Ladies and gentlemen, thank you for standing by, and welcome to the Telefónica's January-March 2018 results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you would like to ask a question, please press star one on your telephone keypad. If you should require any assistance during the call, please press star zero. As a reminder, today's conference is being recorded, and I would now like to turn the call over to Mr. Pablo Eguirón, Global Director of Investor Relations. Please go ahead, sir.
Good morning and welcome to Telefónica's conference call to discuss January-March 2018 results. I'm Pablo Eguirón, Global Director of Investor Relations. Before proceeding, let me mention that financial information contained in this document related to the first quarter 2018 has been prepared under International Financial Reporting Standards as adopted by the European Union. From the 1st of January 2018, we have implemented IFRS 15 and 9, and all financial information in this presentation is based on this new standard. In organic terms, the effects of accounting changes to IFRS 15 are excluded in 2018. This financial information is unaudited. This conference call webcast, including the Q&A session, may contain forward-looking statements and information relating to the Telefónica Group. These statements may include financial or operating forecasts and estimates based on assumptions or statements regarding plans, objectives, and expectations that make reference to different matters.
All forward-looking statements involve risks, uncertainties, and contingencies, many of which are beyond the company's control. We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators. If you do not have a copy of the relevant press release and the slides, please contact Telefónica's Investor Relations Team in Madrid or London. Now, let me turn the call over to our Chief Operating Officer, Mr. Ángel Vilá.
Thank you, Pablo. Good morning and welcome to Telefónica's first quarter results conference call. With me today is Laura Abasolo, Chief Financial and Control Officer. Following our presentation, we will host a Q&A session and invite you to ask any questions you may have. I would like to start this call by sharing with you an update on the execution of our strategic priorities. First, our total access base reached 357 million, highlighting strong growth posted by LTE, smartphones, fiber, and pay TV. In addition, we have increased our own fiber footprint by 15% year-on-year to a total of 45.8 million premises passed with fiber and cable, and advanced further in our focus on monetization. Second, all of our business units delivered revenue and OIBDA growth, excluding the impact of regulation. Third, we continued to strengthen our differential platforms and advance in our digitalization and monetization journey.
As such, we launched Aura in six countries, leveraging on cognitive intelligence to enhance customer relationship. Overall, this translated into incremental revenue, OIBDA, and operating cash flow growth at the group level, with further net debt reduction. In addition, Q1 results are in line with our expectations, allowing us to reiterate guidance for the full year. To review Telefónica's key financials, please turn to slide number three. Reported figures for the first quarter reflected the new IFRS 15 and 9 accounting standards, with a limited impact on both revenues and OIBDA. However, 2017 figures are reported under IAS 18. As such, year-on-year reported variations are affected by accounting changes, by the negative evolution of FX, regulation, restructuring costs, and tower sales. On an organic basis, growth is robust and accelerated from revenues to operating cash flow, as top line grew 1.9%, OIBDA 3.3%, and operating cash flow 4.4%.
Net income surpassed EUR 830 million, 7.4% more than in January-March 2017, and underlying earnings per share reached EUR 0.17. Free cash flow of EUR 550 million is a positive result in a quarter traditionally negatively impacted by seasonality and is growing pre-dividends to minorities. Moving to slide four, based on Q1 results, which were in line with our expectations, we confirm our 2018 guidance, as seen in the table to the top left of the slide. We are well on track to meet our guidance and are executing actions to maintain a solid balance sheet to pursue additional deleveraging, improve return on capital employed, and offer an attractive, stable, and sustainable shareholder remuneration. We also confirm the dividends to be paid in the calendar year. EUR 0.2 per share on 15th of June, which is the second tranche from the 2017 dividend.
EUR 0.2 per share on 20th of December, which will be the first tranche for the 2018 dividend. The second tranche of the 2018 dividend, EUR 0.2 per share, will be paid in June 2019. On slide five, free cash flow generation reached EUR 550 million, roughly EUR 50 million less than in January-March 2017. As shown in the graph on the top right of the slide, free cash flow evolution is affected by a one-off payment to Telxius minorities. Before minorities, free cash flow grows by 15.2% to a total of EUR 719 million. This strong cash generation has helped to reduce net financial debt in the first quarter by EUR 255 million. This is the best first quarter performance on the last four years. In addition, net debt declined EUR 4.8 billion in the last 12 months, a 10% decline. Let me remind you that Q1 is traditionally impacted by negative seasonality.
