Telefonica Brasil SA (VIV) 2006 Q3 法說會逐字稿

Good afternoon ladies and gentlemen, and welcome to today's Telefonica's January to September 2006 results presentation conference call. [OPERATOR INSTRUCTIONS]. I would now like to hand over to today's chairperson, Mr. Ezequiel Nieto, please begin your meeting and I'll be standing by. Thank you.

Thank you. Good afternoon, ladies and gentlemen. Welcome to Telefonica's conference call to discuss the 2006 third quarter results. Before proceeding, let me mention that the document contains financial information and data reported under IFRS.

The financial information contained in this document has been prepared under International Financial Reporting Standards. This financial information is unaudited and, therefore, is subject to potential future modifications. This presentation may contain announcements that constitute forward-looking statements which are not warranties of future performance and involve risks and uncertainties, and actual 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 this presentation, which you will find also in our website. We encourage you to review our publicly available disclosure documents filed with the relevant securities markets regulators.

If you do not 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, 34 91 584 4713. Now let me turn the call over to our Chief Financial Officer, Mr. Santiago Fernandez Valbuena, who will be leading this conference call.

Thank you Ezequiel and good afternoon, ladies and gentlemen. Welcome to Telefonica’s 2006 third quarter results conference call. I am glad to have with me here today Julio Linares, our General Manager for Coordination, Business Development and Synergies; Jose Maria Alvarez-Pallete, Head of Latin America; Antonio Viana Baptista, Head of Spain; and Peter Erskine, Head of O2's European operations, who is connected from London.

Telefonica is keeping its distinctive growth profile in the sector at the closing of September with consolidated revenues growing by more than 43% year-on-year to reach almost EUR39b. Operating income before D&A topped EUR14.6b, up close to 36% annually. Organic growth for both matrix stood at a very healthy 7.5%, unparalleled in the European context. Operating income exceeded the EUR7.4b mark for the period, equivalent to a 24.5% annual nominal growth rate, which translates into a 6.2% organic increase. Operating cash flow ended the period close to EUR9.6b, or a 26% increase year-on-year in nominal terms, or 8.4% up on a purely organic basis.

For a review of net profit key drivers please turn to slide number four. January to September net income reached almost EUR5.2b, 59% above last year's figure. Please notice that the discontinued operations caption is including the EUR1.6b net of taxes which corresponds to the capital gains following TPI's sale, and that close to EUR640m are being added to the depreciation and amortization line, once we have concluded the allocation of 02's purchase price. I'll run you through the basics of O2's PPA later on during this call.

Earnings per share for the nine months ending in September reached EUR1.091, 64% above last year's figure. Underlying EPS was up close to 23% year-on-year.

The strength and reliability of our financial performance puts into value the Company's diversification which is [drawn] in slide number five.

Latin America, a region with above average growth potential and Europe, which is keeping a strong momentum, are gradually increasing their weight over consolidated financials and represented already close to [60 and] 54% of Group sales in OIBDA at end of September, respectively.

Turning to profitability we present those numbers in slide number six. The expansion of the cost base is trending down, despite strong commercial activity leading to a 1.4 percentage point acceleration in organic OIBDA growth since the beginning of the year. Group operating income before D&A margin stood at almost 38% driven by the healthy 43.7% margin posted by our Wireline division on aggregate. In organic terms, OIBDA margin remained flat year-on-year at 38%, up one percentage point compared to the level achieved at the end of June.

Operating cash flow remained solid across operations as presented in slide number seven. Capital expenditures exceeded just the EUR5b mark in the first nine months of the year and that is equivalent to a 6% organic growth. More than 70% of our CapEx efforts have been channeled to growth projects. All major subsidiaries retained solid cash flow profiles posting annual increases in the mid to high teens for Telefonica Latin America and Telefonica [Mobiles].

Turning to guidance updates in slide number eight, we are increasingly confident of our ability to excel by year end. It is worth mentioning that all matrix are comfortably meeting the targets we set at the beginning of the year. As such, and taking into consideration our expectations for the various divisions, we are updating our financial objectives as follows. First, we're upgrading revenue growth from the original 34% to 37% to above 37%. Second, we reinforce our OBITDA growth target as we commit to end the year at the high end of [public] guidance in the 26% to 29% rate. Finally, we reiterate operating income guidance that we project will continue to grow between 26% and 30%.

Let us start the review of individual operations with this snapshot on Spain, where commercial activity across businesses is driving superior growth. Regarding domestic fixed we continue to witness a further slowdown in traditional Fixed Line erosion, coupled with a strong Broadband uptake that consolidates our market share. Revenue growth is clearly ahead of the peer group and the strength of OIBDA is set in the basis to upgrade guidance.

On Domestic Mobile third quarter customer growth remains attractive driven by gross adds and churn containment. Service revenues are growing in line with customer expansion and renewed commercial efforts in pricing pressure are not depressing profitability, which remains a benchmark in Europe.

For additional details of the performance of Telefonica de Espana, please turn to slide number 10. Both in the Internet & Broadband businesses and Data & IT services stood as major drivers of the company's ongoing business transformation, posting a 27% and a 7.5% annual growth rate in the first nine months of the year, respectively.

Total Group revenues increased 1.7% year-on-year well ahead of peer group performance and totally in line with 2006 targets. Business transformation aims to proactively increase the value of our subscriber base and push overall ARPU per customer up as shown in slide number 11. Total ARPU, end of September, 4% above last year's figure led by three key levers that we managed actively. First, heavily promoting double and triple play products, which -- with close to 1.2m new packages sold in the January through September period.

Second, increasing Broadband appeal through VAS, Value Added Services, with an average spend of over EUR7.0 per customer on top of broadband connectivity. And third, increasing the usage of the traditional access with more than 260,000 voice flat rates sold since the beginning of 2006.

