Telefonica SA (TEF) 2015 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to Telefonica's January to June 2015 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today's conference is being recorded.

I would now like to turn the call over to Mr. Pablo Eguiron, Head of Investor Relations. Please go ahead, sir.

Good afternoon and welcome to Telefonica's conference call to discuss January-June 2015 results. I am Pablo Eguiron, Head of Investor Relations. Before proceeding, let me mention that financial information contained in this document related to the first half 2015 has been prepared under International Financial Reporting Standards as adopted by the European Union. This financial information is unaudited.

This presentation may contain announcements that constitute forward-looking statements, which are not warranties of future performance and involve risks and uncertainties, and that certain results may differ materially from those in the forward-looking statements as a result of various factors. We invite you to read the complete disclaimer included in the first page of the presentation, which you will find on our website.

We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators. If you don't have a copy of the relevant press release and slides, please contact Telefonica's Investor Relations team in Madrid by dialing the following telephone number, 3-491-482-8700.

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

Thank you, Pablo. Good afternoon and welcome to Telefonica's Second Quarter 2015 Results Conference Call. Today with me is Jose Maria Alvarez-Pallete, Chief Operating Officer. So during the Q&A session, you will have the opportunity to address us with any questions you may have.

Telefonica has released today a robust set of results, accelerating in the second quarter the new cycle of profitable growth initiated at the start of the year. We're particularly pleased with the year-on-year growth posted for the second consecutive quarter in reported main metrics, ranging from 7% in OIBDA to 17% in net income, along with a remarkable EPS of EUR0.37 in the quarter and EUR0.75 up to June.

We continued to strengthen our quarterly organic trends. Topline accelerated by 110 basis points to 4.4% in Q2 year-on-year; OIBDA by 90 basis points to 3.3% and operating cash flow virtually flat with just 0.4% decline.

CapEx is being consistently devoted to high speed networks, namely Fibre-to-the-home and to the cabinet and LTE, to further increase our differentiation and to complete our spectrum map with the aim of fostering our competitive position.

Net financial debt increased in the quarter to EUR51 billion on seasonal and non-recurrent factors that we normalize along the year. We remain committed to our annual target of leverage ratio below 2.35 times adjusted for O2 UK Sale.

In this context, I would like to highlight the upgrades in outlook recently made by ratings agencies. Our free cash flow generation was sound and surpassed EUR1.4 billion in the first six months, pre spectrum. The execution of our portfolio strategy continued delivering synergies as the ones in Germany are already flowing and there is upside potential in the Brazilian synergies. All of this has allowed us to upgrade our year-end guidance.

Moving to slide 3, let me summarize our key financials, where we also outline several factors which impacted Q2 results. Firstly, we are adjusting our FX in Venezuela to the SIMADI exchange rate, which was fixed at VEF197 to the dollar in the last auction. This has had limited impact in OIBDA of minus EUR90 million and in net income of minus EUR 364 million, with Venezuela now contributing only 0.6% of revenues, 0.4% OIBDA and a net cash position reduced to around EUR100 million.

Other impacts on the P&L includes the positive effect of the divestment in TI and a large activation of tax credits. On the debt side, the quarterly increase is mainly explained by non-recurrent factors such as the demerger of Telco, the acquisitions of GVT and DTS, plus the dividend and the spectrum payments.

On slide 4, we explain the year-end guidance upgrade, given the earlier consolidation of GVT, plus the incorporation of DTS and our good performance in the first six months of the year. Up to June, we have exceeded our outlook, as revenues are up 9.4% versus the guidance of over 7% and margin is 0.9 percentage points lower. CapEx to sales ratio stands at 14.8% as CapEx has a more seasonal evolution. Our new guidance implies growth acceleration to above 9.5%, with the new perimeter adding 1.8 percentage points to revenues. OIBDA margin threshold is updated to around 1.2 percentage points, as perimeter changes increase short-term erosion by 0.3 percentage points, but will bring future synergies. The rest of the metrics guided remain without changes, CapEx to sales at around 17%. Leverage lower than 2.35 times post UK sale, dividend at EUR0.75 per share and a treasury share consolidation of 1.5% that has been executed already.

On the next slide, we can see how Q2 changes in the perimeter and organic performance have accelerated reported revenue and OIBDA year-on-year growth versus Q1. The consolidation of GVT and DTS from May 1 clearly had a positive impact in the quarter, contributing jointly 10 percentage points and 7 percentage points respectively to revenue and OIBDA year-on-year reported changes. The previously mentioned move to SIMADI in Venezuela has reversed Q1 positive FX movement and dragged in Q2 close to 3 percentage points in year-on-year variation. In addition to that, we are seeing a consistent improvement in organic trends in Q2.

On slide 6, I would like to highlight the acceleration in accesses organic growth this quarter, on higher quality customer base with fiber, pay TV and smart phones growing solidity and LTE up 5 times. Churn was also down across services, GVT and DTS have contributed significantly to our high value portfolio with 10 million customers. In the bottom of the slide, we highlight that Q2 revenues have seen sequential improvement across the board in organic terms, except in Germany. Mobile data and Telefonica Hispanoamerica have made a significant contribution to year-on-year growth in the period April to June and revenue mix is positively evolving towards fixed and mobile data and services over connectivity.

Slide seven shows some insights on how mobile data monetization is fostering growth. We are seeing encouraging data dynamics on LTE, with data usage 60% above 3G customers on average. As such, LTE traffic already represents 13% of total mobile data traffic, while LTE penetration is still at 8%. Furthermore, the Smartphone penetration expanded by 11-percentage points year-on-year and will continue benefitting from clear upside opportunities going forward, as shown by the limited Smartphone penetration in Hispanoamerica. On the other hand, we're implementing measures to monetize data beyond the allowance, as 30% of customers are exceeding data caps, and more than 40% of those buy extra data products. This leaves us plenty of room to upsell, thanks to the launch of new data services that are already adding 1 percentage point to organic revenue growth in Q2. As a result, non-SMS mobile data revenue picked up its growth to 27% organic year-on-year in the second quarter and now represent 82% of mobile data.