For the rest of the year, we expect free cash flow to substantially improve. Moving to slide six, we will share with you some more details with regards to FX impact. The largest impact that is affecting the year-on-year evolution of our revenues and OIBDA in the first quarter is the euro appreciation. This is a factor affecting many European companies. FX dragged OIBDA by EUR 372 million in the first quarter, but impact in free cash flow was reduced to just EUR 26 million as FX also reduced payments in euros of CapEx, taxes, financials, and minorities. The use of spot rates for the calculation of net debt versus average rates for the P&L mainly explains the net debt increase in the first quarter. In the 12-month rolling period to March 2018, FX reduced net debt by EUR 722 million.
As you can see on slide seven, we are delivering positive organic growth across key financials. In reported terms, the year-on-year decline diminished as we move from revenues down to operating cash flow, which was pretty stable. OIBDA margin expanded 0.4 percentage points in organic terms in the quarter to 31.7%, benefiting from the increasing relevance of digitalization, cost efficiencies, and synergies. OPEX was stable in reported terms. Sorry. We continue to be more efficient in CapEx, with a 1.5% year-on-year increase due to different phasing versus previous year. This increase will revert in the following quarters as we are covering more with less investments. Finally, operating cash flow margin expanded 0.5 percentage points. Now let me present the progress made on data monetization. The opportunity is huge, given the exponential growth in data traffic.
Therefore, we are enhancing our focus on the three levers we employ: attracting, bundling, and upselling. Each quarter, we attract more high-value customers, as reflected in the increased LTE and fiber penetrations. Once they are Telefónica customers, we then bundle voice and data in various ways with tailored and innovative offerings to foster upselling. We add exclusive video content to our tariffs, enlarge data allowances, or make the prepaid data plans recurrent. The results are positive. Bundling encourages usage and increases our customer loyalty, while upselling increases ARPU by double digits when customers move, for example, from copper to fiber or from 3G to 4G. On slide nine, we lay out our platform strategy and why we believe this structure best serves our customers' needs. In the first platform, our physical assets are supporting connectivity, we continue to build leading-edge networks for tomorrow.
LTE coverage reached 92% in Europe and 66% in LATAM, ultra-broadband coverage is now at 76 million premises passed. Additionally, we are moving towards 100% virtualization of the network. In the same vein, we are accelerating end-to-end digitalization in the second platform to advance in real-time process automation with the largest full stack transformation in the industry. Our end-to-end digitalization index is up nine percentage points year on year to 61%. The evolution of our third platform, products and services, has allowed us to offer a distinctive value proposition. Broadband connectivity and services beyond connectivity now represent 53% of total revenues. Finally, in the fourth platform, we are pioneering artificial intelligence to make the new customer relationship model a reality with 1.3 petabytes of data being processed a month. As a result of these capabilities, we have launched Aura in six countries, as shown on the following slide.
On slide 10, we present Aura, our new way of experiencing and interacting with Telefónica, based on our fourth platform capabilities. It's a one-stop shop for our customer needs, delivered via own and third-party apps, which allows customer to talk to technology in real time to get things done. This will build a relationship of trust with our customers based on data transparency and security, will have a positive impact in terms of customer acquisition and retention, plus improved brand perception. We have already launched Aura in six countries, further innovations will come during 2018, such as the Movistar Home device to be launched in Spain. On slide 11, we are taking a step forward in our digitalization program, an area in which we are pioneers. We have a clear objective here, to imbue digitalization in everything we do.
As such, across our geographies, we are focused on the execution of the initiatives set around five priorities to improve the customer journey: to foster sales through own digital channels, to expedite payments and collections, to improve provision and technical support, and to enhance customer care experience. As a result, we are increasing customer engagement and progressing well towards our goal of more than EUR 300 million savings this year. Now, I will hand over to Laura.
