Ladies and gentlemen, thank you for standing by, and welcome to the Telefonica January June 2018 Results Conference Call. Later, we will conduct a question and answer As a reminder, today's conference I would now like to turn the conference over to Mr. Pablo Adiron, Global Director of Investor Relations. Please go ahead, sir.
Good morning and welcome to Telefonica Conference Call to discuss January 2018 results. I'm Pablo Eiran, Head of Global Director of Investor Relations. Before proceeding, let me mention that financial information containing the document related to the second quarter of 2018 has been prepared under International Financial Reporting standard as adopted by the European Union. From the 1st January 2018, we implemented IFRS 15 and 9, and all financial information in this presentation is based on this new standard. In organic terms, the effects of the accounting change to IFRS 15 are included in 2018 and that this financial information is unaudited.
This conference call webcast included in the Q And A session may contain forward looking statements and information relating to the Telefonica Group. These statements may include financial or operating customer estimates based on assumptions or statements regarding plans, objectives and expectations that make reference to different matters All forward looking statements involve risks, uncertainties and contingencies, many of which are beyond the company's control. We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators. If you don't have a copy of the relevant press release and the slides, Please contact Telefonica's investor relations in Madrid or in London. Now let me turn the call over to our Chairman and Chief Executive Officer, Mr.
Jose Maria Alvarez.
Thank you, Pablo. Good morning and welcome to Telefonica's Second Quarter Results Conference Call. With me today are Angel Villa, Chief Operating Officer and Laura Abasolo, Chief Financial And Control Officer. And during the Q And A session, you will have the opportunity to address us with any questions you may have. I am pleased to present solid second quarter results which showed continued progress on our strategic goals set for the year, responding today to the needs of the future, Business sustainability leverage on the robust momentum, seeing high value connections.
LTE accesses increased 31% with LT coverage reaching 73%. Whilst Ultra broadband connections increased 23%. Having passed more than 47,000,000 premises. In addition, bundling and upselling remains an ultimate lever to increase revenue per access and reduced churn. By markets, we highlight the stronger franchise in Spain after recent content acquisition and the O2 brand cloud, market leading position in key segments in Brazil, the improving trends in the UK, the positive impact of new tariffs in Germany, healthy growth in south Houston and good commercial traction in North Lisbon.
Optimizing our capabilities is a must, and we are radically transforming networks. We have created a global digital ecosystem center around the customer, and we are 4 fund runners in cognitive intelligence. Digitalization is driving business strategies is starting to generate efficiencies. So all in all, we report a strong delivering financials, consistent with the full year outlook, with acceleration in growth trends of key metrics and net debt declining for the 5th consecutive quarter even after dividend payment of per share in cash. To review our latest financial achievements, Please turn to impacts amounting to 1,000,000 in OIBDA and minus 1,000,000 in net income.
Namely derived from a Brazilian crude ruling and Mexico impairment and tax assets with Ursula. ForEx and negative effect from regulation across Europe and LatAm also dragged growth. In organic terms, we posted sustained organic revenue OIBDA and operating free cash flow and operating cash flow growth with margin progression. Revenues surpassed 1,000,000,000, 2% more versus last year. OIBDA, 1,000,000,000, plus 4.1% year on year.
And operating cash flow reached almost 1,000,000,000, 0.3 percent more than the previous year. Net income increased to 1,000,000 in the second quarter, plus 9.9% year on year, and net financial debt decreased 10.1 percent in the last 12 months, leverage on a 2nd quarter free cash flow ex spectrum 1.5 times higher than at the same period last year. Let's move now to the guidance on Slide 4. We are well on track we paid the second tranche of 2017 dividend per share in cash on June 15. In addition, we confirm the Finally, we continue deleveraging and working to improve return on capital employed.
Let's move now to Slide 5. During the second quarter, we posted healthy year on year growth rates across the board. Improving sequentially in organic term, plus 10 basis points in revenue, 90 in OIBDA and 25 in margin terms Operating cash flow is decelerating due to CapEx phasing, but growing in the 1st 6 months by 2.4 year on year. Organic service revenues maintained trends versus what's seen in the first quarter. And OpEx improved on our continued focus on cost control and efficiency measures, digitalizations and synergies from integration, to highlight All regions are contributing positively to FDA increased year on year in second quarter, but not this span, which is impacted by regulation.
As shown on slide 6, we are a platform company, advancing towards a digital telco. By leveraging both on a customer centric digitalization and on the use of artificial intelligence across all platforms. Our first platform consists of larger, smarter and more efficient networks. We are number 1 in virtualization with our global solution Unica under the industrialization process and available in 4 countries. We count on 78,000,000 premises passed with Ultra broadband and our LP coverage ranges from 92% in Europe to 67% in LatAm.
We have, as well, installed more than 3,000,000 customer devices of home gateway units that incorporate the latest features at a lower price. Systems and IT transformation on our second platform showed solid progress. As such, our end to end digitalization index reached 62%, growing 8 percentage points year on year. The same growth rate we are bringing digitalization to customers at a global scale. Our revenue mix is transforming and up to June, 53% of our total sales are coming from connectivity and services beyond connectivity.
Lastly, benefiting from the capabilities of our 4th platform and aiming to enrich customer experience since the July 3rd Is it possible to access to Aude through Movistar Home in a pilot service in 6 shops in Spain before the commercial launch anticipated within the coming months. Now let me review the main guidelines of our monetization strategy in Slide 7. In the customer segment, we are adding new levers to our portfolio, promoting upselling and increasing the customer lifetime value. In prepaid, integrated recurrent data plans are present in 43% of LatAm customer base and 62% in Brazil. Delivering ARPU uplift of around 10%.
In postpaid, we enlarged data allowances with dedicated data tariffs, for family plans. And we bundle video to encourage usage and increase customer loyalty. In fixed, Video and Ultra broadband continue to be the main growth drivers. In the B2B market, we leverage on our differentiated capabilities, being the best partner for our customers' digital transformation. Our global popularity and a complete portfolio of owned leading brands and partnerships allow us to deliver strong results with cloud and security revenues growing 42 and 63% year on year, respectively.