We are successfully managing current competitive pressures in the fixed business, as presented in slide number 12. Within the context of the 1.8% total market growth for year-on-year, lines lost in the third quarter decreased by 25% thanks to the positive impact of the latest free connection fee campaign that we ran in mid September. Since the start of 2006, Telefonica de Espana lost close to 157,000 lines, which is flatish compared to last year's comparable figure.

ULL keeps growing, although, 60% of ULL net adds were churning from our wholesale offering. Regarding traffic, the decline in outgoing voice minutes continues to be limited by flat rates and bundles, falling just 1.5% annually. Traffic per minute is losing its significance as an operating metric at around 47% of third quarter national traffic revenues are already on flat rates.

The pressures on the traditional fixed are being fully offset by our lead in Broadband, as we present in slide number 13. The Company has captured almost 700,000 net new ADSL subscribers in the first nine months of this year, 34% above last year's figure. Market share remains stable at 55%. In the Pay TV business Imagenio is a clear driving force of market performance, having captured more than 35% of third quarter net additions. Imagenio already represents 8% of the Pay TV market at the end of September.

Before turning to our Spanish Mobile business, let's review domestic fixed profitability in slide number 14. Despite robust top line growth, operating expenses were down more than 3% annually with cost containment across the board. OIBDA, adjusted for guidance, went up 8.6% year-on-year equivalent to a very healthy 4% underlying growth rate, and well ahead of our original guidance. We are confident to beat our initial target, thus, we are upgrading OIBDA guidance to higher than 5%. This new guidance will exclude any future provision for redundancies corresponding to the 2007 tranche the Company may decide to record in the fourth quarter of this year.

Let's now continue with Mobile operations in Spain in slide number 15. Telefonica Moviles Espana's operating performance has been characterized by strong commercial activity and very positive churn. Third quarter net adds increased by 45% year-on-year, adding 365,000 customers to a total base that has grown by more than 7% annually. The increasing contracts in corporate accounts remained healthy.

On top of strong gross adds, the Company's performance in number portability continued to improve, with Telefonica Moviles in Spain showing the greatest progress in the year to reach a positive balance of 63,000 clients in the third quarter. Additionally, the Company was capable of keeping contract churn under 1% in the third quarter to push blended churn down to 1.75% in the first nine months of this year.

On the next slide we present the drivers of Domestic Mobile revenue performance. Total revenues reached close to EUR2.5b for the July to September period, up 5.1% year-on-year. Cumulative revenues to September increased by 3.7% in line with 2006 guidance. The Company posted a very positive 7.1% growth in customer revenues, a rate fully aligned with customer expansion. The robust growth in outgoing service revenues more than offset lower incoming and roaming-in revenues. On the roaming side the joint initiatives as My Europe are helping us to limit the impact of Amena being part now of France Telecom.

In addition to solid client growth, usage and outgoing voice and data ARPU remain strong, as we can see in slide number 17. In the first nine months of the year outgoing MOU showed a 5.9% increase year-on-year which translated into a 1.2% growth of outgoing ARPU to reach close to EUR23. Incoming ARPU was down 9.5% annually under pressure due to interconnection rate cuts. As such, blended voice ARPU ended the period virtually unchanged at EUR33. Data ARPU reached EUR4.4 equivalent to a 1.9% growth rate, driven by higher revenues from data connectivity and content. Now P2P SMS data revenues continue to increase amounting already to 43% of total data revenues for the first nine months of this year. We now have more than 785,000 3G customers with more than 145,000 PC cards.

In slide number 18 we briefly review OIBDA growth. Nine months OIBDA exceeded EUR3.1b, up 1.1% versus last year despite higher commercial activity. OIBDA margin reached 47% in the third quarter and 45.5% for the full reported period.

If we now move to Europe, where we are successfully managing Mobile growth opportunities, we see the rapidly turning around of our Fixed Line franchise. Starting with out European mobile properties, I would like to highlight the U.K.'s strong momentum first led by increasing customer and ARPU growth. In Germany O2 is posting above average service revenue growth and continued to gain market share despite lower commercial activity. Finally, enhanced value propositions from Telefonica/O2's collaboration are being presented to clients such as My Europe. Turning to the Czech subsidiary, it's turnaround is a tangible reality with positive growth rates for both sales and operating income before D&A. DSL and Mobile continue as major engines for growth with synergies acting as an additional support for financial performance.

Our O2 U.K. performance is summarized in slide number 20. Under a very dynamic competitive environment service revenue continues to excel after growing at 15% year-on-year pushed by customer growth and ARPU expansion. February to September OIBDA margin stood just below 28%. From the commercial perspective, gross adds were up 15% on an annual basis in the third quarter with 12 months rolling churn contracting by five percentage points year-on-year to end at 28%. In terms of usage, ARPU increased by around 2.5% thanks to a better mix, the 11% pick up in the minutes of use and the growth in data ARPU.

Please turn now to slide number 21 for a review of O2 Germany's eight month results. February to September service revenues were up 50% year-on-year with a higher subscriber base being partially offset by pressures on ARPU. Eight months margin attained 24%. The Company has traded well at the operating level amid competitive pressures for a total of 18 -- I'm sorry, 19% annual growth in the total base. Blended churn remained broadly stable, despite the growing contribution of prepaid that represented more than 50% of the base. ARPU declined by close to 13% annually, affected by the change in mix and pricing pressure.

Our commercial strategy to adapt to market trends has led us to rebalance original targets in the U.K. and Germany as we present in slide number 22. In the U.K. we will prioritize acquisition and retention as we expect to continue capturing value clients, as we have done throughout the year. As such, we have great service revenues for the second quarter in a row, this time to a new range of 14% to 15% for the 11 months ending December. Consequent to this focus on growth, we expect OIBDA margin to fall by one percentage point from last year's comparable figure.