Thank you, Ángel. Moving to slide 12, we present the performance of the domestic business. In a market led by more for more strategies, our increasingly competitive offering drove a solid commercial trading in value services, with a noteworthy churn reduction seen across the board. Fusión continued to post healthy growth in customer base and total accesses. Fusión ARPU increased 7.5% year-on-year, on the back of tariff upgrades and an improved value mix thanks to the enhanced portfolio. The leading quality and scale of Telefónica España's networks are unrivaled, and they continue to deliver growth in both the retail and wholesale business, as proven by the recent wholesale fiber agreement signed with key players in the market. Moving on to slide 13, we present how the growth profile of Telefónica España is also reflected in its financials.
Service revenue accelerated their year-on-year growth to 0.8% in the quarter, on the back of a better performance from retail revenues and despite declining wholesale revenues, which were impacted by the gradual loss of wholesale accesses from MásMóvil and MTR cut. Excluding this impact, service revenue would have increased 1.8% year-on-year. As a result of this positive top-line trend, in combination with cost discipline and lower commercial costs, OIBDA posted a 0.6% year-on-year growth, and margin stood at 39.5%, flattish year-on-year. Finally, operating cash flow margin stands out among European peers at 28.3%, despite a slight increase in CapEx due to different phasing versus last year. Telefónica Deutschland, on slide 14, demonstrated a continuous market momentum in a dynamic yet rational competitive environment. In the first quarter, the company successfully continued its integration process and was ranked number 2 in the connect Mobilfunk-Hotline-Test.
The first quarter presented a strong KPIs performance, supported by solid contract net adds of 157,000 customers and robust partner trading. LTE accesses increased 15% year-on-year to 16.1 million. Additionally, data traffic continued its strong growth and was up 46% year-on-year, supported by the new O2 Free tariff portfolio. On financials, MSR regulation continued its improving growth path, while handset sales registered a year-on-year increase of +10.5%. OIBDA posted a sustained growth of 0.7% year-on-year, and further margin improvement of 0.3 percentile points year-on-year, with a successful synergy capture of EUR 35 million, which more than offset the ongoing regulatory drag. Finally, it's worth highlighting the operating cash flows increase of 7.1% versus Q1 2017, also boosted by CapEx synergies of EUR 15 million and efficient CapEx spent on network consolidation and LTE rollout.
Turning to slide 15, the U.K. delivered another robust financial performance this quarter. We are highly satisfied with the results of the recent spectrum auction, in which we won the largest share of the spectrum for the lowest price per megahertz. The 40 megahertz of 4G spectrum we have won enables us to enhance connectivity for our customers right away, while the 40 megahertz of 3.4 gigahertz spectrum will be suitable for the development of 5G technology. Telefónica U.K.'s award-winning network remains the largest in the country, with 32 million customers leveraged on sustained growth in higher value customers and market leading loyalty level. This high-quality base has led to another strong quarter of organic MSR growth of 2.8%, excluding regulation, leading with total revenue growth of 2.9%, as consumer and businesses alike continue to choose us to be their preferred network provider.
OIBDA was up 6.1% in the quarter, despite the continuing regulatory drag, mainly from roaming like at home, while benefiting from lower annual license fee payments. As a result of this, and the phasing of CapEx investments, operating cash flow was up 32.9% year-on-year. Moving on to slide 16 on Brazil. Our unique assets once again allow us to post a strong set of results. Postpaid Q1 net adds increased by an outstanding 67% year-on-year, with a stable churn rate of 1.6%. New fiber connection accelerated to 102,000 in the quarter, with an impressive take-up ratio of 50% in the first five cities launched in 2017. In Pay TV, we continue to focus on IPTV, which has a higher internal rate of return, uses cutting-edge technology, and currently represents 27% of our total TV access.
This quality growth enable us to maintain an outstanding ARPU growth across our main services. On to slide 17, we saw the consistent and solid financial performance in Brazil. Mobile service revenues increased 3.5% year-on-year, once more well above inflation, driven by mobile data and tariff updates. The fixed business trend continued to be affected by the decline in voice, fixed to mobile substitution, and DTH. These negative effects are partly offset by the outstanding growth of almost 22% in fiber and 67% in IPTV. Finally, OIBDA margin increased to 36.3%, the highest margin since 2009, underpinned by our ongoing cost reduction efforts built on efficiencies, digitalization, and simplification measures. Moving to slide 18.