Now Let me explain in more detail our strategy in video, a powerful tool to increase customer engagement and therefore, data monetization. In Latin America, we are working to migrate TV customers to our IPTV platform with advanced live functionalities. And in parallel, we have launched the over the top service mobile star play in almost all countries, increasing the differentiation and value of our connectivity proposition. In Spain, Video continues to be at the core of our convergence strategy. The premium movistar Plus portfolio, including exclusive content and the best IPTV platform, results in a superior customer experience which continues to be key launching Netflix as a promotion in June.
I will now hand over to Angel to explain in more detail, segment performance and digitalization.
Thank you, Jose Maria. Let's move now to Slide 9, where we show how digitalization increases customer value and lifespan. Our growth in strategic assets supported the 3 percent year on year organic growth in average revenue by access. As clear examples of relatively longer customer lifetimes, it is worth highlighting 8 years in the UK for mobile contract, 6 years for Fusion customers in Spain, 5 4 years for mobile contract and fiber customers in Brazil, respectively. To fully capture the digitalization benefits, We have first built Leading Smart Networks as the network accounts for more than 50% of total customer satisfaction.
We are now focusing on radical automation of processes with our full stack deployments being the largest worldwide and the seat of our transformation. These are the foundations for providing best in class digital experience through a digital ecosystem and to provide our customers with a truly distinctive value proposition. Moving to next slide, we show our commitment to digital transformation in which we are pioneers, and not already capturing the impact of customer centric digitalization. Our customer journey is structured around 5 priorities, which focus on direct sales through digital channels, making payments easier, enhancing service provision and post sales technical support. I would like to mention some proof points achieving our main countries, Spain and Brazil.
In Spain, Sales in digital channels increased 45% versus Q2 2017. And total users of Movistar app were up by 54%. On the other hand, self management technical incidents were up 19% in June 2018 versus December 2017, resulting in 13% reduction of unsatisfied customers with technical support. At the same time, in Brazil, the interactions through digital channels rose by 22% versus Q2 2017 The users of mail Vivo app were up by 66%. Prepaid digital top ups increased by 16%.
And E billing customers rose by 53% year on year. And all of these translated into a 5% decline of calls to the call center. Finally, we are progressing well towards our target savings of more than 1,000,000 this year, and we have identified other initiatives like robotic process automation, cognitive contact center and blockchain which will also have relevant We again delivered a solid quarter in terms of commercial trading, with fixed broadband returning to growth and posting the best quarter in terms 233,000 net mobile contract adds, which is 7% accesses growth year on year. We continue to see value increasing within our Fusion customer base. Accesses grew 10% year on year.
Whilst ARPU increased 5.5 percent year on year despite the negative tariff upgrade calendar effect. On an improved value mix, thanks to the enhanced portfolio. High end customers, note make, for 27% of our total Fusion base. The living quality and scale of Telefonica Spania Networks remain unrivaled, and they continue to deliver growth in both the retail and wholesale business. In fact, fiber wholesale penetration gained traction in the quarter with 163,000 net add Moving on to Slide 12.
We detailed how the growth profile of terifolicaspania is reflected in solid profitability and strong financials. Service revenues annual growth, decelerated to plus 0.1% in the quarter, due to the mentioned negative calendar impact on Fusion tariff upgrades, as well as the loss of wholesale accesses from mass mobile and MTR cuts. Which impact is larger this quarter than in Q1. In any case, both residential and business revenues which altogether account for 83% of service revenues keep on growing. Cost discipline and lower commercial costs allowed to more than offset higher content costs.
OpEx declined by 0.7 percentage points quarter on quarter, leading to a 40.5 percent OIBDA margin in the quarter. As regards to football, last month we acquired All pay TV rights to broadcast La Liga football league for seasons, 2019, 2022, and WEMA Champions League and WEMAA Evoqua League for 3 seasons starting this next September. As a consequence of this, content cost will peak at the end of this year. Start coming down in Q3 2019 and remain stable onwards for the first time in quite a few years. Moving to Slide 13.
Telefonica Deutschland delivered robust operational momentum in the second quarter, while successfully progressing with network integration process. The company launched a refresh portfolio of its O2 Freeatives, including a popular data boost option as well as new O2 connect tariffs, further supporting data growth and ARPU uplift strategy. In the quarter, the company benefited from 333,000 contract net additions. Mainly driven by good take up of the O2 Free tariffs and significant partner trading supported by 4G offers. LTE accesses increased by 15% year over year to 16,600,000 customers.
Improving LTE penetration to 40% and accelerating average data usage by 22% quarter on quarter to 3.4 gigabytes per month. On financials, MSRx regulation continued growing by 0.2% versus the second quarter 2017. An ongoing strong demand for smartphones resulted in handset sales achieving a year on year increase of 7.5%. OIBDA registered a year on year growth of 0.3% with margin expanding by 0.4 percentage points, driven by a focus on profitable growth and efficient cost management. In the first half, operating cash flow increased by 3.2% year on year, leveraging CapEx and OpEx synergies of a combined 1,000,000.
Moving to Slide 14, Telefonica UK posted a very solid set The company remains UK's favorite network carrier, with more than 32,000,000 customers and continues to lead market loyalty with the lowest churn. We have successfully deployed our recently 1 ForeSee spectrum to enhance connectivity for our customers right away. The company delivered 1 more strong quarter, being the 7th consecutive quarter of top line growth. Revenue grew 5.6% year on year and MSRx regulation accelerated to 3.5%. Mainly driven by an increase in customer spend as customers continue to choose us as their preferred mobile operator.
