfolio fueled data growth in a dynamic environment, with average usage above 7 gigabytes per month.

Mobile service revenue, excluding regulatory effects, return to growth in Q4, plus 0.8% year-on-year. And OIBDA was 6.3% up year-on-year, reflecting successful synergy capture, partially offset by regulatory headwinds and commercial investments for future growth.

These improving trends, combined with efficient CapEx spend, boosted operating cash flow growth to 27.4% in 2017.

Moving to Slide 20.

Telefónica U.K. has once again posted a positive performance, driven by its customer-centric approach and great brand, as seen in the introduction of new innovative propositions.

Contract customer base continued to grow, driven by market-leading churn, with accelerating net ads, excluding machine to machine. Thus, mobile service revenue grew 2.7% year-on-year in the quarter, after excluding the roam like at home impact, which stood at 1.6 percentage points, and driven by the higher-value tariff mix. This, along with an increasing contribution from wholesale and higher handset sales, led to a solid increase in revenues and 3.7% in OIBDA. Furthermore, Telefónica U.K. continued to deliver market-leading margins.

CapEx was down 4.8% versus 2016 as we met our LTE indoor coverage objective of 98%. So operating cash flow grew 6.9% to reach EUR 812 million in 2017.

On Slide 21, we show the performance of the Brazilian business, the best positioned telco in that market.

Throughout 2017, Vivo has continued to widen its quality differential, with 84% LTE coverage and 18.4 fiber premises passed, reflecting the best network and the best brand.

In mobile, we reached the strongest quarterly net adds over the last 3 years, while our customers are accelerating their adoption of high-value plans, which in the end resulted in a remarkable year-on-year ARPU growth of 2.6% in 2017.

In fixed, we are achieving excellent results in the cities where we are expanding our fiber reach, with a takeup of between 40% to 60% just 6 months after deploying and with the growing adoption of new capabilities, as shown by the more than 50% growth in IPTV.

Moving on to Slide 22. We show how this successful strategy resulted in a solid revenue growth of 1.4% year-on-year in 2017 in spite of regulatory effect dragging 2 percentage points.

As a result of this positive revenue performance, together with an impressive cost discipline, which drove the eighth consecutive quarter of year-on-year OpEx decline, we reached the highest OIBDA margin in 2 years, surpassing the 35% mark. At the same time, amid year-on-year stable CapEx, we are posting an outstanding double-digit operating cash flow growth of 13.6% in organic terms.

In Hispanoamérica, moving to Slide 23, the penetration of value services continues to gain traction. In contract, we posted marked improvements in Argentina, Mexico, Chile and Peru. In LTE, the highlight was the strong uptake across our footprint and penetration growth by more than 10 percentage points year-on-year. In addition, let me point out the positive results of our focus on deploying best-in-class fixed networks in the region, with penetration of fiber accesses increasing by more than 11 percentage points after consistently adding new connections throughout the year.

Moving to Slide 24.

Commercial traction has translated into strong financial performance, which more than offset the negative impact of the depreciation of some currencies in the region. As such, full year reported figures showed profitability expansion, with operating cash flow rising by more than 22% to reach EUR 1.4 billion.

By countries, in Argentina, full year operating cash flow rocketed plus 67% in reported terms. We are seeing progressive recovery in Mexico, with revenues back to growth again in the second half of the year. And in Peru and Chile, better commercial momentum is driving a gradual improvement in revenue performance.

Slide 25 shows the solid performance of Telxius, our leading infrastructure unit.

First, it has been addressing the growing demand across its businesses. In the towers unit, we have increased the scope by more than 4,000 -- 400, sorry, towers throughout the year and grown co-location rates across all geographies to reach 1.33.

In the cable business, the priority has been to tackle growing traffic demand, while completing the rollout of new cables, MAREA and BRUSA, to capture further market growth.

And second, Telxius is delivering robust revenue growth with a balanced contribution from both business units, while the full year profitability, above 47%, reflects the operating efficiency after its first full year of operations.