In South Hispam, mobile contract quarterly net adds reached 159,000, well above last year levels, with Peru posting positive figure for the first time in seven quarters and Chile strengthening the upwards trend shown since the second half of 2017. At the same time, fiber connections posted a fourfold increase and Pay TV accesses were up 7% year-on-year, while penetration levels still remain low. This focus on quality, along with a better macroeconomic backdrop, resulted in healthy financial results with revenue growth of 7.6%, OIBDA of 10.8%, and margin expansion of 0.8 percentage points. Turning to North Hispam on slide 19, it is worth highlighting our commercial success, delivering best-in-class connectivity through continuous network improvements. In mobile, we reached the highest ever contract net adds in the region, while penetration of smartphones and LTE is ramping up.
In the fixed business, fiber adoption accelerated after adding 41,000 new fiber connections in the quarter. However, revenues and OIBDA were negatively impacted by the new regulation in Mexico implemented at the start of 2018. Excluding this adverse impact, revenue and OIBDA grew. On slide 20, we saw the Telxius highlights. The key development to flag is that Marea cable came into service at the end of March and is now connecting U.S. and Spain. The tower portfolio continued to grow 3% year-on-year, as 24 new towers were added, mainly in Spain and Brazil, amounting to more than 16,000 in total, while tenancy ratio also grew to 1.34 times. Solid financials were maintained in the first quarter, with improving revenue trends, +2% up year-on-year, mainly driven by tower business. OIBDA margin levels were sustained at 47.6%.
CapEx reflected the efforts deployments of the two cables, Marea and BRUSA. We expect to reduce the CapEx levels during the second half of the year when BRUSA comes into service. Let's move now to the financial metrics on slide 21. Net debt has reduced below the EUR 44 billion mark, mainly thanks to healthy free cash flow generation. Net debt to OIBDA ratio remains range bound at 2.67 times, despite the usual Q1 seasonality. Our high reliability management exercise had a temporary positive effect on debt reduction in Q1 that will reverse in Q3 when the remaining amount on hybrid with known call September 2018 is called. Overall, the hybrid management exercise has had a positive mid-to-long-term impact. Slide 22 shows how Telefónica keeps on actively approaching the market with over EUR 10 billion long-term financing completed in Q1.
As a result, we have increased our average debt life in excess of nine years and maintained a liquidity cushion over EUR 20 billion. Therefore, facing comfortably next two years of maturity. The interest payment effective cost in the last 12 months stood at 3.50% as of March 2018, stable compared to a year ago. The positive evolution in Latin America is compensated in Europe due to different coupon payment calendars. I will now hand back to Ángel.
Thank you, Laura. To summarize, first, we are making excellent progress with regards to our strategic priorities, focused on our mission to let our customers choose it all. Second, we had a healthy start to the year, delivering robust financials. Third, we are reiterating our 2018 guidance. Thank you very much for listening, and we are now ready to take your questions.
Thank you. Ladies and gentlemen, if you would like to ask a question at this time, please press star one on your telephone keypad. To cancel your question, please press star two. Once again, that's star one to register a question and star two to cancel. We would like to ask you to a maximum of two questions per participant. If possible, we recommend you not to use your cell or hands-free phone. There will be a short silence while questions are being registered. Our first question comes from the line of Joshua Mills from Goldman Sachs. Please go ahead.
Hi there. Thanks for taking the questions. I've got two, please. The first is just a quite straightforward data point. On slide eleven, you've laid out quite a few targets for digitalization. I wondered if you could give a statistic, as some other operators have, as to how many of your sales, maybe just in Spain, are actually done online now, and how that has changed over the past year or so. I think a few operators said it's around the 20% level already. The second is a bigger picture question on your convergent strategy in Europe. The message has always been that whilst we're convergent in Spain, we're less worried about having fixed line in Germany and the U.K., which you haven't had the same level of fiber build in. Now, that level of fiber build may be increasing.
You potentially have some strategic options to go for cable wholesale in Germany if Vodafone Liberty gets approved or maybe buy an asset in the U.K. My question is, do you think that there is a bigger need now for convergence in either of those markets than there was before? Why is it that you think your U.K. mobile-only trends seem to be holding up a lot better than your German mobile-only trends when you look at net adds, ARPU, et cetera, on an underlying basis? Thank you.