In Germany service revenue growth has decelerated quarter-on-quarter. On the one hand, ARPU has been under pressure by a change of mix, competition and termination rate cuts and, on the other hand, we have been deliberately less [stiff] in the market so far this year in anticipation of new tariffs and our DSL launch. Therefore, we now expect service revenues to grow at high single digit rates this year, below our initial low double digit guidance. We keep our forecast of stable margin unchanged because of O2 Germany's plan to increase marketing expenses in the last quarter to re-gain momentum, particularly for [inaudible] and mobile tariffs, and promoting the newly launched DSL offering.

Moving to the Czech Republic in slide number 23, we can see that revenues and OIBDA were up 2% each in the third quarter, led by Mobile and Retail Broadband, which is a clear turnaround since takeover. Integration is on track. Renewed pricing and products are being launched under the O2 brand and the first convergence products are out including IPTV. As you may know, the Company upgraded OIBDA growth target from flat to around plus 2% when we presented results last October 27. Revenue guidance has been kept unchanged at flat year-on-year.

Please turn now to slide number 24 to end the operating review of our businesses with Latin America Fixed and Mobile. On the Fixed side we are developing Broadband in all countries, gradually positioning double and triple play products to drive top line growth for all operators. Additionally, we are reinforcing local and regional management to strengthen profitability.

On the Mobile side regional service revenues keep growing in line with client expansion, with margins progressing. And cash flow generation remained very solid, doubling annually.

The more detailed analysis of our Fixed Latin American business is outlined in slide number 25, starting with Broadband. Telefonica Latinoamerica's Retail Broadband connections grew 48% year-on-year with net additions accelerating on a quarterly basis. Consolidated Broadband revenues rise by close to 33% annually. Broadband connectivity and Value Added Services are the drivers behind top line growth. The aggregate of Internet, Broadband, Data and IT accounted for three fourths of the 3.5% [client] revenue growth of this division.

Efficiency measures are paying off, as shown in slide number 26. OIBDA margin excluding capital gains in Columbia Telecom exceeded the 45% mark, 1.6 percentage points ahead of last year's comparable figure. Additionally, the focus on cost contention is reducing operating expenses growth from the 6% posted in the first quarter this year to below 4% for the nine months ending September. Thus, the Group underlying OIBDA margin has improved more than two percentage points from the first quarter figure.

Local operators are successfully balancing growth and profitability, as slide number 27 summarizes, being able to improve their margins even if revenues slow down. With the exception of Argentina, due to a stronger activity and frozen retail tariffs, all Fixed subsidiaries improved profitability between 1 and 2.7 percentage points in the last 12 months.

Moving to guidance, nine month revenues came below target, mainly due to Telesp's sales growth reduced speed. [Inaudible] inflation in Brazil implied a zero tariff adjustment for Telesp, pressing down revenue performance. As such, we expect consolidated revenues to grow this year around the low end of the guidance range. On the contrary, adjusted OIBDA grew at 7% year-on-year clearly above guidance. We expect 2006's final rate of growth to reach the high end of the 3% go 5% original objective.

Moving to our Mobile operations in Latin America in slide number 28, let me highlight first the 20% annual growth in service revenue in [inaudible] euro terms, which is fully aligned with the rise in the customer base. Outgoing service revenues increased by a sound 29.2% year-on-year. Robust revenue performance has been coupled by the greater increase in OIBDA allowing us to expand margins by 2.7 percentage points, despite higher commercial activity and, as a result, operating cash flow more than doubled nine months 2005 figure, reaching more than EUR765m.

Let me start slide number 29 with Brazil, where ongoing initiatives to enhance our competitive position are showing their first results. Among these measures that range from reducing the loss of value plans to improving the quality of our call centers, I would like to comment two of the most relevant in terms of enhancing Vivo's perception.

First, a series of initiatives to reduce fraud, which has allowed us to cut cloning cases by 84%. And second, the launch of new tariff schemes for prepaid, that have led to a 6.6% increase in minutes of use and a change in ARPU trend. From a financial perspective third quarter service revenues grew 3.2% annually, limiting OIBDA reductions to 6.8%.

Let me now show you the positive performance of our operations in Mexico in slide number 30. Net additions and churn continue to [defend] positively. Commercial activity has yielded strong results leading us to capture close to 1.1m new clients since the beginning of the year, 1.7 times above last year's figure. And churn for the nine months to September improved by 1.6 percentage points to hit the 3.7% level, with contract churn falling below 2% for the first nine months of the year.

Despite solid client expansion, MOU was up 36% year-on-year, backed by the launch of new commercial plans pushing annual ARPU to grow at 8%. The combination of both growing base and the uplift of ARPU was behind the 26% annual increase in service revenues. Strong top line performance has led to OIBDA [recovery] in the third quarter.

Let's briefly review now other major Wireless operations in the region starting with Venezuela. 200,000 net additions were registered in third quarter, 69% year-on-year leading to a 51% customer growth. Planned expansion and a strong ARPU have driven the 50% annual rise in service revenues. OIBDA grew by 44% on an annual basis to reach a margin of 40%, slightly below last year's level due to higher commercial activity.

Turning to Columbia, we are slowing down commercial activity to guarantee quality growth. Net adds mounted to almost 1.7m in the first nine months of this year with a strong focus on contract which represented 26% of total new connections. Service revenue increased 6% when compared to last year's, influenced by the rapid growth of the customer base, low usage and interconnection rate cuts. OIBDA margin improved 3.2 percentage points to reach 14.5%.