On slide 8 we can see that OIBDA year-on-year organic growth ramped up versus the first quarter by 0.9 percentage points to plus 3.3%, with Germany and Spain being the largest contributors to this improvement. Furthermore, we expect to see further benefits from the execution of synergies in Germany in the second half of this year. I would also like to highlight that Group margin in Q2 has remained stable overall with a limited erosion of 0.3 percentage points year-on-year organic.

Turning to slide 9, we take you through the progress made in Digital Services, which have delivered solid organic year-on-year revenue growth of 27% in Q2. As such, in this quarter, we are proud to present a Video business enhanced by the consolidation of GVT and DTS, boosting scale and bringing new exclusive content, brilliant know-how and the best technologies. Thus, in Spain, we have launched a new TV offer, Movistar+, built in record time with the most complete TV product on the market, national coverage, a groundbreaking platform and the most extensive catalog. In other Digital Services, we remain focused on wrapping digital solutions into our core offers. There were noteworthy advances in Q2 in various areas, such as security, cloud and machine-to-machine.

The main accomplishments delivered by Global Resources are shown on slide 10. On the network side, we continue to accelerate OIBDA growth and deployments. Premises passed with fibre to the home increased to 12.5 million in Spain, while in Brazil, premises passed with fibre to the cabinet totaled 16.1 million, including GVT. In LTE, coverage in Europe stands at 67% and 35% in LatAm, with LTE now available in all countries except El Salvador and Nicaragua. We continue advancing towards becoming an whole IP company with initiatives such as Voice over LTE in Germany or central switches closure in Spain. As of June, fixed Voice over IP accesses totaled 4.3 million.

In terms of operational excellence, the Global Device Center designed and integrated router that is delivering WiFi at full fibre speeds and we're introducing self organizing network automation. IT-helped business transformation and full stack projects are progressing in line with expectations. Lastly, our efforts in simplification continued with a year-on-year reduction of physical servers of more than 10% organic, more than 350 applications decommissioned, four data centers closed and virtualization increased by 10 percentage points.

Please turn now to slide 11 for a review of our business in Spain. Commercial activity in the quarter slowed down, influenced by typical factors during April and the first half of May. The first and most notable was a decline in gross additions due to the strike held by third-party installation technicians. Second was Fusion tariff repositioning and the removal of loyalty clauses, which saw a momentary pickup in fixed services churn. Importantly, net adds in June were back on track, once the aforementioned effects had ended and the upgrade of speeds up to 300 megabytes started at the beginning of the month. Fusion continued delivering very positive results with ARPU growing to EUR72 in the quarter. That is 4.4% year-on-year or 3.1% quarter-on-quarter, underpinned by the better customer mix and the tariff adjustment. Lastly, we further expanded our ultra-broadband networks, reaching 12.5 million premises passed in June, and we launched the new TV offer in July, integrating the assets of Digital+, significantly strengthening our positioning to promote content upselling going forward.

Moving on to slide number 12. Once again, revenue posted a sequential improvement in the quarter, with year-on-year decline at minus 1.1% improving by 2.7 percentage points versus previous quarter. Let me stress that revenues in May and June had already stabilized year-on-year, something we had not seen since the month of December of 2009. The OBIDA trend notably improved to minus 1.3% year-on-year in the quarter or minus 2.7% excluding a EUR90 million real estate gain, benefiting mainly from the revenue flow-through and the better OpEx performance, as commercial trading was slower and content costs were stable quarter-on-quarter. As a result, margins remained stable at 44.4% in Q2.

In Germany, turning to slide 13, we see that Q2 results reflect Telefonica Deutschland conscious strategy to derive value through the development of the customer base, plus strong traction in the business and product segments and better consumer churn quarter-on-quarter. This was translated into contract net adds of 201,000 and mobile base growth of 2% year-on-year organically to 42.6 million. Additionally, we continue to focus on LTE deployment, reaching a coverage of 70% at the end of June. LTE was the main growth driver with 35% of new O2 Blue All-in customers, taking tariffs above 1 gigabyte, and 34% of customers [opting] data automatic feature, extending monthly volumes with data [stacks]. In this context, mobile service revenue grew 0.2% year-on-year versus 1.5% in the first quarter, with two thirds of mobile service revenue sequential deceleration on lower trading in high value.

On slide number 14, we present the strong sequential improvement in OIBDA growth organic and ex non-recurring items to 12.5% year-on-year, which was driven by three main factors. First, yearly synergy execution, which represents more than 40% of our annual improvement. Second, commercial activities centered on retaining high value customers and third, significant change in trend in margins for handset sales. As a result, Q2 OIBDA margin improved by 2.4 percentage points year-on-year and reached 23.8% in organic terms.

Finally, I would like to highlight our steady progress on integration activities with recent milestones, including the agreement to transfer 7,700 rooftop sites to Deutsche Telekom, continued consolidation of shops, [over] 750 employees already signing the leaver program.

Turning to slide number 15 to review the performance of Telefonica Brazil. Let me first remind you that the acquisition of GVT was closed in May to fully complement our high quality strategy and to reinforce our growth profile in the Brazilian markets. On the mobile market, our leadership has once again been strengthened with 41.7% of contract market share. This coupled with ARPU growth, driven by increased data consumption allows Vivo to capture 97% of the market mobile service revenue growth in the last 12 months. In addition, in the fixed business, the first positive signs of the transformation into a fibre and media company are already visible. We reached 3.6 million fibre connections out of a footprint of more than 60 million premises passed, which represented 57% of the ultra-broadband market. In Pay TV, we captured 93% of the new customers of the market in the first half of 2015.

To review the financial performance in Brazil, turn to slide 16. Organic year-on-year revenue growth ramped up to 5.2%, thanks to the sustained solid growth of the mobile business, up 6.9%, the sound progress of the fixed business excluding GVT, plus the contribution of GVT. This topline performance is flowing into positive organic year-on-year OIBDA growth, despite the impact of macro and the strong commercial activity. Finally two months after the combination of both companies and following the hard work made by our Brazilian team, we've identified significant upside potential on integration synergies. As such, an intense review of all the assumptions confirms the base case scenario while pointing out to an upside opportunity. Operational synergies are raised [to under] BRL9.6 billion as a base case to a best case scenario of up to BRL16.2 billion with upward revisions on all items.