Thank you, Joshua, for your two, actually three questions. On digitalization, we have described on page eleven first the five areas in which we are focusing with regards to the customer journey, these and the targets for 2020. We had already put this in the previous presentation in the last quarter. We are including examples on how in different geographies we are progressing in different points. For instance, in direct customer interaction regarding to sales, we expect across the group to increase over the next three years by 2.5 times the sales in self-assisted channels. Offer personalization is increasing conversion rate in online channels. It also increases value sales. In this sense, Spain is already showing progress. At the end of 2017, Spain has already achieved 40% of sales personalized. This is a good KPI with respect to the Spanish operation compared to some peers.
Regarding convergence strategy in Europe, in particular with respect to the markets in the U.K. and Germany, we have also always stated, and we continue to be of the same opinion, that convergence is supply driven. Convergence is depending on the specificities of each one of the markets. What we're seeing both in Germany and in the U.K. is soft conversion trends, with relatively limited traction so far. We have different hedges to our mobile-centric exposure, both in the U.K. and Germany. In Germany, we have a long-term agreement to access the ultra broadband network of Deutsche Telekom. In the U.K., on the one hand, one of the leading players that is aiming for convergence, which is Sky, has been. We have a partial hedge.
In addition, regulatory measures regarding Openreach are going to be providing progressively access to that network, and other independent players are building fiber networks. We keep on monitoring those developments to have access to backhaul or more capillary fiber when needed, but we believe that our mobile-centric approach in both markets is sustainable. I think that you finally were commenting on the different performance of the mobile operations in Germany and the U.K. These are very different situations. In the U.K., we deliver very solid results. We remain being the leading mobile network carrier with a base in excess of 52 million. We are growing 0.4% year-over-year. The postpaid base grew 1.2%, the LTE grew 2.7%, reaching a penetration of 60%.
There was increased customer spend in the U.K., and we continue to have the leading level of customer loyalty with churn below 1%, and this has flown into financials in our U.K. operation. In Germany, we continue to have progressively better commercial momentum, in B2C and in B2B, and we are in a trend that if you exclude regulation, we are moving towards better mobile service revenue trends. Different markets. In both, we are the leader in terms of number of subscribers in mobile, and in both, we are improving or, in the case of the U.K., posting a shining performance.
Just one very quick follow-up. Would you consider co-investing with some of these smaller fiber players, either in the U.K. or Germany to get better fixed-line access terms, like a CityFibre or Deutsche Glasfaser, for example?
We're open to agreements with players in order to have the infrastructure that we may need for our operations. Yes, we're absolutely open to explore such agreements if they were needed by our operations to deliver to their customers.
Thank you, Josh. Next question, please.
Next question comes from the line of Mathieu Robillard from Barclays. Please go ahead.
Yes, good morning. Thank you for taking the question. I have two questions. The first one on fiber rollout in Spain. The regulator has now released what the wholesale prices will be for fiber. I wanted to get your take on how you view these prices and more importantly, how does that affect your plans in terms of FTTH rollout in Spain? I think this was something you were waiting to have confirmation on, to have a better sense of what kind of profitability you could reach from these investments. The second question with regards to the U.K., for very good results on the spectrum auction. I was wondering how fast can you put this spectrum at work, how does that impact your thinking in terms of any potential IPO for this asset? Thank you.
Thank you, Mathieu. With respect to the regulation of fiber in Spain, the NEBA fiber wholesale price, which applies to regulated areas, is based on replicability. Formerly, it was cost-based, now it's based on replicability. This means that every retail offer from Telefónica must be replicable with profitability by competitors. The new price of NEBA service has been set at EUR 17.57, which is clearly better than the initial consultation price, and recognizes a price premium versus copper, which is significant. This price allows Telefónica to combine the generation of wholesale revenues. At the same time allows for a competitive retail offer. The price will be periodically reviewed every six months. Any more formal strategy will be reflected in NEBA price variations or increases even.
This is allowing for a simultaneous generation of wholesale offers. We have entered into wholesale agreements with Vodafone and Orange, which are being reflected in the nice take-up of the fiber wholesale revenues. The NEBA fiber accesses have multiplied by 2.3 year-on-year. At the same time, we can have competitive retail offer. This will also result in avoiding an overbuild of fiber in the country. With respect to the U.K. spectrum, Telefónica UK acquired the most amount of spectrum in the auction at the lowest price per megahertz. This was an auction in which the industry has displayed rationality. The more balanced spectrum distribution will benefit U.K. mobile customers. The spectrum is already in use.