After explaining the evolution of the different business units, I would like to go back to the digitalization potential on Slide 26. On this slide and the following ones, we will give you some details on where we are today and what is the expected future evolution to help you extrapolate future trends and efficiencies.

I would like to start by going over the clear proof points achieved this year.

First, the best connectivity, with 73 million footprint premises passed, LTE coverage of more than 90% in Europe, 9 countries with VoLTE technology and more than 8 million voice over IP customers.

Second, in data monetization, digital revenue surpassed the EUR 5 billion mark with video as the main driver and contributor, but also leveraging our new ecosystem opportunities like cloud, machine to machine, security, big data, advertising and artificial intelligence.

And third, we clearly move towards -- we clearly move forward in digital transformation, in network virtualization with our proprietary UNICA infrastructure. In customer apps, we doubled the number of unique users on our platform such as Mi Movistar, Meu Vivo, My O2 and Mein O2. We are migrating 15 countries to full stack deployments. And on the back of all of these, we continue simplifying our operations, minus 6% physical servers, minus 8% applications, minus 2% data centers.

Slide 27 shows how our high-quality base has expanded, as demand for fiber and LTE remains very strong.

We continue to progress in customer base monetization based on 2 levers: the first, bundling voice and data; the second, up-selling, thanks to higher speeds, data-sharing plans, value-added services, et cetera. So protecting revenues through bundling and then up-selling them to increase the ARPU, monetizing data and fostering loyalty. As such, we are obtaining more value with average revenue per access 4% higher than in 2016 and with churn stabilized.

Slide 28 shows some insights on how mobile data monetization and connectivity are boosting growth.

We are living (inaudible) exploding data traffic, the challenge, but at the same time the huge opportunity is to monetize such traffic growth. We continue to apply More for More strategies to improve our offering with higher value for money to increase ARPU. And to do so, we employ different levers, offering more mobile data or fixed speeds, introducing mobile tariffs including data dedicated to certain apps and extending family plans to combine usage. In addition, increased penetration of recurrent prepaid data in Hispanoamérica and successful deployment of new repricing techniques are improving the value mix.

All this translated into, first, mobile data revenue growth of close to 20% year-on-year in the quarter, to represent 60% of mobile service revenue; and second, steady usage and ARPU uplifts due to higher fiber adoption in fixed data. Overall, data monetization is a key growth driver with further upside.

Moving to Slide 29.

Digitalization is a key lever for our transformation center on the whole customer life cycle. It is structured around 5 priorities, which focus on direct sales through digital channels, making payments easier and enhancing service provision and post-sales technical support. We have set ourselves concrete targets for each 1 of these 5 priorities for the coming years, which will bring further efficiencies to our cost structure.

Out of our total OpEx, we have an addressable cost base for these digitalization initiatives of EUR 11.6 billion, and we expect a run rate of gross savings of more than EUR 1 billion by 2020.

Digitalization also brings CapEx optimization opportunities, as shown by the strong decrease of 47% in our unit cost per household passed with fiber. We will continue to apply data analytics to invest in network smartly, focusing on return on investment.

In addition, digitalization will bring higher customer satisfaction and loyalty. And it will define a closer relationship with our customers with innovative digital channels and new interaction models such as our new AURA platform.

On Slide #30, our own transformation and digitalization journey is critical to be competitive, to be sustainable and opens up multiple efficiency sources. The accelerated investment in future-proof connectivity is the key enabler for our business sustainability. Our extensive experience in Spain allows us to industrialize fiber deployment, thus Latam countries now benefit from shorter and more efficient deployments.

So it is not that we're investing less, it is that we are being more efficient in the deployment. In other words, we are passing more homes with the same investment, meaning that we can capture the growth at the lower cost.

Network transformation and legacy management is another reality where we are ahead. Just to give you an example, we are projecting the decommission of approximately 650 central offices up to 2020. So again, not only better networks, but also more sustainable business.