On slide 17, we review our performance in Hispanoamerica where growth rates in both revenue and OIBDA remained solid in Q2. Accesses growth and higher usage resulted in topline organic growth of more than 10% year-on-year or 7.7% when excluding Venezuela, stable versus the previous quarter. The main driver for this performance is the Smartphone explosion which is driving data traffic up 60% year-on-year. And it seems that there is still plenty of room to grow ahead of us, because Smartphone users are still one out of every three in the region. In addition, OIBDA grew by more than 9% year-on-year in organic terms or almost 11% when Venezuela is excluded, boosting profitability expansion for the sixth consecutive quarter.

In Mexico, as shown on slide 18, we continue to post strong commercial activity that enables gradual market share gains that are translating into revenue growth acceleration. Thus, revenue growth accelerated to 7.8% year-on-year, despite a negative impact of regulation that was dragging 2.7 percentage points. The combination of growing economies of scale, the benefits of the new regulatory framework and the consistent implementation of efficiency improving measures continued to deliver strong OIBDA growth, up by almost 44% year-on-year and profitability expansion of almost 6 percentage points year-on-year.

In the rest of the region, turning to slide 19, we continued to post solid growth, gradually gaining revenue market share based on best-in-class assets. Let me also highlight the notable OIBDA margin expansion with very positive trends in Colombia, Argentina and Chile. In Peru, we maintain a strong commercial traction in value segments, but regulation and intense competition explain the deceleration of financial growth rates in the quarter.

Please turn to slide 20 for a review of UK, reported as discontinued operation. The robust financial performance was underpinned by sustained commercial momentum over the last two and a half years, leading to maintain market outperformance. Continuous mobile base growth was driven by the contract base increase and record high customer loyalty. This is explained by the outstanding LTE adoption with 864,000 net adds in the quarter and LTE penetration up 16 percentage points year-on-year to 26%. Topline growth accelerated to 6.8% year-on-year in Q2, excluding O2 Refresh, driven by service revenue with ARPU inflection through demand for higher value tariffs. OIBDA margin expanded 2.9 percentage points year on year and reached 26.5% in the quarter on tight cost control and higher handset margins.

Let me now move to the financial slides on slide 21. As anticipated, our leverage ratio in the second quarter was negatively impacted by certain cash consumption matters that will be offset as the year progresses. In particular, net debt has grown due to the seasonality of the dividend payment, combined with non-recurring factors such as Telco demerger, GVT and Digital+ acquisitions, change to SIMADI in Venezuela, and the German spectrum payment. The net OIBDA ratio adjusted for O2 UK sales stands at 2.38 times and would stand at 2.35 times in the absence of the M&A deals closed in Q2. We expect to improve our leverage ratio towards our target of less than 2.35 times via positive free cash flow generation in the second half of 2015, growing of OIBDA on an organic basis and also benefiting from the acquisition of E-Plus and GVT and closing O2 UK divestment in 2016.

Moving to slide 22, first thing I would like to highlight is that our effective interest cost has continued to benefit from the EURIBOR rate reduction. We have intentionally decreased fixed rate debt in euros and lowered refinancing cost, leading to 53 basis point savings, but higher debt in Latin American currencies has partially offset those benefits. In all, there has been 15 basis points reduction in the financial cost to 5.23%. We showed a robust liquidity position, covering maturities until the end of 2016. In line with the strong financing activity completed year-to-date, in the second half of the year, we will continue accessing capital markets and reinforcing our liquidity position. Finally, let me mention that the three rating agencies covering Telefonica have stabilized or placed a positive outlook on our rating year-to-date.

To conclude, let me highlight that we have presented today a solid set of operational and financial results, delivering sustainable profitable growth. We are accelerating organic growth in sales and OIBDA and enjoying a strong commercial momentum on LTE, fiber and Pay TV. We are capturing early integration benefits in Germany and going forward, we will be unlocking and increasing amount of synergies on recently closed acquisitions.

We are continuously focused on best customer experience through technological leadership. We are investing to enlarge this leadership. Our balance sheet remains strong, considering the sale of O2 UK, in spite of temporary increase in leverage this quarter. And finally, we are upgrading our guidance for the year. Thank you very much for your attention. We are now ready to take your questions.

(Operator Instructions) Nick Brown, Goldman Sachs.

Couple of questions please. Firstly, have you had conversations with the EC regarding the O2 UK [failure]. If the Competition Commission decides not to approve anymore (inaudible) consolidation deals, what's plan B, please? We have an issue refinancing debt next year and presumably that might impact the dividend. And secondly, are you still expecting another domestic football rights auction later this year? Will it be two or three more seasons and is it reasonable then you might have to spend another EUR1 billion to EUR2 billion on content costs? Thank you.

Nick, if you don't mind to repeat the second part of the question?

Yes, sure. Just on the domestic football rights auction, will it be for two or three more seasons? Are you expecting another auction later this year still or will that get pushed to next year?

Hi, Nick. This is Angel. On the O2 UK sale, we're progressing on the work from signing to closing. We're highly confident that the deal will be successful. Our estimate continues to be that it will be reviewed at European level, European Union Phase II is the most likely. There are several [presence] for this type of transaction. There has been already conversation on draft documents of the formed CO. We expect a formal filing to be made in September. There are several [presence] of this type of transaction in Germany, Austria, Ireland and other markets. Hutchison is highly experienced on this type of dealings and we remain highly confident that the deal will be approved in this instance and with Phase II in Brazil.

Taking your question on the football rights in Spain for the domestic rights, the 2015-2016 season has been awarded. As you know, we have been the winners of that and therefore there is not going to be another auction during 2015. The next round will probably be during 2016 for the three next seasons and it would be an auction process. So there is no other auction expected for this year and Telefonica has the rights -- the domestic rights for the football season 2015-2016.

Mathieu Robilliard, Barclays.