OIBDA grew 8.2 percent in the quarter and margin expanded by 0.7 percentage points despite the ongoing regulatory drag, while benefiting from top line growth and lower annual license fee payments. In the first half, operating cash flow ex spectrum increased by 21% year on year as a result of these healthy operational trends and phasing of CapEx spend. Let's turn now to Slide 15, where we present our Brazilian business, which remains focused on capturing growth in high value markets. Once again, Vivo achieved an outstanding performance in contract, leading the market with a 37% share of new adds Thanks to our unrivaled assets. Highlighting this quarter, the fast 4G plus deployment with 596 new this cover so far this year.
Contract accesses already account for more than 50% of our mobile customer base. And coupled with the ongoing migration to higher value data offers, mobile ARPU grew by 1% year on year. Fiber reached the highest level of net adds ever. Thanks to the continued deployment that already reached 224 Cities, 98 of those with FTTH. The higher quality mix of customers led to ARPU and loyalty improvement.
Turning to Slide 16. We continue to post solid revenue growth, thanks to strong and consistent data growth of 12%. And to the accelerated smartphone adoption, boosting headset sales to 60% year on year. The transformation journey continued in fixed revenues, with nontraditional services already accounting for 59% of total revenues driven by our outstanding performance in fiber and APTV. OpEx declined for the 10th consecutive quarter, thanks to the benefits of digitalization and simplification.
And the overall ongoing effort to control costs. Finally, Vivo's sustainable business allowed to improve profitability with an upward trend in organic OIBDA margin of 2.2 percentage points to 36.5 percent. Let's turn now to Slide 17. Southeast PAM presented a strong acceleration in contract net adds driven by higher rationality in the region and by the higher Moreover, fiber connections posted an excellent performance and already represent 46% of our total fixed broadband connection space. This value growth is translated into a solid revenue and OIBDA growth trend in the region.
Highlighting first the clear improvement in Chile after posting positive revenue and OIBDA increase for the 1st time in 10 quarters. And second, in Peru, the progressive improvement in revenue and OIBDA year on year trends. On slide 18, we review the commercial performance of the North region. We sustained strong commercial traction with positive net adds, leveraging on our network quality and against the headwind of the worsening competitive environment in the Mexican market. Let me point out that almost doubled in just 1 quarter, driven by Colombia.
Financial trends were highly affected by the new regulation in Mexico since the beginning of 2018, excluding regulatory effects Revenues and OIBDA would have grown versus Q2 2017 by 1.5% and 5.1% respectively. On Slide 19, Telxius showed a solid operational and financial performance, along with increased speed of its infrastructure deployment. The tower portfolio continued to increase, adding 141 Towers in the quarter, mainly in Spain, Brazil and Chile, while currency ratio reached 1.34 times. In the cable business, international data traffic improved significantly year on year, both in terms of bandwidth capacity, plus 28% and IP traffic plus 27%. Regarding financials, top line growth accelerated sequentially, with tower business growing 8.8% year on year and Cable business significantly improving, while OIBDA increased 4.5%.
CapEx reflected the new cables deployment, and it is expected to come down during the second half of the year when Brucea Cable comes into service. And now let me hand it over to Lara to explain in detail the financial aspects.
Thank you, Angel. Turning to Slide 20, Q2 reported results are affected by nonrecurring factors that impact positively OIBDA by 225 1,000,000 and affect negatively net income by minus EUR 60,000,000. This relate to the favorable outcome of a judicial decision in Brazil increased OIBDA by EUR 485,000,000. This factor has also impacted positively net financial expenses in the quarter and reduced net debt by EUR 855,000,000 and is expected to impact free cash flow progressively in the future. -1,000,000 in OIBDA and minus 1,000,000 in net income, following changes in WACC and terminal growth with a higher risk free rate reflecting poorer macro conditions.
3rd, restructuring cost in Brazil and Germany minus EUR 48,000,000 in OIBDA. And finally, contingencies in Brazil minus EUR 108,000,000 in OIBDA, also non cash. Moving to Slide 21, net financial expenses, taxes, and minorities have also been impacted by these factors. Net financial expenses mainly reflect the positive impact of the core ruling in Brazil, while taxes are affected by the Mexican impairment and asset reversal, wide minorities reflect as well the stronger results in Telefonica Brazil. Despite the negative impact of these factors, along with the harsh regulatory drag and adverse FX evolution, net income shows high single digit year on year growth in reported terms and totals EUR 1,700,000,000 in the first half of the year.
ForEx continues weighted on Slide 22 shows. Brazilian reals and Argentinean peso depreciation versus the euro are the main contributors to the minus EUR 148,000,000 drag in year on year OIBDA variation, higher than the minus EUR361,000,000 seen in the first quarter. The positive aspect is that organic OIBDA contribution ramp up to EUR 289,000,000 in q2 versus EUR 214,000,000 in the previous quarter. So in the first half of the year, the negative FX
of
EUR 870,000,000 or EBITDA is reduced to only EUR 158,000,000 at the free cash flow level due to FX reduced CapEx taxes, interest and minorities. At the net debt level, this reduced the level by EUR 117,000,000 on a 3rd month volume base. On Slide 23, we can see that 2nd quarter free cash flow reached almost 1,000,000,000 after being impacted by the UK spectrum payment on EUR 600,000,000 and negative seasonality. Excluding spectrum free cash flow growth, sorry, 54.7% year on year and 32.7% in the first half. In the first half, reported free cash flow surpassed 1,000,000,000 or 1,000,000,000 ex spectrum.
For the second half of the year, we expect free cash flow to improve 2nd consecutive year despite dividend payment and the usual first half seasonality. Let's move now to the financial metrics on Slide 24. Stands at 1,000,000,000 as of June, backed up by our strong cash flow generation. We have lowered our net debt figure by EUR 637,000,000 in the first half of the year. In terms of our net debt to OIBDA ratio, we ended June at 2.68 times, which is roughly in line with our 2017 year end.
Slide 25 shows how Telefonica has successfully approached Capital Markets taking advantage of benign market conditions early in the year. And raising EUR 11,400,000,000 year to date. Our average debt life remains high by 9 years. We enjoy a healthy liquidity position close to EUR 19,000,000,000 comfortably exceeding our next 2 years of maturity. Effective interest payment costs in the last 12 months stood at 3.48% after June 2018.