With regard to Wireless in Argentina, in slide 32, we managed to add 1.8m new subscribers in the first nine months of '06, 9.4% above last year. Total customer base increased by 37%. Service revenues increased by 33% in local currency, a similar pace than in past quarters. The sound top line performance, coupled with lower acquisition costs, has led to a 112% OIBDA increase in local currency with margins expanding almost nine percentage points to 24%.

Finally, in Chile, we have increased our customer base by 7% keeping the focus of our commercial actions on the contract segment, which represented 20% of our base at the end of September. Service revenue growth was robust at 21% on the back of strong ARPU performance. OIBDA grew 15% annually with margins almost stable for the last 12 months.

Now before reviewing financial expenses in depth, I would like to give you an update on the synergies, which are presented in slide number 33. Business cooperation has led to generate close to EUR770m of synergies at the end of September, which is in line with the strategic plans. 81% were related to regional management and business integration, and 16% have emerged from the incorporation of the latest acquisitions, namely, O2, Cesky Telecom and Columbia Telecom.

If we focus on O2, more than 50% of synergies have been driven by handset and network procurement with 33% coming from roaming initiatives. In addition to already identified projects, we are exploiting new areas of collaboration that we will yield substantial benefits, such as insurance management, development of mobile data, and the rollout of ADSL [offers] in O2 [inaudible].

If we now turn to the next slide, on liability management, we are happy to report that only a fraction of the 88% increase in average debt has been reflected in interest expense, which have risen 45% over the first nine months of '06. Foreign exchange management in '06 is hitting our targets but is not adding to financial income as much as it did in '05, when over EUR200m were recorded. Even taking this effect into account, the Debt Service unit cost is down 140 basis points to 4.7%. However, we expect this figure to drift slightly upwards to the 5% area by year end.

Our overall financial debt load has come down EUR2.8b in this quarter reaching EUR52.2b at the end of '03 -- at the end of the third quarter, I'm sorry. On 12 months trailing adjusted OIBDA this would mean a debts to OIBDA ratio of 2.6 times, or 2.8 times when adding pre-retirement commitments, thus, showing progress towards our de-leverage target of falling behind 2.5 times in the medium term. [With] caution on extrapolating this trend as Q3 recorded the inflow of proceeds from TPI sale and did not include yet the EUR0.30 per share dividend, roughly EUR1.3b, that was paid last Friday.

On the progress of our share buy back program, we held 51m shares in Treasury at the end of the third quarter. During the fourth quarter we have continued to purchase an additional roughly 10m shares, getting to 1.24% of outstanding shares now held in Treasury.

Before concluding let me introduce the estimated impacts of O2's purchase price allocation in slide number 36. I would like to remind you that these impacts are preliminary and unaudited. Goodwill arising from the transaction was EUR16b on the basis of O2's book value as of January 31. EUR8.1b, or roughly 50% of original goodwill was allocated to intangible assets, in particular, licenses, clients, brand names and contracts. After fiscal adjustments the final accounted goodwill exceeded just the EUR10b figure. The average life of assets we have allocated goodwill to has been calculated to be around 10 years. As such, O2's February to September P&L in our consolidated accounts had an impact of close to EUR640m of additional amortizations which are related to the PPA. Total impact in net income came close to EUR450m for the above mentioned period. We estimate an annual impact on net income of around EUR600m per year for the next five years.

To sum up, first financial results stay as set to benchmark with high single digit organic revenues and OIBDA growth leveraging the value of diversification.

Second, our performance sets the basis for reinforcing our guidance commitments for the full year.

Third, sales growth close to our bottom line with EPS up 64% year-on-year.

Fourth, Group margins are resilient despite strong commercial activity benefiting from both cost optimization and tangible synergies.

Fifth, we are now pushing commercial activity and developing Broadband in Spain to get a superior growth profile.

Sixth, we are growing high value businesses amid strong competition in Latin America with the focus on profitability.

And finally, we are successfully managing Mobile growth opportunities and rapidly turning around Fixed in Europe.

Now, thank you very much, and I will stand ready to take your questions.

Thank you. Our first question comes from Jesus Romero. Please go ahead, announcing your name and your company name.

Hello, Jesus Romero from Merrill Lynch in London. I have three questions. The first one, could you tell us how many employees you expect to sign up for the early retirement plan in Q4 for Telefonica de Espana?

Second, could you give us an update on O2 Germany, maybe for next year, and how your ADLS plans are going in both Germany and the U.K.?

And third, regarding TIM Brazil, do you think the regulator could allow you to have control of both in Brazil and Vivo and, if that's the case, would you consider that acquisition? Thank you.

Thank you for the question, Jesus, and let me answer on the TIM Brazil thing. It's anybody's guess what the regulator might say. Brazil is enriched with a number of different players and at this point we are in no position to speculate as to what the regulator might or might not think.

Hello, this is Antonio Viana. Regarding the question you had on the number of people to leave the Company for the fourth quarter. Until September 13, 2006 Telefonica de Espana we had people that had joined the [area] of 1,237 and the forecast for the end of the year is that this number will reach for the whole year 1,468. Okay?

Yes.

Thank you. Our next question --

Sorry, sorry, excuse me. You will answer the third question, please?

We seem to have lost the connection. We'll try to get that [all in] later on. Please, operator, could we go ahead with the next question?

Thank you. Our next question comes from the line of Guy Peddy. Please go ahead, announcing your name and your company.

Yes, good afternoon, gentlemen, it's Guy Peddy from Deutsche Bank. I just wanted to follow on to Jesus' question. Of the 230 people you're looking to get rid of in Q4, based on the mathematics, I think, you just gave us, are you still going to be running at the just over EUR300,000 provision for those?