First, with regards to your Digital+ acquisition, so you've launched a new TV package, but I was wondering how we should think about your strategy in terms of integrating this content into your main offering, would that be a way to continue to push ARPU up next year or the end of this year, as you give more -- for more? So, that's the first question. Second question has to do with the tax assets you highlight in your presentation that you activated some tax assets and looking at your 20-F, there still is more than EUR9 billion of tax losses that I understand are not recognized at least in Spain. So, what are you saying -- are you saying that you are activating those and potentially there could be more? Some color on that would be very helpful. Thank you.

Taking the first one on DTS and the integration of the offering, let me stress the fact that we have been able to do in less than 60 days a fully integrated offer, across spectrum with value-added services like Video on Demand and multiplatform screening, integrating not just the content, but also the assets of the two companies. As a result of that, we have been registering in the Competition Commission here in Spain, the wholesale offer 30 days in advance of the retail offer and we're already commercializing the retail offer in Spain. Excluding the football rights, which are still pending to be approved at the retail price. So the message here is that, yes, we have been integrating both offerings. Just we have now a [extra tier] offerings with different segmentation and significant ARPU -- significant content improvement across platforms. And yes, we think we have a significant upside from an ARPU standpoint and we are going to be [incentivizing] that ARPU to move -- our customers to move upwards on that value chain.

Finally, let me just stress the fact that we are pending the -- we have just pending the approval of the retail offering on the football rights, all the others have already been commercialized and the commercial results that we are seeing -- the commercial trends that we are seeing during the month of July as a result of those -- of that integrated offer has significantly improved. So, integrated the offering, integrated the platforms and already commercializing the product.

Regarding tax, the full EUR9 billion have been activated. So what we've recognized is slightly above EUR1.1 billion tax credit accounted in Spain. This comes from losses incurred in previous years that have been clarified after tax audit, court resolutions and after finishing tax authorities reviews. So, the full [EUR9 billion-something] that you were talking about have been activated.

Is there additional tax assets that are not activated and that could still be activated beyond what you just did?

Non-material ones.

Luigi Minerva, HSBC.

I have two questions on the European big picture. The first is on the digital single market framework currently under discussion in Brazil, if you can share your views on the current status and the progress. And secondly, on cross-border synergies, whether the network is being upgraded to all IP, whether there is increasing interest by both companies and investors on the topic, if you can share your views on these please. Thank you.

On the first one, on the telecom single market initiative being currently run at the level of the European Commission. We -- there are several fronts, there is a front on roaming that as you know the end of roaming has been delayed or postponed for a few more quarters. And on that, we think we have better news this quarter than before. We think the Commission has understood that in this a progressive fading off of those roaming charges. And I think that now, we are facing a different scenario than a quarter ago. On other issues like net neutrality and all that issues in terms of net neutrality, we think that the definition of net neutrality has been significantly advanced. We think that we've a framework that is workable, both on a technical and on commercial terms. We think that that framework will allow us to go ahead with network optimization and network management, without interfering and without provoking a loss of quality on the customer side. And I think that -- we think that with this that we have advanced. We're in favor of a consolidated regulation at the European level. We think it makes total sense. And I think that the framework that is being run is logical and make sense.

Of course, we are arguing on some of those elements, namely on interoperability of operating systems, which we think needs to be addressed and also a new definition for rollover markets, because we think that a market like the Smartphone market needs to be defined and it's not currently contemplated in the regulation. So basically we agree with initiative. We think it makes sense to have one single set of rules all across the European footprint. We think that those rules -- the discussions are advancing into the right direction, but we still think that there are some issues that needs to be addressed and have not been addressed.

In terms of the cross-border synergies, we're the believers and we have been practicing that of in-market consolidation. We think it makes total sense. We think that there are just too many operators per country, both MNOs and MVNOs. We think that we're facing competition from over-the-top platforms, like in Voice over IP on an unregulated manner, [reduces] elements of the network. And therefore, we think that the regulation needs to contemplate those kind of situations in order to avoid [just judging] concentration on the traditional manner. So we are the believers on in-market consolidation. We think that cross-border consolidation depends on what's the scale that you have.

Let me give you an example. We're on a height, globally speaking, to become distributors of technology. And therefore we need to be relevant when the new iPhone is being launched or whether new elements of the network of Ericsson or Huawei or Cisco are being launched. And therefore it depends on your size and your scale. If you are among the top 10 players, you have that scale and therefore you can take advantage of the leadership to be -- to have a kind of first-mover advantage in technology, which is essential. And therefore, I think that cross-border synergies needs to be judged in dependence of the size that you have. Telefonica feels that we have the right size. We feel that we have the right position in order to take advantage of that leadership position to distribute technology and to be efficient on that side. Therefore, we don't feel that need. So to make a very long answer short, deep believers in market consolidation, cross-border synergies is still to be proven, depending on your size.

Giovanni Montalti, UBS.

Two quick follow-up on Digital+. Some of your competitors have been pretty loud in complaining, especially about the football rights. Do you see room for negotiation or is there a risk of some litigation, let's say, on the rights for this season? And about the macro consolidation, if you can share with us any update about the way you look at Brazil? What could be the timing. I know things are very complicated there, but if there is anything you can share with us. Thank you.

Taking your first question on the situation of the football rights in Spain, you know that in order to get the Digital+ transaction approved, we were imposed significant remedies in terms of eliminating some retention process, in terms of giving access at no margin to premium content, in terms of having available for our competitors at least 50% of the premium content that we will be buying. So, we have a list of things that have been imposed on us in order to get the transaction approved in a very asymmetrical way, I need to say, because we are still suffering the bulk of the content acquisition that we are buying. I think that on that side, the situation is already asymmetrical and we don't share the view of our competitors in Spain on that side. Having said that, both -- the two largest competitors in Spain, Orange and Vodafone have decided that they are going to have access to our wholesale offer of -- namely of the football rights. And therefore, they've access to that content and they're sharing less than 50% of the total cost of that asset. We think that this structure is much more rationale, because it makes the whole amount of the football rights more sustainable on a long-term view for the football clubs, but also this is incentivizing all of us to expand Pay TV penetration in Spain. So we do not share the view. We have given access to them to our premium content. We have registered in a record period of time our wholesale offer in the Competition Commission here in Spain and they're ready accessing those content. Therefore, we do not share their view.