The first sites, because we had been preparing thoroughly for this, the first site went live within six minutes of spectrum award. 60 sites went live within four hours. Over 100 sites will be already live by the end of April. This spectrum is already in play and is giving our customers an immediate boost in the user experience. With this successful auction behind us, the very nice performance of our U.K. operation, we continue to progress on the preparation of a potential IPO. For us, the U.K. market is strategic because it's at the forefront of the digital customer revolution in Europe. The U.K. operation is displaying a very good performance. This successful outcome of the spectrum auction is giving us the capability to strengthen our quality proposition.
We are a stronger company now than we were when we last spoke in the previous conference call. Imagine if our performance was good so far, from now on without capacity restrictions, how it could be. The IPO is still an option. We keep working on it. We will be monitoring market conditions. We will be prepared as soon as there is, if there is, a suitable window of opportunity.
Thank you very much.
Thank you, Mathieu. Next question, please.
Next question comes from the line of Ivan Lill from BBVA. Please go ahead.
Hello. Good morning, everybody. Just maybe one question on football and try to understand how you are approaching the next auction on football. The first thing is, I think you are going to have to negotiate the Champions League rights before La Liga rights. I would like to understand if you feel you can make different offers for Champions League or La Liga or forcibly, you think that has to go in the same package. The second one is, do you think the availability of an OTT offer has hurt your return on football rights, and therefore for the next seasons, you need to secure both OTT package and a normal package? Those are the two questions on football.
Thank you, Ivan. First, Champions League and La Liga are separate and different processes. Not only they are different processes, but also the periods or the seasons for both contents are different. The Champions League, there is a cycle that starts for the three years starting this coming September, so 2018, 2019, 2020, 2021. La Liga would be one year after. The cycle that starts in September 2019, so 2019, 2020, 2021, and 2021, 2022. They are one year separated. As you know, in the last results call, and I am talking about first about the Champions League or on both contents. We affirmed that regarding soccer rights, both League and Champions, we would always be analyzing the cost-benefit equation in a rational way. We also stated that there was a distinct possibility that we may not renew the Champions League contract.
One quarter on, both statements remain absolutely valid. During this period, Mediapro started the process to market the Champions League for the next three seasons. This is an attractive content for our customers, provided that it is acquired at economically sound conditions. The Mediapro process includes a condition of confidentiality, so we cannot give specific details. What I can tell you is that you should expect us to proceed according to very strict cost-benefit rationality and acknowledging that there is a very distinct possibility that we may not acquire such content. With respect to La Liga, the conditions or even the calendar of the auction of La Liga is not clear. It is still in a process of consultation between La Liga themselves and the antitrust regulator, so the conditions are not clear. Here, the key issue is whether to bid or not to bid. That is the question.
We will respond to this question based on what conditions and minimum prices and the possibility of different loads and the possibility of variable prices, but always with a rational cost-benefit analysis. You were asking about the over-the-top-
Yeah
offer on those rights. The conditions of the auction of La Liga are not clear, but I would think it would be unwise for La Liga to set conditions that would shut off their main distributors. I hope this answers your question.
Okay. Thanks, Ángel. Fair enough.
Thank you, Ivan. Next question, please.
Next question comes from David Wright from Bank of America. Please go ahead.
Yeah. Good morning, everyone. I think historically, you guys have talked about the potential for some asset divestment or portfolio restructuring in Latin America, and there was a clear move, obviously, to recategorize the North and Southern regions with, I think it's quite clear, some significant underperformance coming from the North. Mexico in particular, Venezuela looks literally like it's trending down towards zero. Could you talk a little bit about your ambitions for those assets and how you can stem some of the declining return on capital profiles there, please? Thank you.
Thank you, David. We constantly monitor our portfolio of assets to improve according to profitability, return on capital employed criteria, and derive better strategic positioning for our portfolio from those. When we restructured Hispanoamérica along the regions, we wanted to recognize two different realities. In Hispanoamérica South, we are mostly former incumbents with fixed and mobile capabilities, strong market positions, which have a very different approach to what we have in Hispam North, which are mostly mobile-centric attackers, with exception of Colombia, where we have more capabilities. In both regions, we are aiming to improve our strategic positioning and return on capital employed. You were talking specifically about Mexico, I think. In Mexico, we are focused on organic development and improving the return on capital employed in our operation. We are focusing in the 26 biggest metropolitan areas of the country, covering the rest through roaming and agreements and franchises.