In addition, as we have already explained, customer-centric digitalization will deliver more than EUR 1 billion savings and more initiatives will be added to this figure. And the restructuring plans already executed will continue generating additional savings. All of this will underpin our superior cash flow conversion.

Now I will hand back to José María.

Thank you, Ángel.

Now on Page 31, let me outline the 2018 guidance.

We aim to retain sustainable profitable growth. Revenue growth of around 1%, despite regulation dragging 0.9 percentage points. Applying prior organic criteria, guidance would be 2%. OIBDA margin continues expanding around 4 -- 0.5 percentage points, in line with 2017, despite regulation dragging 1 -- minus 1.6 percentage points on OIBDA growth. CapEx will continue with its rate of decline with a CapEx to sales ratio of around 15%, 1 percentage point lower than in 2017. We will push additional deleverage while we improve return on capital employed. This will allow us to maintain a solid balance sheet and investment-grade credit rating.

Regarding the dividend, we are maintaining a stable and sustainable amount of EUR 0.4 per share to be paid in 2 tranches of EUR 0.2, 1 in December and 1 in June 2019. And like in 2017, total payment will be EUR 0.4 per share.

To recap, please move to Slide 32.

First, in 2017, our results were solid, growing across all fronts. We continued to advance in digitalization and data monetization. And we made a firm progress in deleverage.

Second, and for 2018, we will be exploiting a more sustainable business model with increasing revenues, margin expanding and control CapEx. At the same time, value creation will be enhanced through digitalization, which will enable us to achieve greater revenues, but also be more efficient, improving return on capital employed, and our financial flexibility will be also key.

And finally, our focus is on profitable and sustainable growth with technology as a key enabler going forward, leveraging on our massive transformation over the last 7 years, which has led to us being at the forefront of the digitalization process.

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

(Operator Instructions) Our first question comes from the line of Joshua Mills from Goldman Sachs.

Two for me. First, on digitalization. So the cost saving target of EUR 1 billion, which you lay out on Slide 29, is obviously a gross number. What would that be do you estimate on a net basis? How much do you think you're going to have to reinvest in provisions or pass on in the form of competition? Just trying to get an understanding of how this will translate through to a midterm EBITDA margin expansion target from your perspective. And then secondly, I was wondering if you could give us a bit more detail on today's announcement of the fiber to the home wholesale agreement with Orange in Spain. How many homes does this apply to? And will you be extending the same access terms to Másmovil, which is obviously working with Orange? And ultimately, just trying to understand whether or not this is likely to reduce Orange's current fiber to the home rollout target of 18 million homes by 2020.

Thank you, Joshua. On your first question, on digitalization, the target that we are publishing today is a target that has to do with the items regarding OpEx that you can see on Slide 29. This figure, first, does not include revenue benefits, does not include also CapEx benefits. This would be applying to OpEx. It's expressed in terms of run rate of savings I do expect to capture by 2020, but we're also expressing that, for 2018, we are aiming to already reach around EUR 0.3 billion of those savings in this year. We prefer to give this figure in terms of gross savings because there's going to be moving pieces across the different P&L items. So giving an OIBDA indication would be probably difficult to give at this moment. But we are committed to achieving these savings, plus additional benefits that we will get at the revenue and CapEx levels. And then, regarding Orange, we have announced today an agreement which demonstrates Telefónica's competitiveness in the wholesale market. This will generate sustainability of wholesale revenues for us and will improve the profitability of investment made to build the largest fiber network in Europe. This will cover -- it's a 5-year commitment that we are entering into, which will apply to all Telefónica's footprint, both in regulated and nonregulated areas. This will not affect our plans to deploy. We will continue to deploy on our own means, and we continue to expect to reach 25 million premises by 2020. But here, we are showing our will to reach commercial agreements with competitors. We are aiming to improve the long-term profitability of our infrastructure investments. It's similar to the agreement we signed with Vodafone. It will help our wholesale service revenue line, which is progressing, as you can see, in our results. And very importantly, this will also benefit customers and citizens in general because they will enjoy a wider fiber coverage with alternative options being able to advance in the digital economy in Spain.