If I may follow-up in terms of asymmetry, again back to Spain, the current draft implies a regulation (inaudible) has, let's say, an operator with significant market power, nothing apparently on cable, how do you see this? Probably nothing will happen for the next, let's say, regulatory period? How do you see this topic going forward, Europe wise and in Spain, do you see obligation on cable operators coming? Are you pushing for this? Thank you.

Well, I, again as I was saying in the previous question about the definition of relevant markets, I think that because of what's going on, because of the convergence that is happening in some of the countries, I think that the definition of relevant market needs to be addressed and that applied to the Smartphone market and in my opinion that also apply to the cable market.

Having said that, we think that in Spain, the situation has already been defined. The rules of the game are now clear in Spain after the Digital+ approval process and the revenues applied on that side. I think that right now what we've here in this market in Spain, is infrastructure-based competition -- significant infrastructure-based competition that is incentivizing all of us to invest heavily and to expand heavily on next-generation network. And that explains why Spain in the middle of the crisis, of the macroeconomic crisis between 2011 and 2015 has passed from being the sixth country in Europe in terms of absolute number of fibre connected to the home to be the leader. And it's not just Telefonica, all other players have also done their job, like us, lot others. So my view is that next-generation network requires new regulation at the European level. And in the case of Spain, the rules of the game have already been defined and we're already playing with those rules.

Thank you.

Regarding Brazilian consolidation, three messages. First one is that we have the best assets and the best management in (technical difficulty) the synergies of Vivo-GVT combination. Second that we continue to believe that the potential synergies of furthering market consolidation could be very substantial. And the third message is that we are at the sweet spot to benefit from various potential consolidation scenarios, probably need to be triggered by other parties.

Georgios Ierodiaconou, Citi.

I have got two questions please. The first one is around OpEx in Spain. I was wondering if you could give us an idea of the delta in content expenses with the acquisition of La Liga rights on one hand and on the other hand, the synergies you have from the DTS acquisition; going forward, if we should expect a significant growth in content cost or whether the two effects could net off? And secondly, again on OpEx, if you could give us an idea of the benefits you had on your cost base in the second quarter, because of the strike? And my second question is on the debt, if you could just give us an update of any special one-off items being spectrum payments or some other factors that -- or working capital moves that may impact the deleveraging in the second half? Thank you.

Thanks for your question. Taking the one on OpEx certainly, I would say, more globally margins in Spain. In the first half of the year, as you know, we have been significantly focused on revenue recovery. And as we explained during our last conference call, the sooner we get back to growth in revenues, the sooner OIBDA will stabilize as well. Revenue recovery therefore has been crucial in OIBDA performance, namely in this quarter, since OpEx has been flattish during the quarter. And therefore all the revenue recovery during this quarter is [strained] -- all the OIBDA performance during this quarter is [strained] by revenue recovery and tight cost control having the remainder of the OpEx flattish. It is true that we have had lower commercial activity due to the strike and these has helped OIBDA performance. And let me also highlight that the strike has had also some effect on -- negative effect on OpEx, since we have been compensating some customers for service interruptions. We have applied practically a little more of subsidies to offset the impact of the strike on our customers, but also during the month of the price increase, in terms of the elimination of the retention clauses.

So, all in all, and finally regarding the contents, let me also highlight that now that we have Digital+ on board, and taking into consideration the fact that there is almost no inflation on the football rights in Spain, because we have been paying just slightly above -- 2% above the price of the previous year and Digital+ has the rights of those -- of the previous year. On a consolidated terms, the impact is going to be negligible and we will have more rights at last year, within the half the second division rights. So all in all, we keep focused, as we told you, on revenue recovery. It is true that the strike has been helping us marginally on the positive side, but it is also true that we have had some one-offs in terms of some compensations -- revenue compensations, of revenue reimbursements to customers, because of service interruptions, we have been having tactically more subsidies.

If I could follow up, what could be the synergy benefit on the content side from putting the two assets together? I guess there will be some scale benefits when you talk about international content from that. Will we see the benefits already from Q3 or would it be something for next year?

There will be benefits. Whenever we will have the right to distribute the -- to have those rights internationally. So therefore in terms of your scale outside Spain, we don't have that benefit yet. But in terms of the content in Spain, remember that we have been basically -- before the acquisition of the Digital+, Movistar TV was already leader in Spain. And therefore now the cost of the content -- of the football rights is divided into much more customers. Therefore in terms of margin, positive effect of the growth factor that we will have is more positive than before. Add to that, the fact that through the wholesale offer, we are sharing part of the fixed part with other players, which are also going to be incentivized, because they have minimum amounts of customers before reaching the marginal part of the agreement. We are all going to be incentivized to massively distribute the content throughout Spain. So I think that one of the major synergies that you will be seeing on the content side is the dilution effect on the fixed part of the content among a much larger customer base. And there are other synergies, like for example, the technological one on the platforms, not just on the Video on Demand, but also on the closed platform multiscreen offering that we have developed. So we expect that for the next quarter, we will have more numbers to share with you on that front as we are doing in terms of the synergies in Brazil or in Germany.

Regarding the question on why net debt will go down in the second half of the year, I am going to be using slide number 21 as a base or a structure of my answer. First, we had EUR1.4 billion free cash flow pre spectrum in the first half, which is going to be much stronger in the second half of this year. Spectrum that was a significant cash outlay in the first half. We are not expecting any significant additional spectrum in the second half of 2015.

Regarding shareholder remuneration, we will have the tranche of dividend of EUR0.35 in November. Remember that we have structured that as a voluntary scrip dividend. If the take-up was similar to the one that we had last year, it would not imply a significant cash outlay.

With respect to net financial investments, we are not expecting to close any further acquisition in the second half of the year. So all these go in the direction of a much better evolution in the second half.

Why am I saying that free cash flow pre spectrum in the second half will be much stronger than in the first half? Well, we have just upgraded the guidance -- on our guidance and this if you do the math, you will see that it results in operating cash flow growth. The consumption of working capital that we had in the first half will move to positive cash generation in the second half, order of magnitude close to EUR1 billion-ish.