Yes, good afternoon, gentlemen. It's Guy Peddy from Deutsche Bank. [I just wanted] to follow on to Jesus' question. Of the 230 people you're looking to get rid of in Q4, based on the mathematics, I think, you just gave us, are you still going to be running at just over EUR300,000 provision for those?

And on a second question related to headcount, are you still planning to invite about 3,000 -- sorry about the background noise -- about 3,300 people to join the early retirement for 2007? And, again, is that going to be costing you another EUR300,000 per person?

And then my second question, more for Santiago. Given the outlook in Germany, as clearly a lot more tougher for 02, especially given the two downgrades to guidance, and the fact that competition seems to be picking up, pricing seems to be coming down quicker, mobile termination rate cuts seem to be bigger, and the fact that Vodafone this morning decided to take a fair value adjustment on their asset, is that something that you are considering as well for your 02 business as you go through the fair value assessment of your goodwill? Thank you.

Hello, it's Peter Erskine. Can you hear me?

Yes, Peter. Could you answer the question from the previous --

Yes, of course. Two questions then. Regarding DSL, and our plans for Germany and the U.K., today in Germany we cover about 40% of the country, the population, and we will be at 60% by the end of quarter two. And we have actually, literally in the last three weeks, launched one bill to our mobile customers so that they can buy DSL from us and pay on the same bill as mobile.

In the U.K., you'll know we bought the [B] acquisition about two months ago and that had 15% population coverage. We've already built that to 30%. We will be launching around about the middle of next year and would expect to have about 70% of the population covered in the U.K. by the end of next year.

Now the next gentleman's question regards Germany. I think, first of all, yes, we saw Voda took an impairment this morning. We took that about two to three years ago, so that's Voda, without being too smart, catching up. So we see no need to do that.

I think regarding your [said] -- I think you actually said two changes to guidance. Wrong, sir. Our revenue guidance we have changed to single digit, but we hold constant at constant margin with last year. And we're actually in the process now of launching some new tariffs in line with the fact that our Genion product, which has been a big piece of our success. We're effectively re-launching at new tariffs, timed for now we've launched DSL in that country. So we're actually looking forward to some renewed energy out there in quite a challenging market.

Okay, Antonio will answer the other question.

Guy, related to your question on the early retirement program, as I said before, we expect to reach 1,468 this year. If we reach this number that would mean that, in order to complete the 15,000 --

[Inaudible].

-- early retirements that are incorporated in the program, next year we would need to have early retirements of 300 -- 3,723. The average cost is on the range of EUR310,000 per head, basically. Okay?

The guidance, just to clarify, the guidance that we are giving, in terms of EBITDA being higher than 5%, have incorporated the costs of early retirements in order to reach the 4 -- 1,468 until the end of this year. Should we anticipate any of the early retirements from 2007, obviously, that additional cost would come in 2007 and not -- in 2006, pardon. And not in 2007.

Thank you. Next question please. Operator, next question please.

Thank you. Our next question comes from the line of Brian Rusling. Please go ahead, announcing your name and your company.

Yes, good afternoon, gentlemen, it's Brian Rusling from Cazenove. A couple of questions. The first one is, Santiago, in reference to, in May, you gave guidance that you were going to double the EPS, headline EPS of Telefonica, by 2009. Today you've said that there's going to be the purchase price amortization of 600m a year. Does that doubling of EPS still stand, including the extra 600m net income impact?

Second question is on Spanish Fixed Line. When will we hear whether you take advantage of the ability to increase the monthly rental by 2% for 2007 for the Spanish Fixed Line vehicle? Is that going to be January, or do we hear about [that] a little bit earlier?

And, then, final question. In Brazil, with reference to your negotiations on buying the Cable TV operation, can you give us some sort of sense of the order of magnitude of how much cash that will involve?

Yes, let me answer the question on the doubling of the EPS. We projected [dalybolatia] to arrive by 2009, and that includes everything that we could possibly foresee at that point, which includes the purchase price allocation amortization charges that we have just announced today that we'll -- that will start. So, for [avoidance] without our doubling EPS target does include the amortization of goodwill.

On the increase of the monthly rate in Spain, that will take place on January 1, the 2% increase. On the [TVR], on the Brazil cable unit, we have not disclosed the price yet and the transaction is still subject to approval and, therefore, we are not disclosing that information yet.

Thank you. Next question please.

Thank you. Our next question comes from Luis Prota. Go ahead please, announcing your name and company.

Yes, hello. It's Luis Prota from Morgan Stanley in Madrid. I have two questions. The first one is on the Spanish Broadband. Looking at your impressive 68% share of net additions this quarter, I wonder if you could give us some light on why you think that clients are choosing Telefonica, despite the very aggressive offers in the market? Now that we are already in November, if you could share with us how the fourth quarter is going?

And the second question is on Venezuela. The market is looking more mature now with high penetration already, but do you expect the fourth quarter to come back to higher growth and margins to narrow again? Or growth potential is somehow limited from this level and margins are going to remain above 40%.

Okay. With regarding the share of net adds that we're having on the Broadband, I think that there are two clear issues. The first one is the quality of service that we're offering, in the sense that we are delivering the quality that we're promising to our clients, in terms of speed and in terms of quality of the implementation. Add to that, the fact that we have a very broad catalog of Value Added Services that we include, together with the Broadband offer, like anti-virus, security and maintenance. Okay? And I believe those are the reasons.

On the question on how the fourth quarter is going, well, we can't complain, but we'd better talk after Christmas. So we'll [be] having that discussion probably in February.

Hello. It's Jose Maria Alvarez-Pallete speaking on the Venezuelan question. For the time being, we are not seeing any signs of decelerating in the Venezuelan market, which is [technical difficulty]. And [I have to conclude] that revenue services are totally in line with the [end one or] net adds. For the time being, [we cannot see] any sign of deceleration in the Venezuelan market.