2 basis points below that of March 2018. I will now hand back to Jose Maria.
Thank you, Laura. To summarize, first, we continue to execute on our strategic priorities. Focused on our customer centric transformation. 2nd, we continue delivering robust financials and strengthening our balance sheet As such, we are posting healthy growth rates in revenues and OADA across the board. We continue to accelerate momentum in high value accesses And this is the 5th consecutive quarter of net debt reduction.
This allow us to return value to our shareholders, whilst reiterating our 2018 guidance. Thank you very much for listening and we are now ready to take your questions. Thank
we would kindly ask
you.
We'll take our first question from Nicholas Didio from Berenberg. Please go ahead. Your line is now open.
Hi, good morning. Thanks for taking the question. I have two questions. First is regarding the expectations in H2 in Spain regarding, I mean, the pipeline for your commercial strategy you have the agreement with Netflix. You're going to launch Movistar Home, you're going to launch O2.
You're going to have the changes in the Champions League distribution. So I mean, the H1 was a decent commercial momentum, should we expect a clear acceleration of the KPIs, let's say, in H2 based on that pipeline? And the second question is regarding LATAM, any potential, let's say, M and A opportunities to reshuffle the portfolio asset swaps or any discussions from the network sharing? Thank you.
Thank you, Nicolas on the question regarding Spain. As you have seen in the second quarter, we have continued with a very positive commercial momentum. I mean, signs of market rationality. We've posted positive net adds across the board in fixed broadband, in fiber, in NEFA Fiber, in mobile contract, and TV. So we have seen so far a very positive, commercial momentum.
When we look towards the second half, we think that we have a business, which if anything is is even stronger. We have, the best capabilities. We have the best functionalities. We have the best content. So we see that commercial momentum should be strong Also, in the second half, we would expect Fusion positive net adds.
We would expect ARPU growth mobile growth to continue. Fiber take up is growing and expected to continue increasing, driving fixed broadband accesses growth. And even in TV growth is also expected.
Taking your second question, Over the last years, we have, as you know, reshape our portfolio. And we have been actively managing our assets. So our focus was always to optimize return on capital employed. And capital allocation. And that's why we did the Telchi's transaction among others.
And we are constantly reviewing our asset portfolio in order to reinforce our strategic positioning. Our aim is to build leading positions to have the stronger networks in the market where we operate while at the same time to increase the focus, clear focus on improving return on capital employed. So we are permanently evaluating our assets, return on capital employed, aiming to optimize efficiency and effectiveness of our portfolio. Our balance sheet has been strengthened. So we don't need to sell any asset at any price.
But the fact is that we will review our portfolio when it makes the strategic sense. So to conclude, you should expect from us to actively manage our balance sheet to provide us with enough flexibility. And at the same time, to decide the over convenience on timing of potential asset disposals. Always focusing on improving return on capital employed.
Thank you. Thank you, Niko. Next question please.
Next question comes from Matthew Robillers from Barclays. Please go ahead. Your line is now open.
Good morning. I had two questions, please. 1st, with regards to, your content strategy. So you've secured the rights for Lylega for a few years. It seems that Vodafone isn't completely committed into buying on a wholesale basis.
Those are right from you. And my question is, wouldn't that be actually a positive opportunity for you if you think about the customer pool that on your competitor's network and that value content and given the high level of ARPUs, obviously, you would receive less from a wholesale basis, but couldn't you make that up with increased market share? So if you could elaborate on that, it would be helpful. And then, second in with regards to leverage. So obviously net debt has come down, since the beginning of the year, leverage is flat because of Farx as we all know.
And I was wondering if you could maybe detail a little bit how you see a leverage developing in H2, what are the pluses and minuses? Thank you.
Thank you, Matti. Regarding your question on content in Spain, so far, Vodafone has announced that they would not buy the party Datto, the best match of the week. So the champions league for the season 2018, 2019, but Orange has confirmed they will buy both. You should expect us to be ready to launch to the market compelling commercial offers, including all the football aimed at those potential customers who are now left and satisfied by the current provider. These tend to be the most valuable, the highest ARPU, the lowest churn customers.
And this, many of these customers from other players, Our customers had had explicitly chosen to have football as an add on to their package with their current or their former provider customers who explicitly wanted and chose to subscribe to football. Those customers will be very welcome at Movistar TV and in addition to the football, they will experience a better set of content and functionalities compared with what they have enjoyed up to now.
If I can follow-up and do you think that that could be actually a net positive, this outcome?
Well, in order to quantify the impact we can have in the short term, because of Vodafone not buying the rights from us, You should consider the balance between loss of wholesale revenue and the increased retail revenue from an enlarged customer base capturing high value customers. And here, there are many factors, which are relevant and which we think we are quite strong. Our Fusion ARPU stands at euro at which is significantly more than what other gets. Or off pity. And this is because our offer is richer and more complete.
We use football as a tool to upsell and all of our high value cash have football in their bundles in addition to other benefits. It's a it's a contact that helps to reduce churn. Owning the contact rights not buying the channel from somebody else is more valuable because it gives us commercial flexibility to design the context to label it To do the wholesale structure, to have additional revenue from advertising, penetration of overall pay TV is still slow and football penetration, in our base, although it's much higher than other players still has way to go. So, we think that this When you run the numbers to try and measure the impact of this situation, you should bear in mind, all these effects, which all of them would work towards it being positive for us.
Taking your second question and before handing it over to Laura, you should expect from us to keep taking debt down, both organically. And now Laila will give you more color on that. But also inorganically, depending on market condition, So our aim is to keep taking the debt down in both fronts, but I will hand it over to Laura to give you more color on the organic part.