Financial payments, you should expect us to be in the bottom, right at the bottom of the 5% to 6% range. With respect to cash tax and given the positive developments of this year, we are changing our guidance from 23% to 21%. So all in all, a reasonable estimate of net debt for year-end would be something below EUR49 billion.

James McKenzie, Fidentiis.

Football rights, I'm afraid, again. Could you give us an idea of how the wholesale negotiations are going with the other operators? You've mentioned sharing the costs, but then I think in your presentation, you talk about exclusive football rights for Spain. And then second question once again on Spain is, you've put through some pretty hefty price rises on us, poor residential clients, and yet the growth in revenues or the decline in rev or the growth in revenues that you're saying in June seems relatively sparse. I wonder is there something going on with the corporate client base that we should be looking at or aware of that's detracting from this and will this change in the second half of the year?

I mean on the football right, I think it is public information that two of our largest competitors have already decided to have access to our premium wholesale offer on the football rights. And therefore we are not going to have the domestic league, the National Championship in exclusivity, not on the two packages, I would say. One package is all the matches, excepting the best match of the weekend. And the other package is the weekend match. Both of them have been acquired by our two largest competitors. But that means that as we have six premium packages and they need to choose 50% of those, therefore three packages out of six, our differentiation one account from the older content, namely the Formula 1, the Motorcycling, the movies, the new launches -- the new movies premiers and series, depending on who is accessing what. So we are going to be able to differentiate [on our offer] depending on who is accessing what.

And in terms of the price -- operating spend, because you know it has not been just a price increase, it's been an offer in upgrade, you know that first, we, all along the year, because this is not just in May, all along the year in Spain, we have been taking several actions to increase our offering and to change our offer. Namely, in the -- it is not just Fusion, it is on the mobile side, it is in the [1P]. Generally we have been doing a significant effort to upgrade to Vodafone. Namely on Fusion, we communicated first the five-year increase, we eliminated during that process their retention clauses. And therefore, during the month of April, we were exposed to a higher churn because of that effect. And then, I think it was the May 10, we upgraded our offer with much more megabytes, a much richer content and more capacity on the mobile side. And coincidentally, we had the strike in the middle of all of that. What we can share with you is that, during June already, we had the significant return to normal patterns of churn in all segments of customers. And therefore before launching the new TV offer during the month of June, we were back to historically low levels of churn, before launching the new offer that have more visibility and that have more richer in terms of content.

So, at the end of the second quarter, the price increase of the (inaudible) offer that we have launched in Spain has been totally assimilated by the market. And by that, I mean that the customer -- the residential customer, and mainly the Fusion customer looks like accepting the value proposition, more value for a little bit more of price, more content, relatively more price. And therefore, the highest execution risk that we have this year in Telefonica Espana was precisely upgrading the offer in an orderly manner and seeing the reaction of our customer base has been, I would say it is very positive, because we are back to historically low levels of churn at the end of June. And now, during the month of July, that we have been able to launch the new content offer with the exception of (inaudible) this still pending to approval, we are seeing, I would say, very high levels of commercial activity, which allow us to think that the price movement that we have done, that that value movement at the beginning of the year that we have done has not just -- not only been very well accepted by the market, but has been boosting the appetite of our customer, for our products. As a result of all of that, I think that we need to start thinking about a sector or namely a company and this is not necessarily deflationary in the long run, but probably the opposite, if you do the right proposition.

In terms of other segments, in terms of B2B, B2B was already doing very well in Spain. It has been one of the segments that has been reacting faster to macroeconomic turnaround. In Spain, was just issued today, has been growing 1% in GDP in the last quarter and corporate we're already feeling that for a long while. So in the B2B segments, we are doing okay. It was the SMEs in which -- the segment in which we were struggling. And on that, during this quarter, we've launched the Fusion [Impresa], the Fusion corporates, namely for SMEs, that is having also a very significant positive traction. So all in all, will you approach that by the residential market or by the others, the trends in Spain are going the upside direction. And then on -- I think that was all.

Luis Prota, Morgan Stanley.

Sorry, to again follow up on the football rights topic. I'm not sure if I understood well earlier, regarding the wholesale from Vodafone and Orange. I don't know Jose Maria, whether you said that that was going to account for 50% or below 50% of the total cost. So, I'd like to clarify roughly what percentage of the EUR600 million that could be compensated through the wholesale agreements. And secondly, how convinced you are that this can be monetized and not impact EBITDA negatively in 2015 or 2016? So, you have already made comments on this, but what I don't understand well is whether existing Digital+ clients who will be migrating to Telefonica's offer will be providing some ARPU dilution to Telefonica and then you are expecting to compensate that through either take-up of fibre or how will all the different moving pieces work? Thank you.

We do not disclose what is the amount of the EUR600 million that has been covered by the wholesale offer. It depends on two factors. First what are the packages that our competitors are buying. We already know that. It also depends that those packages have a minimum number of customers attached to those, which means that they have a minimum amount of connection warranty by this fixed amount, and if they overpass that amount, they start paying variable during the season. So, it's going to be depending on what is the price offering that they would do, in terms of how fast they are going to be covering the allowances of customers that they have attached to the price that they are paying for the channel. And therefore we'll see along the year, but the initial movement in the fixed component is significant. This is highly commercially sensitive information and that's why we don't disclose that. But it depends on those two things. We think that both of them have are going to buy the two football packages and therefore now it is going to be depending on how fast they are deploying or distributing those packages around their customer base, how fast they consume the allowance of customers that is attached to the fixed component of that offering.

And answering your question of can it be monetized, it's a very good question, and effectively, it was depending on how many customers we're overlapping, having both services in the former Digital+ customer base, on the Telefonica customer base. We didn't have access to that information till the transaction was finally approved. Now we know. And as you know, this is essential for the signing the offering. And all in all, we think that the situation is controlled and therefore we think that -- and that's why we were pretty rational on what was the amount of money that we were offering for the domestic rights. And let me remind you that the inflation on the domestic football rights has only been of 2%, and we have included the second division. So, all in all, I think that equation makes sense. I think that we are going to be able to show all along the next quarter that it makes sense. It is a very attractive valuable position for our customers and I think it is going to be a profitable business for Telefonica.