Maybe just one very quick follow-up on the digitalization point. I think if you go through the presentation, it's clear that a lot of savings you're targeting are focused on the network side. Is there a scope to reduce your personnel expenses as well as part of this? Is that a large component of the EUR 1 billion cost saving target? And if so, would you expect that you'd have to take further upfront provisions in the near term to deliver those savings?

If you look at Slide #29, you will see that the benefits or improvements that we're seeing, we are aiming to, in the horizon over the next few years, a great significant in not only network, but also in commercial activities. So we are aiming to increase direct customer interaction. And in self-assisted channels, we plan to more than double the sales in self-assisted channels. This has benefits in terms of lower commissions, for instance, to the channel. So you should not think necessarily everything in terms of personnel. There are many other commercial expenses which are not linked to personnel that will improve. The top-ups, which is the second block, that we're going to do through our reps and through digital channels, we expect to more than double online top-ups. The payments in self-assisted channels and collections, these are also going to improve. And this also reduces commissions that we're paying to some of the payment systems. And we will continue, from a very high level, to solve incidents remotely, and we expect to improve or to progress further in customer experience, which will lead to a reduction in calls to the tune of what you see in the slide to our call centers. So there are many levers on saving, not only linked to network items, to lots of the commercial activities and all the customer journey, with a potential for savings that are clear in -- across different levels of the channels.

We will now take our next question from the line of Georgios Ierodiaconou from Citi.

I have 2. First one is a follow-up on Joshua's question earlier around digitalization. From what we understood yesterday, Telefónica Deutschland implied that there are some costs that are being invested, at least Germany, in 2018 in order to get more of the savings in latter years. Obviously, my understanding of this gross savings is that they exclude the costs that may run for the next couple of years to generate the savings. Is it possible to give us an idea across the group how much will that number be roughly for '18 and whether in the next couple of years, we should assume most of it goes away or whether it's replaced by other types of investment? And then my second question is around the CapEx guidance and the reduction in CapEx that you highlighted. And I can see on Slide 29, you show that fiber cost rollouts have come down a lot. But at the same time, we have flipped this argument around. That means the returns are even better. So I'm just trying to understand why -- about the pace of the rollout of fiber outside of Spain, especially in Latin America and why you're not accelerating more the rollout, given the efficiencies that you are managing on the fiber unit costs.

Thank you, Georgios. On the first question regarding digitalization, we have given guidance on margins for 2018. So you should not be thinking of provisions that may affect the numbers. Those -- the investments that we need to make to achieve these digitalization benefits that we're posting are already included in the guidance that we are giving to you for 2018. And regarding CapEx, we are clearly -- or CapEx in Latin America into fiber, we are accelerating into that. You are seeing in our results in different units in Latin America that we're growing. And we have even the figure in Hispam, but also in Brazil. We are growing the deployment of fiber. We are enjoying a very efficient deployment, thanks to what we call the industrialization of the process. Given the extensive experience that we have gained in Spain, we're accelerating fiber in Brazil. We're accelerating it in Argentina, right? We're investing also partly in cable, but also in fiber in Peru and Chile. And also selectively, but also accelerating in Colombia. We are seeing a big demand, but interesting rates of take-up, and you should be expecting us to be investing along this line.

If I could follow up on the first one. I didn't mean exceptional provisions. It's more my understanding, in the case of O2, they are suggesting, and we'll find out tomorrow the numbers obviously, that there are one-off IT investments perhaps which will affect the cost line. Is that something -- which will be passed to the recurring OIBDA obviously. Is that something you are seeing in other countries? Is it German-specific?