Yes. Thank you, Matija, for the question. Let me emphasize again the reduction of the net debt in the first half of the year, which is being by 10%. And it's not only the amount of the debt is also the management we've done through the 1st 6 months of the year, increasing the average debt life to 9 years in June enlarging the proportion of fixed rate, which is now 73%, which we decreased slightly interest payment costs which is standard at 3.48%. And this is complemented with the liability management exercise on the high rates that in the second half of the year, we'll have a slight negative impact in net debt.
As you recall, it's a very good extra side that has a payback of around 1.5 a year. I can tell you that Telefonica is definitely committed to maintain a solid investment grade credit rating And our intention, as Jose Maria said, is to continue reducing debt in organic basis. For that, you should improve the second part of the year, increasing free cash flow and increasing the quality of free cash flow. We are operating a growing business in terms of revenue or EBITDA and with lower cash flow, cash CapEx intensity. And that's going to flow through the free cash flow that comfortably exceeds dividend payments, labor commitments and the hybrid coupon payments.
So there's buffer to continue further deleveraging. And that could be complemented, as Jose Maria also pointed out within organic measures provided that they add value to the company, and they make a strategic sense.
Thank you very much.
Thank you, Matthew. Next question, please.
Next question comes from Keval Kiroya from Deutsche Bank. Please go ahead. Your is now open.
Thank you. I've got two questions. One, Spain and one on LatAm. On the Spanish slides, you do highlight personal expenses as a potential source of further savings. I know it can be a bit difficult to comment on future headcount reduction until you've decided upon it, but do you think we could expect something similar to what we saw at the start of early 2017 or the extension of the early retirement program?
And then second on LatAm, I thought it was encouraging that we've now started to see improvements in Chile and Peru. Should we expect these improvements in the rates of EBITDA deterioration or the EBITDA growth to also continue as well?
Thank you, Keval. On the first question, we have seen, incremental savings from the personal redundant programs that have already been announced because this will achieve full run rate in 2019. Nothing else has been decided so far. And with respect to our questions in LatAm, we have in this quarter the very good news of Chile having turned around after several quarters of decline. The company is back to growth in revenues and OIBDA.
We believe that that will be sustainable. And Peru, as I said in the previous conference call, is progress seeing in the turnaround progress. In the previous quarter, they were already in positive commercial activity. This commercial activity has accelerated into the 2nd quarter. The next stage of this turnaround should be moving to growth in revenues, eventually growth in OIBDA, which we may see towards the end of
of this
year. So we see a sustainable recovery in Chile and very good trends in Peru.
Thank you, Keval. Next question please.
Next question comes from Georgios Iradakko from Citi. Please go ahead. Your line is now open.
Hello. I've got two questions, please, both on Spain. The first question is a follow-up and I appreciate you've already partly answered this. Around the football content. And I was wondering, I know in the run up to the decision you were running some sensitivity analysis on your customer base.
Do you mind just sharing with us some thoughts around how could, let's say, one of your competitors use the savings from football to reinvest in other content or discounts, whether this could be a strategy that has some potential success. I'm guessing is something you looked at at the time as well. And also if you could perhaps share with us the importance of the different packages like the March of the week, and the Champions League versus the other games, whether, there's sensitivity in having all the packages or whether is a significant part of the base, happy with the other games. And then my second question is around 2 I know it's been just a few weeks of a soft launch, but if you could share with us some of your learnings, the traction you are seeing and there were some reports of some teething issues, earlier in the month, if you could share with us some information on that.
Thank you,
George
Well, on the first question regarding, potential reaction from some competitors that don't have the football, it's How can I say this? It is not clear to us. It's highly questionable that the subsidy for some retention, tools may be an effective way to retain the higher poo football funds who had explicitly bought an add on because they wanted towards the best football. Bear in mind that this will be the 1st season in the history of Champions League, where no free to air game will be broadcasted in Spain in the previous seasons, half of the matches were broadcasted in free to wear, not anymore in Spain. These potential tactical moves from competitor may only result in double self inflicted damage, putting tension on their commercial costs.
Added to loss of football subscribers anyway. So in any case, we prefer to talk about ourselves. Our strategy will continue to be to grow our business based on value customers. Regarding the the impact of the different matches of the week. Obviously, the party asset, which is the best match of the week, normally played by Barcelona and sometimes by Madrid is a very important piece of content that is critical to have a traction with football funds in Spain.
Regarding your question on 2, we have a multi brand, sorry, multi brand strategy designed to better suit all segments fulfilling market needs. It's a way to efficiently reach diverse customer profiles. And having the objective to strengthen our commercial traction and our financial indicators. We are positioning those brands with differentiated offer propositions, through different channels, targeting different type of customers with different product components different communication, following different strategies. So we do not foresee cannibalization risk.
The launch of O2 has been still on a beta launch, we call the official launch will be in September. O2 complements both our premium brand Movistar and the low cost 20 proposals by filling a commercial space in between. Targeting customers that demand a plane, but competitive quality proposition, easy product portfolio structure and innovative customer care what we call a premium simple brand. And, it will be competitive, but rational the official launch will be in September.
I would like to compliment to Angel that the champions league been especially important for Yamalit supported last few seasons. We expect that to continue. Thank you.
Next question comes from Sam McHugh from Exane. Please go ahead. Your line is now open.
Yes, good morning guys. Hope you're well. Two questions for me. Just First on the UK, obviously you have some currency and IFRS impact, but when I try and disaggregate everything together, it looks like the underlying retail business itself is maybe declining 3% to 4% despite some inflationary price increases, but that's being offset by tremendous growth of around 50% in wholesale So does that sound about right? And how should we think about the core retail business versus wholesale going forward?
And then secondly, in Brazil, all know what a terrific business, Vivo is, and they have 43% mobile market share, but you're now underperforming Tim and Claro probably by the widest margin that I can remember So should we be worried about negative MSR growth at Vivo going forward? And what can you do to turn this around?
I'm sorry. Could you please repeat the first question?