If I can just follow up, how is this attitude -- you said you are going to show this in the future quarters, this is for the Season 2015-2016. Is that starting in September or in August? So in the third quarter, we should already have a few months of this or how is this attitude?

Well, we are going to be assigning the cost of the football starting with the season, and therefore, you will see the effect in terms of cost immediately. But again, let me remind you and let me stress the fact that you should just reflect on the consolidated terms, because remember that Digital+ already had those rights last year. And therefore in the absolute -- in the consolidated numbers of Telefonica on a pro forma basis, there is very, very light dilution, just 2% that we have been paying more. And now it's a question of how fast we are going to be able to distribute to increase capillarity of those rights among our customer base. And on that regard, even before having the offer approved, if you judge upon the numbers of calls that we are having to our call centers asking for the football channels, we're pretty positive on the future of revenues on that side.

So, when I was saying on the next quarters, on the third quarter, you will really have the impact of the content and you will see the consolidated effect on Telefonica's numbers. And you would also have the commercial results of the offering. And that's why I think that during the third quarter results, you will have a much better picture of how the equation makes sense.

Paul Marsch, Berenberg.

So, I have two questions about pricing in Spain. Firstly, the trade-off between pricing increases on margin and how we should think about the operating leverage from price increases as we go through the rest of the year. I mean, is the aim to see price increases flowing through to margin and benefiting margin or should we expect the benefits of the price increase to be spent on content cost from handset subsidies and other commercial expenses? So that's my first question. And then the second question is just a more general question about the pricing environment, which I think you alluded to earlier on. I mean it seems like the reaction of the customer base was pretty limited to the price increases that have happened so far. So, do you see this as the beginning of a period of regular annual price increases or is this still likely to be something of a one-off that maybe still remains exposed to price reactions from competitors, for example?

In terms of your question about the trade-off between price increases and margin and namely on the operational effect, again, the same message that we shared during the first quarter. The only way to really stabilize or to improve OIBDA was to eliminate the erosion of the revenue decline. And that's why we have been so focused on revenue in Spain in the last quarters, and we'll keep going into that direction. We have been able to do that, without significantly affecting our OIBDA margin, and we have best-in-class OIBDA margin, if you benchmark ourselves against our peers in Europe, and we keep doing efficiency efforts, namely on stores and other fronts. So, we feel that now the priority is revenue increase, at the same time, and if you just judge upon the example of the football rights, we intend to be rational. And therefore, we have been having just a limited inflation on the football rights of 2%, because we felt that was the right thing to do between the trade-off of having their contents and not diluting our margins.

So overall, what I can tell you is that we feel that we can combine both things that in the next quarters, we should have the ambition of re-taking or preserving historical low levels of churn, to have a higher take of premium content from customers and therefore the customer is moving up on the value chain. And that should help in the second part of the year. On the same time we are going to have an impact from the regulatory obligation to commercialize premier at wholesale level at mostly zero margin, and that will have an impact in margin -- a negative impact on margins. But I think that overall, we have significant expectation about upselling.

And now I presume that will lead to your second part of your question, in terms of the future. The main reason of what has happened in Spain in the last two quarters, namely since January this year, is that when you do the right proposition between price upgrades and value, the customer responds. The customer wants more data, the customer wants more value-added services, the customer wants to enjoy richer content, more speed, more capacity and that can be monetized. So I think that our goal is to keep monetizing data. Our goal is to be able to do that, at the same time combining historically low levels of churn, and we think that we have had now one quarter that even considering extraordinary negative effects like the strike, we have been able to demonstrate that that can be executed without sacrificing much margin and without sacrificing churn.

So to make a very long answer short, we are going to -- we're trying to combine both things, price upgrades or product upgrades with historically low levels of churn, based on exceptional quality. And therefore, as I was saying before, we think this industry should target to stop being a deflationary industry.

Fabian Lares, JB Capital Markets.

I am sorry, to be so redundant, to keep coming back to the football rights, but this is not so much about domestic, but the European. I've seen some items on news that say that you're negotiating with MediaPro to access the Champions League and the Europa League broadcasts. Is that finalized or still undergoing? Do you have the intention to keep increasing your football content? And if this were the case, would you be forced to open that, or since that channel is not an exclusivity, it can be basically owned by anyone who actually puts the money up? I guess that's my first question. Second, with regards to the situation with the UK disposal, and I know you highlight that you're very confident on the conclusion, but are you concerned that the timing of the deal could be somehow delayed as we could have seen in the deals such as the Jazztel-Orange transaction which took almost an entire year to get the Phase II approval and how would that change, if anything, your objectives and/or your remuneration policies, if at all? Thank you.

On the first part, unfortunately I am not going to be able to be very transparent because we are in the middle of our process and therefore I cannot be very specific. Are we interested in the content, the answer is yes. What will be the implications? Well, MediaPro has the exclusive rights. So they would -- they can sure that with other players, but sorry, I cannot be more specific on that because we are precisely in the middle of those conversations.

On the second question, you're right, we have seen previous processes, not only Orange-Jazztel, but also in our e-Plus transaction, or when we [sold it to Ireland] that this processes tend to take around 12 months. But remind that we signed the O2 UK transaction by the end of the first quarter. So even allowing it for a little bit of slippage, we are still thinking of closing in the second quarter of 2016.

Jonathan Dann, Royal Bank of Canada.

I've got a question on the opt-in and opt-outs with the price rises in the Fusion 300. Could you just -- I mean, it seems as though you mentioned that churn wasn't the problem. But can you just confirm that post the initial one month opt-in, opt-out periods, there hasn't been a sort of backlash where people get the second or third bill and starts worrying about the price increases and could you also just quantify roughly how many people have opted it, have chosen to upgrade to the 300 meg offer?