Well, first, I want to reiterate that the CapEx needed for transformation and digitalization is included in the CapEx envelope. So even with that, we expect CapEx to revenue to continue reducing, and we have left our CapEx a bit behind. Regarding investments in IT, we have made huge progress already in moving to full stacks across our footprint in Hispanoamérica. We are upgrading those efforts. We are quite advanced in those efforts already in Spain and in Brazil. And maybe Germany, because they have been focused on the synergies of integration, have been more focused on integrating the systems from O2 Wifi Plus, and now they have to invest a bit in transforming those systems, but that is a very German-specific situation. But to reassure you, the CapEx needed for transformation for digitalization, the CapEx systems is already included in the envelope that we are putting in front of you, and we see now that CapEx peak is behind.

And if I may complement, I would like to say that keep in mind that we have done several integration process during the last years, the GVT process and the German process, and that has required upfront investments as well to accelerate the transformation. And those were one-offs be coming out of the acquisition process. So that's why we think that we can do a highly significant effort in CapEx deployment with less level of capital.

We will now take our next question from the line of Giovanni Montalti from UBS.

If I may, a couple of questions. Can you share with us some update about the way you think about football rights, their renewal and the negotiation with Mediapro for the Champions League, in particular? And following your announced restructuring, can you share with us some thoughts about what is core in terms of geographies and what you may be more pragmatic about, either for disposals, IPOs or any other strategic option?

Thank you, Giovanni. I'll take the first one on the soccer rights. Regarding soccer rights, you should expect us to analyze the cost-benefit equation in a very rational way and to take decisions accordingly. We have noted the recent developments and dynamics in the soccer league options in places like the U.K. and Portugal, which we think point in the right directions. And bear in mind that given our customer base and given data analytics on an actual content consumption, we probably are very well placed to accurately assess the value of each content. So taking all of these into account, we should say that there is a distinct possibility that we may not renew the Champions League contract. And regarding La Liga, current rights run until the season 2018-'19, so it's this season and the next. An auction could be held in the first half of 2018 for the rights of the season starting in September '19 for 3 years. Here, the key question of whether to beat or not to beat in such auction will be determined by the conditions and the minimum prices eventually set. But again, with a rational cost-benefit analysis, we are going to exert financial discipline in -- as we always do.

Taking your question on the new structure of the group. We have decided to separate the Hispam countries in 2 fronts: the South, which are mainly either integrated incumbent players, and the North in which we are attackers. Because we think that those deserve different management styles, different approach, different levels of CapEx intensity, and therefore, we wanted to really focus on enhancing the management performance of both units in order to make sure that we have the best return out of that. But that also means that, as you know, over the last years, we have reshaped our portfolio. We have been actively managing our assets and -- because we want to finance profitable growth. And therefore, we are constantly reviewing our asset portfolio in order to reinforce our strategic positioning and significantly enhance our return on capital. So we evaluate the assets through a set of factors, including operating cash flow margin and market share, with the aim of optimizing. So you should expect for us to have a very active approach to enhance our return on capital employed, and therefore, to reshape our portfolio.

I'm sorry, if I may -- sorry, can you hear me? Hello? Hello?

Yes, Giovanni, please go ahead.

Sorry, apologies. If I may follow up on this point. Can you share with us some thoughts in terms of timing, in terms of how, let's say, you see these as a priority for the group in terms of your capital allocation strategy? How important, in your view, is it to move forward in terms of reviewing your portfolio? The share price does not factor in any M&A optionality, any strategic optionality for Telefónica. As a matter of fact, there's a lot of optionality there. So maybe if you can share with us some thoughts about these that would provide some more ground to investors to recognize this optionality.

Well, enhancing or improving our return on capital employed is top of mind of the Board of Directors of Telefónica and of the management team. And therefore, you should expect from us to be very demanding internally with our own assets in terms of execution because we are committing a significant amount of capital for CapEx. And therefore, you should expect from us to be very, very demanding internally on that front. I'm not going to comment on timings or processes, but you should be expecting for us to be much more demanding on that front.

We will take our next question from the line of Akhil Dattani from JPMorgan.