Yes. So just on the UK, it looks like the underlying retail business, excluding currency and IFRS, is perhaps declining around 3% or 4% despite inflationary price increases, but that's being offset by kind of 50% growth in wholesale was just wondering how we should think about the trends in the retail business versus the wholesale business going forward? And I guess the relative importance of the 2 team?
Okay. Thank you for your questions. Cola, if you've seen our UK business continue to deliver very solid results in the second quarter. We remain to be the leading mobile network carrier with the highest number of subscribers in excess of $32,000,000, which is a growing base year on year. And our it's not only growing overall, but our post pay base is growing 1.2% with growing ARPU and reduced churn.
So we believe that our retail traction in the UK is is quite strong and it's proven to be consistent in the last quarters. Regarding Brazil, we are very focused or extremely focused in contract in the contract segment because every contract customer has a lifetime value, which is substantially but very substantially higher than prepaid. So as far as we continue to get the lion's share of the net adds in contract, we are happy or we are tolerating a lower traction in prepaid. So when you look at contract performance, 37% share of net adds in the last months, We have 42.41.3 percent market share. We continue to have superior assets, be it the network, the service, the brand recognition, we have had in contract very strong net adds, 9% year over year up.
Churn has been stabilizing 51 percent of our total customer base and 80% of our mobile revenues are and in contract. So we see and we continue to focus in the high value segments in in mobile in Brazil and we feel confident on that.
Thank you, Sam. Next question please.
Next question comes from David Wright from Bank of America. Please go ahead.
Yeah. Hello, guys. And apologies if the mobile reception is a little poor. A very strong set of results. So Jose Maria, when I look at your guidance, And I think about H2, you're obviously running ahead on the revenue line.
You're very much in line with the margin, but there are indications that operations in H2 could become stronger. Spain in particular, you probably have the toughest comp. OTA UK, you had that very tough comp in Q3 last year with roaming. We're seeing some good momentum in the key LatAm markets And obviously Germany yesterday was a better number 2. Is the guidance starting to look almost a little too conservative now.
And then my second question, just on the net debt, I understand the focus on deleverage and Laura, we spent some time on this recently. But is there not an opportunity with the balance sheet, very much in shape now with the debt profile very clear with the cash flows improving to do, some targeted buybacks, especially given your I think you would probably agree your undervalued share price. Right now, could there be an opportunity just to do some some targeted quite opportunistic moves there. Thank you.
Thanks for your questions. In terms of the guidance, revenue revenue guidance is to be around 1%. We are at 2% growth in the first half. That we are always prudent when we set up our guidance metric. And what we can tell you is that current business trends are solid We have not seen anything that could significantly alter on the downside what we are seeing today.
And we feel confident that we can comfortably meet our guidance. What we can tell you is that we will will revisit the issue at the time of the third quarter results. But for the time being, we feel pretty confident we feel pretty comfortable. And you know that we have always been very prudent on that part. And in terms of the debt evolution, and potential share repurchase program, we keep being very focused on debt reduction.
So what you should expect from us is to to focus on free cash flow generation to be devoted to debt reduction. And only we will be feeling comfortable that we are there then we will certainly analyze potential share buybacks because we strongly believe that whatever you approach it in any metric, but namely on unlevered or levered our equity, free cash flow yield. Our share
price is
significantly attractive. And that's why we will monitor the best use of our capital in order to improve return on capital employed for our shareholders.
Okay. Thank you very much guys.
Thank you, David. Next question please.
Next question comes from Lee Porter from Morgan Stanley. Please go ahead. Your line is now open.
Yes. Hello. Good morning. Two questions, please. First, just on, again, on the football rights, and a potential wholesale offer to over the top providers.
What I would like to know is, 1st of all, whether this is a mandatory as it happens to all the telco players as part of your remedies? And secondly, how do you see this option? Whether this is more an opportunity to monetize the football rights or whether there's a higher risk of cannibalization or reducing your competitive position, with other peers like Escalteo, which we're offering this through Bainsports. So I would like your thoughts on how should we look into this, whether it would be a positive or a negative and and how to address this optionality? And the second question is on the ownership of the network.
And more specifically about these comments in the press a few weeks ago on the board exploring a potential sale of the fiber network. Anything you can tell us on that would be helpful.
Thank you, Luis. On the football wholesale offer to OTTs, we are now in the process of formally getting offers both on pay TV and OTT for our content. This will be due with the end of of July. So far, what we see is very limited interest on this front. So we don't see risk of cannibalization.
Hi Luis, taking your question on the on those rumors. We have been hearing the rumors. Around this potential divestment or contribution of our fiber neighboring Spain into a fund. We don't know where those rumors are coming from. Our fiber network in Spain is one of our key differential assets It took us a significant amount of capital and determination to build it.
Telefonica Espana is the European leader in Ultra broadband. And as you know, there is more fiber in Spain than in the some of the UK, Germany, France, Italy and Portugal together. So we have no intention to sell it or to contribute it to any fund.
The next question comes from Akhil Dattani from JP Morgan. Please go ahead. Your line is now open.
Yeah, hi, good morning. Thanks for taking the questions. I've got two questions both on Spain, please. The first one is just on the competitive environment going forward. And I guess I'm just keen to get your thoughts on 2 things.
1, Vodafone's comments from yesterday, which I'm sure you've heard around the, I guess, renewed efforts they're making in the market to turn around the business I guess, we saw a good mobile quarter from them, but still very weak on fixed line. And clearly, that's where they seem to be much more focused. So are you seeing anything in the market yet? Is this something you're seeing is having much of an impact? And I guess the second bit around that was just Massimo launching a low end TV product again, is that relevant at all?
And is that having any sort of impact? So that's the first question. The second question was just on fiber regulation. We had a couple of years ago the decision by the Spanish regulator to effectively deregulate fiber in competitive areas. Since then, the level of fiber deployment in Spain has continued to ramp across all players.
Could you help us understand if there's any visibility around when the regulator might update that framework if they did, how much of Spain you think might end up getting deregulated? And ultimately, whether you think that would have any sort of meaningful impact in terms of how the landscape looks? Thanks a lot.