Okay, thank you.

Thank you. Next question please.

Thank you. Our next question comes from Andrew Hogley. Please go ahead, announcing your name and your company.

Good afternoon, gentlemen. Andrew Hogley from Lehman Brothers. Two quick questions, if I may. First of all, could you explain some of the rationale behind the 8% stake you took PCCW this week?

And, secondly, have you yet seen anything from [xTerra], ahead of their likely launch in December, that gives you any concerns over the next couple of quarters in the Spanish mobile market? Thank you.

Yes, Jose Maria Alvarez-Pallete speaking again on the PCCW question. We see that as a wonderful opportunity to strengthen our ties with China Netcom. [Technical difficulty] see that can provide you with a unique opportunity of growing and exploring common fields in the [IPTV] field, and others. So, for us, it's a matter of going further on our China Netcom collaboration, and we think that this transaction opens new areas of collaboration, especially in the IPTV field.

Andrew, on the Spanish mobile market, we're very happy with the result of net adds that we achieved in the third quarter. I think it's a very good sign in terms of the quality of our client base and the way we are defending our client base and getting more and more results on the contract customers. We look forward to see what xTerra is willing to do in this market. Obviously, it's going to be a dynamic market on the Christmas season and, as a consequence, we're well prepared in advance with very attractive handsets to serve our customers.

We also expect new MP&L's come upfront in this period, and I can tell you that we have reached a global and general agreement. There are some minor issues to fine-tune with El Corte Ingles in order to launch their MP&L.

Thank you.

Thank you. Our next question comes from the line of Robert Grindle. Please go ahead, announce your name and company.

Yes, hello. Robert Grindle from Dresdner Kleinwort here. Is it possible to get an update on Peru, as the Congress there seems to have been making things a bit tougher for you recently?

And just on the 02 intangibles, is it possible to say how much of the 8b of the intangibles is allocated to the 02 brand, and over what lifetime that is amortized? Thanks very much.

Yes, thanks for the question on the -- Jose Maria Alvarez-Pallete on the [Peruvian] question. As you know, the Government of Peru rejected the law decree and, as a result, there is no [further tension] on the table. And we are continuously talking with the Government and with the regulator in order to see areas of collaboration and improvement in the telecommunication landscape in Peru. So, for the time being, there is no tension at all. We are talking with them. We are talking in order to see what is the framework for next year. We keep expanding our [facilities]. We keep fulfilling our commitments with the regulator [technical difficulty] and [technical difficulty] [issues though] no news on that front.

Okay, Robert, [on the] intangible issue, as you very rightly pointed out, the gross number is about 8b. The brand names, well this is still work in progress, not fully audited. But roughly this -- we're talking about [20%] of the 02 brand value in this item. On the lifetime, it is varied by us but, as you know, the intangibles are basically made up of clients, brand names and licenses. Licenses are taking, as their contract [as pre-dates] sometimes 12, sometimes longer. Brand names, we have said, a 10 year view. This is much more judgmental than other items.

Then clients, which, I'm sure, is one of the most difficult parts to elicit, are -- of course, vary country by country. But there is a factor to be taken into account, which is that we're talking about money weight and not physical weights. Therefore, untracked customers which tend to have much, much lower churn rates than the others, are much more valuable and, therefore, carry a much more significant weight in this average lifetime of the total time portfolio. If you want to factor those numbers in [arriving at] the final number.

Sorry, could I have a follow up on that? If the average life of the intangibles is 10 years, are you then, therefore, amortizing, over a shorter period, the five years, just to get it all over and done with? Is that the idea? Is the full amount amortized over five years?

No, it isn't. It is amortized over the average life of the assets. Of course, different assets are amortized over different periods, but all of them are amortized [all] with an average of 10 years.

Okay, thanks very much.

Thank you. Next question please.

Thank you. Our next question comes from the line of Mathieu Robbilliard. Please go ahead, announcing your name and company.

Good afternoon, Mathieu Robbilliard, BNP Paribas. I have a few questions please. First, in terms of your guidance, does the new guidance include the provision reversal at Telesp for the [cichcoffin] item? And that's the first question.

Second question on 02. The EBITDA margin guidance for the U.K. for the full year suggests that EBITDA margin will increase in Q4 versus what has been done in the first nine months of the year. And I was wondering what was behind that? And that's about it. Thank you.

On the first question about the guidance [and if the fiscal things] in Telesp was included? That is yes, it is included in the guidance.

So far as the U.K. EBITDA margin, that's quite right. We envisage, in the last quarter, a slightly better margin and, hence, year end slightly ahead on the first three quarters of the year.

Okay. Next question please.

Thank you. Our next question comes from Terence Sinclair. Please go ahead, announce your name and company.

Good afternoon, it's Terence Sinclair from Citigroup. Two questions. First of all, I wonder if you could talk a little bit more about margin trends in Fixed Latin America? You're guiding now to the high end of the range and, yet, when I look at Argentina -- no, forget Argentina, but Chile, Brazil, Peru, I'm seeing cost growth is as least as fast as revenue growth.

The second thing, I wonder if you could comment on whether you would welcome market consolidation whereby America Movil buys TIM Brazil?

On the margins in Latin America, yes, we have [planned in here] even if you were to exclude the [pisco finch] issue in Brazil, and we are committed to keep doing that for the rest of the year. We have -- we are doing a significant effort in cost control, in spite of the fact that we are having less intense and less robust revenue top line. So, yes, we are committed to maintaining this trend for the remaining part of the year in all the operation. In fact, the only one that is -- the one that is suffering a little bit more is Argentina, but we have [sown] a very solid top line growth.