Two questions from me as well, please, if I may. Firstly, just on the other revenues in Spain. Ángel, you mentioned the strong growth you're seeing in that segment from wholesale. And I just wanted to understand a bit better how we should think about that performance as we go into 2018. Key moving parts, I guess, I'm keen to understand is how and when the Orange contract phases through, so when does that start to contribute? And then, secondly, the other moving part we have is the YoYo contract loss. If you can remind us again how that would phase as well, just to give us some sense as to whether this strong momentum we're seeing in other revenues can continue to flow through to 2018. And then the second thing I wanted to just really point on was the Spanish price environment. There's been a lot of news flow in the last couple of months around your price increase, which seems to have followed very well by your peers. Másmovil seems to have taken up their bottom end price point by eliminating it, therefore, effectively indirectly raising prices, too. Do you feel that this has been broad based enough yet? There's some question whether Vodafone's matching here or not. And so how do you more broadly just think about how pricing is developing right now?

Thank you, Akhil. There are 3 main drivers on the other -- wholesale and other revenues. On the one hand, you have the wholesale MVNO, which we are forecasting the loss of the Másmovil unit's revenues. They can still use our network for as long as they need it, and they have been migrating slower than initially envisaged. But we are foreseeing during 2018 the loss of those revenues. Then we have wholesale of content rights. We are wholesaling the rights of the best match of La Liga. We are wholesaling the international series channel. We're wholesaling the movies channels. So here, you have an element, and very important, the wholesale of fiber. As you've seen in the slide, fiber wholesale keeps ramping up the growth, both on recent agreements and regulation, and penetration is still very low. The fiber accesses never have multiplied almost by 3 year-on-year. And the migration from a corporate unbundled local loop to NEBA is revenue accretive, and it improves the return investment. So in this segment, we will aim to mitigate the MVNO revenue loss and the regulatory impacts by growing the volume of accretive migrations from corporate unbundled local loop to fiber wholesale. Regarding the competitive situation in Spain. Well, here, we've seen a fourth quarter that has traditionally has had a strong promotional activity. But even in this strong promotional activity, we have been able to make progress, both on commercial and on financial terms. So we had a positive commercial momentum following the launch of conversion bundles and targeted promotions. And you can see on Slide 17 improvements. We are 5% up in the year in accesses and TV. Fiber accesses are up. Fixed broadband accesses are back to growth in the fourth quarter. We are growing in mobile. Fusión customer base is 2% up. So commercially, we are doing fine, or we're doing very well even in a very competitive quarter. And (inaudible) revenue trends were back to growth. OIBDA was back to growth and maintaining a margin of 39.9%, which is materially in the 40% level and converting pretty strongly in -- our cash flow conversion is quite strong. So following this fourth quarter in which although there was additional commercial activity, we have done quite nicely in the market. What we see now in 2018, rationality is back. Market is cooling down. Promotional activity is diminishing. And there are new More for More tariffs and tariff upgrades which are being applied by almost every player. Here, it's a -- all of us are investing heavily, and we need to earn a return on our investments. So rationality is back in this start of 2018.

Can I just ask one point on the wholesale comments that you made? I understand on a lot of these buckets, they're commercially sensitive so you can't probably quantify the numbers that are behind each of those pillars. But on the MVNO loss specifically, are you able to talk about what the total envelope is that Másmovil is paying so we understand how much might fall out this year?

I'm not sure that we'll disclose this figure and I will check with the IR team and maybe they can get back to you. By the way, I will use your question to -- or your second question to comment something that I missed in my previous comment. In addition to the volume in wholesale fiber, you also need to factor the pricing of the NEBA wholesale price in regulated areas. And also, obviously, and I spoke about it in the first question, the new Orange agreement that we have announced today. The price in NEBA is based on replicability, used to be based -- cost oriented, now it's based on replicability. It means that (inaudible) from Telefónica must be replicable with profitability by competitors, but also means that the price will be reviewed every 6 months. And More for More strategies will be reflected in the revisions of the price -- of the NEBA price increases. So this creates a positive and constructive environment for earning returns on the fiber investments in this country. We're expecting, there was some consultation on the price of this wholesale. We're expecting shortly announcements by the CNMC, which should be in the line of fostering investment in the country, in the networks.