On the competitive landscape, what we see is that, in 2018, rationality is back. We have seen more or new more for more tariff upgrades applied by most players in the first half by all of them. Vodafone is true has been more active in promos in the second quarter to try to revert some of their trends. But we see, an environment, which is rational and constructive in the high end segment or mid high end segment. There are 3 infra players with rational behavior.
We are oriented to upselling, cross selling, These are the segments where there is more loyalty. We see tactical promotions, but not structural ones and aiming to be our progressive. In the low end, we have seen more intense competition, but now a multi brand approach is being applied by most players. So we are getting And we should be getting more traction on this front. We believe that we continue to have differential strength As Jose Maria was saying, the best fiber network in Europe, LTE coverage, which is second to none.
We have the best TV platform. In terms of content functionalities. None of our competitors has a similar level of contents like the one that we have in spite of of regulation that makes us to offer premium content to competitors. We think we have the best distribution channels we are working to have the best digital customer experience. We have the most valuable customer base, the highest ARPU, the longest customer lifetime.
So we think that we are we feel very well equipped to compete in what we perceive to continue to be a rational market And in all of these, you may say, stock, our results are the clear, the clear proof. Regarding fiber regulation regulation has a geographical segmentation in Spain. The prices, the wholesale prices in regulated areas has been determined already. It's based on replicability. When it used to be cost oriented.
It means that every retail offer from Telefonica must be replicable with profitability by competitors. The price was set points higher than the initial expectations. And this, this prices allows as to combined generation of wholesale revenues and a competitive retail offer. We signed, as you know, wholesale revenues with our main competitors which is helping to avoid what some people have feared, risk of potential overbuilt in fiber in Spain. So we are getting very good traction both on retail and in wholesale fiber revenues.
The prices will be reviewed periodically, on a half year basis. And the way the formula goes, more for more strategies will be reflected in NIVA prices review. So if there is, tariff upgrades, that should result in never price increases.
I, if I may complement, in terms of the competitive zones that you were mentioning, those are sixty six cities today. And this is review every 4 years. I think we have 1 more year to go on this or again, I have to go on this before being reviewed. According to our calculations, today is 2 50 cities that should be included. So we think that the competitive zone should be significantly expanded in the next regulatory radiation.
Thanks. That's very helpful. Can I just clarify one point when the regime gets update in the year and a half? How should we think about what that really means in real terms in terms of the average wholesale rate? I mean, does it effectively mean because there's more regions that are deregulated the average wholesale right rises in those areas for those individuals using your network?
Well, it will provide us with additional commercial flexibility that somehow today is constrained by the regulation, but bear in mind that we have already a long term wholesale agreements in place with Vodafone, with Orange, So that should not have any bad impacts. And on the on the upside, I
think that that would foster migration from Ultra, Ultra and banding of the local access of the local loop into fiber wholesale market. So that should accelerate the migration into higher speeds and therefore, the migration into higher ARPU coming from the wholesale access.
That's very clear. Thanks a lot.
Thank you, Ratil. Next question please.
From Joshua Mills from Goldman Sachs. Please go ahead. Your line is now open.
Hi there. Thanks for taking the question. Sorry to come back to the football rights, but maybe I can ask in a slightly different way. In the press release, which you put out after you had confirmed the media pro deal, you said that the net costs, I. E, how much you're spending less the wholesale revenues you were hoping to receive of the combined La Negron, your A for rights would be 5% higher compared to the previous cycle.
Yes, on my numbers, it looks like you're spending about 1,000,000,000 more on content going forward. And clearly, if Vodafone decide not to renew the agreement, there's potentially quite a big hole in your Spanish EBITDA next year, My question is what percentage of Vodafone's 1,300,000 TV customers would you need to win, given that Orange will also be going after them for that, for this to be actually a net positive to put it in, in other analyst words, And if you do win those customers, do you also have to assume that there's some ARPU increase given what versus what they're currently paying on the Vodafone network? Thanks.
Let me guide you a little bit on the evolution of football content costs in the coming quarters and then I'll get to the Vodafone specific comment. As you know, we are now entering the 3rd season of the previews La Liga cycle. Here, we had only bought as exclusive content, the main the partida for the main March of the week which is what is subject to wholesale resale. We didn't buy the remaining merchants, which, by the channel from the April, we are not reselling those. So the impact of pre sale of content rights in the current season is just restricted to regarding La Riga to the party.
And then, of course, to the Champions League that, which has and pot. This means that the content cost, football content cost will peak in Q4 this year will stay the same in Q1 and Q2 of 2019 and will decline from Q3 2019 onward. For the following four quarters and then stabilizing. All of this has been factored into our internal projections. So for year 2018, we continue to aim to a 40% OIBDA margin since efficiencies, digitalization benefits and other savings will offset the evolution of content costs.
To be clear, starting second half of twenty nineteen. There will be deflation in football content costs. This provides a high visibility and sustainability to the Spanish business model and the P and L of the Spanish operation for the next 3, 4 years and will allow us to continue to maintain the highest operating cash flow Regarding Vodafone subscribers, Vodafone claimed to have 400,000 subscribers with football add ons not so long ago. Now they say 300,000 I don't know, but maybe 2 possibilities that they try to minimize the potential erosion of their base or that they are already losing subscribers in any case. We aim to produce a compelling customer proposition to attract a fair and significant number of the football funds who now may be unsatisfied with their provider.
Thank you, Joss. Next question please.
From Mandeep Singh from Redburn. Please go ahead. Your line is now open.
Thank you very much. I just wanted to come back sort of Spanish revenue and OIBDA trends. I mean, I noted that, service revenue growth Q2 decelerated versus Q1, just ten basis points organic growth, so pretty much flat. OIBDA also pretty much flat. Yet you're sort of projecting or painting a much more bullish picture of the Spanish business, which actually is demonstrating no growth.
How should we think about the sort of growth out Spain, is this a business that can actually grow a few percent or is this literally a flat business with flat margins or how should we think about this? So I don't really see the growth.