And on the consolidation in Brazil, again, we -- sorry, but we are not going to speculate about that [because we don't know] what is going to happen, so we don't know yet what is going to be the final outcome [that is].

Thank you.

Thank you, Terry. Next question please.

Thank you. And it comes from the line of David Wright. Please go ahead, announce your name and company.

Yes, David Wright from JP Morgan in London. Firstly, for Santiago. Obviously, we've had some more confirmation of the tax legislation that was initially banded around at the beginning of summer which accelerates, I understand, the 30% tax rate to 2008. If you could help us understand the impact on your P&L because, obviously, there are various give-backs on international tax, etc. So maybe some impact analysis there and, again, how that would figure within your guidance.

And then for Antonio, I guess, and Spain. Just to maybe understand, and I hope this hasn't been asked before. I had some problems with the line. Just to understand the shift in the competitive nature of the market in Q4, because I think we can assume Q3 was fairly lackluster on the part of France Telecom's assets. But, given their re-brand, are you noticing a step-up in ULL acceleration? Are you noticing a step-up in churn perhaps? Just your sense of how they're progressing, versus, as I say, that very quiet Q3. Thank you.

Okay, David. On the tax issue, you're right that we mentioned in Valencia that we expected the average tax rate of -- for corporations in Spain to come down. This, indeed, seems to be the case, although it is not fully enacted yet. When it is, we will fully record it in our books. It looks like the direction is the one we anticipated, but the timing is going to be one to three years earlier. This is obviously good news and good news, as it will happen earlier, and it will happen to the full extent that we anticipated. And that basically means that pre-tax cash flows are now going to be taxed at the lower rate. And, therefore, the cash flows available for other things, including investors, are going to be more valuable.

There are other negative effects, which are one-offs, and that have to do with the net present value of our tax yields. Those are, of course, [non-negotiable], relative to the overall size, and we will have to take them into account when the full bill is enacted. And that we do not know yet when will happen. It may happen before the end of this year. It might more likely happen at the beginning of next year. We will keep you fully updated and when we give the guidance we will try and give full disclosure of those impacts.

But, obviously, the guidance assumed your original 30% by 2010, 2011, not by the 2008.

You're right that the guidance anticipated the tax cut to start in 2008, not starting in 2007. And, therefore, we might think about changing that a little bit, but let's defer that decision until we have full information.

I'm sorry -- sorry, just to be painfully clear on my side. So the original guidance was the 30% by three or four years. It wasn't 30% in 2008., right?

I don't want to get [battle] into question. In Valencia, we had later coming into effect of the tax bill. It is going to come earlier. We'll have to update you when we publish the full guidance for '07.

That's okay. Thank you. And on Spain?

David, on Spain, first, I do not agree with you that it was a very quiet Q3. I think that the Q3 was extremely dynamic if you have to compare it with Q3 of last year. I think that the good news on our side is that we have been able to contain churn at a very, very low level. And, as a consequence of that, we had a great share of net adds.

As for the Q4, well, obviously, it's going to be a more dynamic quarter with all the Christmas campaign. Yes, we do see Orange being more active in terms of handset subsidy. Yes, we see that trend, obviously. Since we have separate distribution channels, that hurts us less than it hurts others that share the distribution network with Orange, like in the [Phone House] stores where they share it with Vodafone. But, yes, we do see Orange more aggressive in terms of handset subsidy, [not] particularly, in terms of the broadband market.

Okay thank you.

Thank you. Next question please.

Thank you. And it comes from the line of Luigi Minerva. Please go ahead, announce your name and your company.

Yes, good afternoon. It's Luigi Minerva from HSBC. Two questions. One on PCCW again, and whether, did you consider to increase your stake directly in China Netcom rather than having an option to swap your PCCW share into Netcom later on?

And the second one on network sharing. From between Vodafone and Orange, whether you foresee any change in competition and if you have any response to that? Thank you.

Yes, on the PCCW question, we have made it clear that it was a binary decision. Either we were taking more shares in China Netcom or in PCCW. So the amount of capital allocated to that, [particularly] to the Asia strategy, was fixed. So we are not going to be complementing again an additional 5% stake so we will contemplate the share of -- the soft share at the end of the year -- the period.

On the network sharing, I don't see any major change there. What we have witnessed is some announcement from France Telecom and Vodafone regarding side-sharing in small villages in Spain below the 25,000 inhabitants. And, to us, the crucial part is much more to have a better coverage in the cities rather than in those areas that we do not believe that that changes dramatically the scenario in terms of competitiveness.

Thank you.

Thank you. Next question please.

Thank you. Our next question comes Bosco Ojeda. Please go ahead, announce your company name and your name please.

Hello, good afternoon, Bosco Ojeda from UBS. Another question on your mobile strategy in Spain. I understand it has not been your priority to push for 3G handsets, and I was wondering if you foresee at some point of time, a change on that front, maybe for next year? Or -- I'm not sure what is the timeframe on that area.

And also if I could ask, just to be sure on the goodwill generation from 02. I understand the 10b, the net figure, is that the part that is going to be tax deductible]? I just want a confirmation. Thank you.

[Inaudible].

Okay. On the 3G handsets in Spain, what I can tell you Bosco, is that this will not be a 3G Christmas. We still see that there is a significant difference in price from 3G handsets to 2G handsets. And we do not see that the customers are actively seeking to pay for that price differential because they still see more value on getting a 2G handset with better form and functions, let me say. Let me put it this way. Next year we will see depending on the offers from the handset suppliers.

But I'm not sure I got the question right, but I understand that you were interested in the tax impact of the goodwill. Now, after the PPA, the remainder is the goodwill that can be amortized and is tax deductible in Spain under very stringent conditions. If that is what you're talking about, then that number is [EUR6b].