We'll now take our next question from the line of Mandeep Singh from Redburn.

I have 2. The first one is really building on Akhil's question. Again, I appreciate, the moving parts. Is it fair to say that the migration of DSL to NEBA fiber will not be enough to offset the loss of the Másmovil year-ago contract? So if I was to look at your revenues in Spain, if you take other and wholesale out, you've moved from plus 0.9% revenues in Spain to minus -- sorry, from -- to minus 0.1%, if you were to take that line out, so a lot of the improvements come from that line. Consumer sequentially worsened versus Q3 -- B2B sequentially worsened versus Q3. So if wholesale gets worse because of the loss of the MVNO contract, is it reasonable to think that Spanish revenues can be held flat in 2018? And as a follow-up to that question, whether you think the 40% margins are sustainable? So that was the first question. And the second question was on hybrid. You issued some hybrids in 2017. (inaudible) a reasonably expensive form of debt, can you just sort of give us a bit more color on why you still continue to view hybrids as an attractive form of financing and have any further plans to do so?

Thank you, Mandeep. I'll take the first question. So we are seeing rationality, and we expect in 2018 rationality in the market. We would expect commercially Fusión positive net adds in 2018 with ARPU growth. Mobile growth to continue. And we expect the takeup of fiber to continue increasing. And growth in TV, which is solid, is also expected. As you know, we do not guide revenues by regions. But to try to help you with the moving pieces, we can extrapolate from 2017 trends. In B2C, as you were pointing out in your question, service revenues have been steadily improving throughout 2017. We have seen increases, both in volumes and prices. So we exit the year well in positive revenue growth territory. In B2B, we have seen more irregularities through the quarter's trend. The trend should be better as growing IT revenues would mitigate the decline in traditional communications, and we are aiming to sell more digital services, IoT, cloud, security, so we will aim for stabilization in B2B in 2018. In wholesale and other area, already commented. So although we do not guide on revenues, we are reasonably optimistic. And I think you had a question about margins. We think that 40% margin levers or around 40% should continue to be sustainable. CapEx should be below 2017, so operating cash flow should be growing in Spain.

With regards to your question on hybrids, we don't consider hybrids like expensive debt. We could call them a cheap equity. But I think given that the last hybrid issuance we made in November was at a cost of 2.62% pretax, we could even say that hybrids today, at least in our last issuance, was actually even cheap debt, not even expensive. But going forward, we do intend to maintain access to this source of funding. And depending on market conditions, we plan to replace existing hybrids with instrument of similar seniority. In fact, our first call date will be September 2018 and we do plan to replace it.

We'll move on to our next question from the line of David Wright from Bank of America.

I think some of my question was answered there on B2B, which maybe just stood out as being a little bit weaker. And I guess just following on from a couple of questions on the content, could you consider -- or would you always want to consider a standalone perspective or could you consider partnering with other parties, possibly OTT parties, for example, on content? And then if we could just talk a little bit back about the U.K. business, which was recovering very well until, I think, the Q3 roaming impact looks to be back on track now. Is it purely the market condition and volatility that holds you back from an IPO consideration there or are there any other factors?

Thank you, David. I'll take the one on the potential partnership with over-the-top players. In fact, over-the-top players are seen by consumers complementary to our bundled TV, and therefore, we are also open to partner with them for different things. We think we have built a state-of-the-art third platform on top of our networks and our systems. And therefore, we have become a very efficient technological distributor of products and services, digital products and services, and that includes over-the-top content players. So as we speak, we are having several conversations with some of them in different fronts. We don't have anything to announce yet, but we see ourselves as an aggregator and distributor of content being produced for us by us or being just produced by others with a distribution agreement. So we will be keeping you posted as soon as we have any news to announce.