Thank you Mandeep for the question. Revenues in the second quarter, for the Spanish business were up 0.3%. This was a combination of sorry. Hello? Okay.
Revenues were up. Have you asked another question or
Andy, could you please put the telephone in mute? Because the polysilicon, sorry.
So as you saw, Q2 revenues were up 0.3%. This is a combination of handset sales, which are having a positive trend. On the back of the commercial activity, the positive commercial activity that I spoke about in a previous question. And service revenue trends, deccelerated or reduced the rate of growth compared to the first quarter due to the tariff repositioning calendar. This year, we're having done some tariff upgrades in first quarter.
Last year, it was in the second quarter. So the calendar effect is the one which is affecting the rate of growth. We do not guide revenues by regions, but if you look at the trends, you can extrapolate things now. So in B2C, looking at the different components of service revenue. In B2C, which accounts for 54% of service revenues, It's growing, in Q2, 1% year on year.
72% of this is Fusion revenue growing at 7.7% So, we have been seeing in increases both in volumes and ARPUs with contention or reduction of churn, we may see some promotional activity in the second half in in B2C, but this is a trend that is behaving nicely. In B2B, which accounts for 29 percent of service revenue, is accelerating growth. It's back to what's back growth already last quarter is +.2 percent in Q2. And this is a combination of communication services communication revenue services that declined 0.7 percent, more than compensated by IT revenues, which are growing at 7.4% in Q2. So the trend and composition of B2B revenues is gradually improving And we aim for stabilization in B2B for the whole year.
So then you have wholesale and other. Wholesale another this year is declining. The 2 main factors for this was the loss of MVNO revenue from the Masmobile owned units and regulatory impacts due to MTR price cut. This is partially compensated by a growing volume of Neva wholesale migrations from copper to fiber wholesale. And content resale dynamics that we've spoken at length in this call are also going to be relevant.
So, we do not guide for revenues for the year, but we are reasonably optimistic. Thanks very much. Regarding OIBDA, I already said in previous question that we see margin levels to remain around 40% for the year.
Thank you, Mandeep. Next question please.
Thank you. Our next question comes from Giovanni Montalte from UBS. Please go ahead. Your line is now open.
Hello. Thank you. Sorry, just a very quick follow-up again on Fubo. You were saying that you expect the decision of Vodafone to have a positive impact on your numbers. Will these be valid also for the short term for Q4, for Q3?
Thank you very much. Thank you, Giovanni. As I was commenting before, you should expect us to be ready to launch and now I add the word immediately to the market compelling commercial offers, including all the football aim at those potential customers who explicitly wanted and chose to subscribe to football with other providers. So I had to work immediately. So if I may, a very quick follow-up also on the point you were making before about the trend of football costs.
You were saying peaking in Q4, And then starting to decline as of H2 or flattening because I my understanding was that as of H2 2019, Hubacoast would be kind of flat for the coming years. Did I understand correctly? You said they would actually decline? Let me repeat it. The football content cost will peak in Q4 this year.
We'll stay the same in Q1 and Q2 of next year. And will start declining in Q3 of twenty nineteen. Also, Q4, Q1 and second of 2020 and then stabilizes.
Thank you. We have time for one last question, please.
There are no further questions over the telephone at this time.
Okay.
So thank you very much for your participation.
Pardon the interruption. We just have someone in queue, Julio Arciniegas from RBC. Please go ahead. Your line is now open.
Yes. Good morning. Thanks for taking my question. Sorry to come back again with this question, but I don't really, really, really understand the answer. How I understand that the company announced a 5% inflation of net cost of football, assuming that basically will receive wholesale revenues from Orange And Vodafone.
So how this 5% inflation announced by the company is going to change if Vodafone doesn't go? Is that I don't really understand how basically content costs, the net cost is going to be basically lower that is right now? And my second question is regarding O2. The company said that due to regulation Telefonica wasn't allowed to use a national price of and that it was basically forced to use 2 prices. However, the regulatory reply saying that Telefonica can use in all the regions.
And that basically Telefonica, they just need to change the wholesale price of FTTH. Has the company considered changing the wholesale price of FTTH to be able to use EUR 45 nationally and how this will impact also that contracts that you have signed with Orange And Vodafone? Thank you.
Thank you, Julio. Let me let me try again on the evolution of constant cost here, maybe. What you need to bear in mind is the different cycles of 3 years of one content and the other. So when we announced the deflation of the course of La Liga, that's for the season that starts in September 2019 onwards. So in now this coming season that starts after the summer, we're still in the 3rd year of the previous cycle of La Liga, which had inflation versus the 2nd year of the previous cycle of La Liga.
So that's why I'm saying that we're going to see, content cost increased due to that 3rd season of the previous cycle of La Liga. And we will see the reduction starting in the cost of La Liga starting in Q3 2019. Obviously, the net cost, if that we had calculated, assuming that Vodafone would be buying those content at this moment with the current decision of Vodafone, which by the way, if they think twice, they're always, welcome and capable to come back but with the current decision of Vodafone, the net cost will change and the overall economics for us will depend on the trade off between that reduced wholesale revenue versus increased retail revenue if we manage to get, which we are reasonably confident we managed to get additional subscribers. With respect to to prices, we are constrained by the regulation to offer a nationwide offer with the same prices. We want to have a proposition the €45 proposition, we would like to have launched the nationwide regulation prevents to do it so in regulated areas, the customer promise is that as soon as there is a change in the number of regulated cities and areas according to the comment that Jose Maria made before, we will compensate the customers accordingly.
We would have desired or wished to launch that offer from the outset nationwide at the lower price. But unfortunately, regulation is not making it possible for us to offer such benefit to our customers.
I now hand over to Jose Maria to close the call.
Well, thank you very much for your participation. We certainly do hope that we have provided some useful insights for you. Should you still have further questions, we kindly ask you to contact our investor relationship department. Good morning, and thank you.
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