[Inaudible]. Thank you.

Thank you. Next question.

It comes from the line of James McKenzie. Please go ahead, announce your name and your company.

It's James McKenzie from Fidentis. I just wanted to have a quick question on Fixed Line, if possible. I think that at the half-year stage, Antonio, you mentioned that the regulator was dragging his feet a little bit in terms of the commercial offers that -- or that his approval of the commercial offers that you wanted to come out with in ADSL. I was just wondering if you could give us an update on how you're feeling on the regulatory situation now, if your commercial flexibility has improved? And, basically, if you're satisfied with the regulatory situation as stands?

And, secondly, just looking at the third quarter numbers, it looks like you've seen a big fall-off in interconnection expenses of the Fixed Line, which has obviously boosted your margins in the third quarter. I wonder if you've got any explanation for that? I'm certainly not aware of any [inaudible] big fall [of the] [inaudible] that would have caused that.

James, can you repeat the second part of the question please?

Yes, sure. In, if I look at your interconnection expenses in Telefonica de Espana, they were falling at 6.3% in the first half of the year. And that's accelerated to 11% in the nine-month stage, which, on my math it gives you an almost 20% fall in interconnection expenses in the third quarter on a standalone basis. Now, the numbers may be -- well, my numbers may be a little bit wrong, but it does look like interconnection expenses in the third quarter have fallen quite substantially, and that has boosted your margins. And I was just wondering if there was any regulatory change which has caused that? If it's a one-off, or is it something we can expect to be repeated going forward?

I'll have to check the second part. I don't see any one-off there. I see that you've got the increase in fixed-to-mobile traffic, but I don't see any other reason, apart from that. But I will have to check that number.

Okay.

And get back to you. On the regulatory situation, we got the approval for the launching of ADSL 3 megabyte that we have just launched on the twelfth. So that one is up and running, and we still have a couple of products more pending approval from the regulator. One of them, the 512 kilobyte, would be very important for us in order to increase penetration for lower income households on the Broadband offering. And we're still putting some pressure there. So we still -- what we really want is that any product that we would put up to the regulator can be approved on a speedy way and without major delays. That is our major concern and we keep on having a proactive stance with the regulator in order to achieve that.

Thank you. Next question please.

Thank you. The next question comes from [Cheryl Akawi] Please go ahead, announce your name and company.

Yes, I just wanted to see if you're still committed to the 1.5b net acquisition activity between now and year end 2007?

Yes, we are.

Okay. So despite what might happen in Brazil, you're still committed to that?

Yes, first of all committed to what we said. Second, I also have to say that whatever happens in Brazil is not something that leaves us indifferent. So we're monitoring very closely what is going on over there.

Great. Thank you.

[Welcome]. Thank you. Next question please.

Thank you. James Ratzer. Please go ahead, announce your name and company.

Yes. It's James Ratzer from New Street Research. A few questions regarding your Fixed business. The first one is I was wondering if you can give us an update on your thoughts about rolling fiber out further into your network? I mean, particularly, we've seen Telecom Italia just recently announce plans for increasing fibers for street cabinet. Is that on your agenda at the moment?

Secondly, we've also seen Telecom Italia propose a split between retail and wholesale activities. Again, is that kind of move on your agenda at all? Thank you.

On the first issue of splitting retail and wholesale, that is not in our agenda at this moment in time. I won't make any comments regarding Telecom Italia's policy on that.

On the fiber deployment, I would lead you to what we have said in Valencia, where we have explained that the total investment that we are likely to consider for deployment of fiber would be on the range of EUR800m for the 2006 to 2009 period. That would allow that, probably by 2009, more than 40% of Telefonica de Espana local loops would be able to offer premium broadband supporting services that require more than 25 megabytes per second.

And if you add to that the standard broadband that supports services, that would [regard] more than 10 megabytes per second, you have more than 70% of the Telefonica de Espana local loops. That would be our target for 2009. Obviously, the conditions under which we will deploy this investment will depend on the regulatory scenario.

And could I just ask as a follow up, do you -- can you envisage a scenario in which you might be able to actually shut down some of the local exchanges that's been proposed in Holland at the moment?

Well, I can only tell you what the regulatory situation is in Spain. And, under the present conditions, we are not considering that. Should the regulatory conditions change, we will analyze the situation.

Thank you. Next question please.

Thank you. Mr. David Evans, please go ahead, announce your name and company.

[Inaudible].

The line of Mr. David Evans is now open. Please go ahead.

[Inaudible].

He has withdrawn his question, so we go -- continue with Sergio Cruz. Please go ahead, announce your company name and name.

Hello, this is Sergio Cruz from Pyramid Research. I have two questions regarding Latin America. The first one is related to [HSBA] in Latin America, or 3G, your plans, looking ahead to these technologies.

And the second one is related to the role of television of Pay TV, DBH and IPTV in Latin America, going forward. Thank you.

On the 3G strategy, [we are still] far ahead from taking that decision, so I don't think that we should be [ready] right now to share that with you. It's still far away. We are still rolling out this in network countries, so we cannot see what's on the future on that front.

And on the IPTV or on the TV offer, globally speaking, the strategy that we have, our main intention is to become an offer of a triple play as soon as we can in each and every country. And, as a result, we are trying to approach that in a very pragmatic way and providing the offer in a cheap and a most speedy time to the market issue. So, again, launching triple offer as soon as possible in every single country. And, again, we are very pragmatic on the technology side.

Okay, thank you.

Okay. Ladies and gentlemen, with this, we bring this third quarter results Telefonica conference call to an end. We appreciate your being a part, especially, in a very busy day [we have come] from the reporting season. Thanks very much, as we'll have the opportunity to talk to you again after the new year. Thank you.