In terms of your question, I mean, right now as we speak, there is no retention clauses on our customer base. I mean, and as a result, the churn figures that we are issuing already reflects that this is the customer decision if they want to stay or leave, as depending on the series that there is no more retention clauses. This is a result of not just of the price upgrade, but also of the remedies of the Digital+ acquisition. So now, our customer base is free to go wherever they want. And that's precisely why we think that the churn levels that we have at the end of June are so relevant, because it proves that the customer base now that it is totally free to decide, is deciding to stay with us after the offer to upgrade, after the price upgrade. And that proves that the valuable position is fair and that proves that the ARPU uplift that we have been having in Fusion that only reflects that EUR71.8 that we are sharing in terms of ARPU of Fusion, only reflects a month and a half roughly of the price upgrade, because it was done on the second billing cycle of May, which was on the May 20. Therefore, you should expect that during the third quarter that ARPU uplift of Fusion should continue even if it was just nothing has been changed in terms of the customer base.

So to summarize, there is no more retention clauses, no more opt-in or opt-out, they have been eliminated and in spite of that, we are back to historically low levels of churn in Telefonica. And as a result, what I can share with you is there have no big shock and therefore we have not been experiencing any kind of backlash of customers being surprised after receiving their bill, because now they are totally free to decide.

And in terms of the number of customers that have been moving to a 300 megabyte, we do not disclose on that many details, because again, it's very highly sensitive commercial information, but let me just summarize you that we see more and more customers on the Fusion base moving now towards the value chain, in terms of the speed of access, the capacity on the mobile side and on the content side as well. For more detailed information, please contact Pablo on Investor Relationship team.

And, Jose, can I ask a follow-up. Those comments would hold true for July as well as June?

Could you repeat the question?

We are now at the end of July and I would assume you get weekly updates on churn. Those comments for June are sort of equally valid for July?

(inaudible) receiving daily updates on churn, because it is very sensitive and they are totally updated. So the same messages, that apply for June will apply for July.

Jerry Dellis, Jefferies.

The first question relates to Spain and really the cost allocation. See, within the first quarter the DTS business was included within other and now that [kind of Plus] content is being bundled within your Fusion offers from July, then how would you allocate the associated content costs between the Spanish perimeter and the Other category? And then secondly, a question related to Brazil. Obviously revenues is one of the areas in which you indicate that sort of in the best case, synergies could be ahead of your previously published expectations. I think as Telefonica Brazil reported yesterday revenue growth was fairly stable between Q1 and Q2. You are calling out an acceleration in revenue growth in the second half and I wonder what sort of view of the macro environment that's predicated upon, please?

Well, on the cost allocation part of Digital+ from an accounting standpoint; we are working on that because we need to allocate PPA for the depreciation purpose and also we need to take into consideration then some tax issues. That's from an operational standpoint what we are doing. And therefore, sooner or later, that is going to be reflected on the corporate side and on the accounting side is that the retail activity of Digital+, the retail responsibility, so the full amount of customers of Digital+ that responsibility is handled by Telefonica Espana, which means that they are responsible for coordinating their databases for deciding on the offer, for deciding on the segments of the offer, the prices of the offering, the timings of the offering and the marketing strategy of the offering, is going be Telefonica Espana. Digital+ is going to be taking care of the production, the content acquisition and the content strategy.

So I hope that we will be able to be more clear once we have that allocation being done from an accounting standpoint, but all in all, at the level of the Group, on consolidated figures, again let me stress that full of the impact of the football rights is already embedded in the numbers that we are consolidating in our pro forma basis, and therefore we are already incorporating that on the 2014 pro forma numbers, and we're also incorporating that on the guidance review that we have been sharing with you at the level of the Group in terms of the new OIBDA margin erosion. So we do not expect major surprises coming from that side.

And in terms of Brazil, I would give a little bit of color on the operational revenue trends and then I will pass it to Angel for the macro situation.

From a revenue standpoint, let's analyze the different components of the Brazilian unit. On the mobile side, on the former Vivo mobile unit, we're clearly outperforming the industry in terms of mobile revenue growth. As you have seen in the presentation, we have been able to grab 97% of the mobile service revenue growth during the quarter. On the former Vivo fixed line, the former TELESP, for the first time since 2008 we have been growing customer -- residential customers fixed line revenues in Sao Paulo. And that proves that the turnaround effort that we have been doing in the last quarter in terms of improving the quality, shortening the local loops, investing in fibre and upgrading the offer, investing in content and investing on the TV side is paying off. And then you have the trends coming from the former GVT, which is also growing double-digit. And finally, the combined entity, if you add up the former Vivo fixed and GVT, on the TV side, we have been able to grab 93% of the net adds of the market during the quarter.

So, all in all, from an operational standpoint, the kind of traction that we see and the kind of possibility that we see on the combined sales force and that's ex residential. Now I imagine, our corporate offering outside Sao Paulo where we used not to have a wireline infrastructure and therefore we have become immediately more powerful and more relevant for the corporate segment and for the SMEs.

So what we see, operationally speaking, it's a much stronger platform in Brazil, we are the leaders commercially, we have the best brand, we have the best distribution and we have the best momentum in terms of -- and this is based on outstanding commercial team, and outstanding brand and outstanding distribution channels, distribution points and capillarity and the strongest network -- mobile network in Brazil, and one of the strongest wireline networks. So, operationally speaking, we are very positive on revenue trends. And now I am going to be passing it over to Angel for the macro.

Just this is a very positive business performance as Jose Maria was commenting on is against a difficult macro backdrop. This 2015 is a year of adjustments. We see GDP contraction -- consumption constructions, but the new political project that is committed gradually and with some adjustments along the way to a correction of existing imbalances in fiscal, monetary and [infrastructure] fronts, with an objective to strengthen confidence and to increase investments and to expand the potential growth rate. We are expecting a return to growth in Brazil in the medium term. So, as Jose Maria was saying, even against these challenging macro backdrop, we are achieving very positive business results.

I think this was the last question. So, I'll pass over to Angel to close the conference call. Thank you.

Thank you very much for your participation and we certainly hope that we answered and provided some useful insights to you. Should you still have further questions, we kindly ask you to contact the Investor Relations. Good afternoon. And for those of you leaving for holiday soon, we wish you enjoy your summer week, ideally on some Spanish beach. Thank you.

Telefonica's January to June 2015 results conference call is over. You may now disconnect your line. Thank you.