And in terms of the IPO of the U.K. asset, the IPO is still an option. I mean, we -- and in fact, we keep working on that option. We are preparing the asset, as we speak. The performance -- the operational performance of the company during 2017 has been just outstanding. Our team in the U.K. is doing a fantastic work. We do think we have the best mobile asset in the U.K. And in fact, judging upon customer loyalty, we do have the best mobile asset in the U.K. because we have the lowest churn. We are growing in all fronts. And therefore, as soon as we are clear out of the spectrum auction, we will explore. We'll take the possibility of the IPO. In fact, we have been working all along these quarters to be prepared as soon as there is a window of opportunity. And allow me to remind you that we do think we have the best mobile asset in the U.K. and that our team has been doing a fantastic job, operationally speaking, in the previous year.

We will take our next question from the line of Sam McHugh from Exane.

Just one question for me. You talked about the industrial experience you have in rolling out fiber, and you mentioned the U.K. IPO just now. Clearly, we've seen a lot of new deal assignments between different operators for wholesale fiber in the U.K. often with actually very low upfront capital commitment. I wonder if there's anything you have thought about doing? Have you been in talks with some of these guys regarding these kind of builds? Would just love to get your view on fiber rollouts in the U.K.

We are in a mobile-centric mode in the U.K. We have, as José María was saying, a fantastic operation in the U.K. We are obviously getting fiber for the backhaul of our mobile operations, which is very important for 4G and moving in a few years into 5G. We don't think that the U.K. is market driven by strong convergence. So we are not investing at this moment in fiber, but we will monitor market dynamics and we will be able to adjust our position accordingly.

Our last question comes from the line of Keval Khiroya from Deutsche Bank.

Just got 2 questions. So firstly, on Spain, I guess, you had a fairly clear picture of how the football rights inflation has evolved. But can you just talk about the level of inflation you've been seeing on other types of content in Spain and whether that's been accelerating or not? And then secondly, Chile and Peru have obviously been slightly more problematic from a market structure perspective. Have you seen any improvement in the competitive environment there?

Thank you, Keval. We are not seeing relevant inflation in other cost of other content. We have renewed some motor contents without significant inflation. And we actually have them de facto in exclusivity because our competitors have not requested those contents. We are investing in improving the delivery of some of the content that we have. So for instance, in basketball, we are now giving lots of technical features for viewers while they are watching the match to have added information on what they're watching on, on the match. So no inflation on the content. We are adding value to that content in order to provide better experience for our customers. We are investing in a moderate level in own production in series, which are being very successful. The last series that we launched has had 50% more viewers than the seventh season of Game of Thrones. Four series that we've been launched have been between the top 10 of the series in terms of volumes, and all of these within limited budgets. So we are not seeing inflation in other contents. We are adding value to those contents and getting better customer satisfaction. Regarding -- I think your question was on Chile and Peru or just Peru, please?

Chile and Peru.

Yes. On Chile and Peru, the situation continues to be very competitive, although with slight difference across the 2 markets. In Chile, we are seeing progressive and positive commercial progress focused on value. We are having a positive contract portability balance. We have a positive, healthy fiber adoption. So we are seeing revenue year-on-year, trends stabilizing and profitability still reflecting the commercial efforts. Our Chilean operation adjusted quickly in terms of the [finalization] of the customers. These took some impact on ARPUs, but stemmed the churn, and they are in a position to start recovering. And regarding the situation in Peru, again, we also have better operational trends in a while. Still, competition is very tough. But for instance, our loss of postpaid, that slowed down. In prepaid, the base with frequent top-ups grew for the second consecutive quarter. And in fixed, we continue to do well. So it continues to be challenging, but we are seeing some gradual revenue and OIBDA and commercial recovery. But still, both markets continue to be competitive.

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 further questions, we kindly ask you to contact our Investor Relationship department. Good morning, and thank you.

Telefónica's January to December 2017 Results Conference Call is over. You may now disconnect your line.