We are, in Mexico, the only non-incumbent mobile operator that has positive OIBDA and operating cash flow, which is differential for our asset. At this moment, our performance is suffering from the change that we had in the interconnection regulation. We are open to roaming agreements. We're open to franchises. We're open to agreements with other players, and we continue to monitor all the strategic alternatives. We are focused in the organic development of our business, in securing the value of our business, while we explore all the optionality with respect to other potential alternatives. I don't know if you were interested in some other geography.
No, I think that's fine.
Sorry.
Maybe just my second-
David
My second question, if that's okay, Ángel, is just on Spain. We obviously saw the wholesale revenue line deteriorate with the MVNO loss. Can you tell us whether that was a full quarter's impact? Should we expect the same kind of drag through the rest of this year? Thank you.
Yes. Well, the different components of the wholesale line are known, no? On the one hand, you have the negative coming from the loss of the MásMóvil MVNO and MTR price cuts. This is mitigated but not fully compensated by growth in fiber wholesale, NEBA fiber wholesale, DB, and roaming revenues. This will be the trend for the whole year, but what is important, as you must have seen in the first quarter results, is that the positive trend that we're having in B2C and the positive or improving trend that we're having in B2B, more than compensate the decline that we're going to suffer this year on the wholesale line. Spain is back to mobile service revenue growth. It's actually accelerating that mobile service revenue growth, and Spain is in OIBDA growth and accelerating, from the previous quarter as well, the OIBDA growth.
We are managing through very good traction in B2C, which, by the way, is seeing reduction in churn in all its lines and an improving trend in B2B. We are managing to compensate for the impact that wholesale line will have in service revenues this year.
Very good. Thank you.
Thank you, David. Next question, please.
Next question is from Mandeep Singh from Redburn. Please go ahead.
Thank you for taking the question. Given your commentary around the different business lines in Spain, I know you don't give single country guidance, but do you see the sort of current trends as roughly sustainable, the around the 40% margins in Spain and service revenues to stay in positive territory for the remainder of the year? Except there's quarterly movements here and there, just directionally speaking. The second question I have is on the U.K. It wasn't that long ago you deemed this asset wasn't strategic, and it was up for sale to somebody else. That deal got blocked, and now you're saying the asset is strategic. I'm trying to understand, other than the fact that the regulator blocked the sale, what's changed your mind to make the asset strategic versus non-strategic before? Thank you.
Thank you, Mandeep. Your first question is becoming a classical one now in these calls. As you know, we do not guide revenues by regions. We don't guide by quarters. As you can see, B2C service revenues have been steadily improving throughout the last quarters. We have been seeing a first quarter in which the promotional activity was not there, lots of rationality, more for more moves by all or by most players. We have seen increases in volumes. We are seeing increases in prices with reduction in churn. These are good trends. In B2B, the trend should be better because growing IT revenues will mitigate the traditional communications decline, and we will continue to sell more digital services, IoT, cloud, security, this type of services. We will be aiming for stabilization in B2B, which already is showing a very good improvement.
In Q4, B2B was declining -2.6%. In this quarter, it's -0.6%. Wholesale and other, I already commented in a previous question. There is also a differential factor this year versus last year, which is handset sales are getting more traction on more commercial activity. We do not guide on revenues, but we are reasonably optimistic. With respect to the U.K., we think we have the best mobile asset in the U.K. We have probably the best management for a mobile company in the U.K. Our performance is displaying this. We have, even when having some capacity problems, been able to maintain the best customer satisfaction, to maintain the best customer loyalty in the market, and we're experiencing margin improvement while we grow also our revenues. We are happy with this company.
Regardless on how the market may evolve in the coming years, to own the best mobile franchise in the U.K., we think it's a very valuable position to be in.
Thank you.
Thank you, Mandeep. Please.
Next question comes from Keval Khiroya from Deutsche Bank. Please go ahead.
Thank you. Got one question on Spain and one on LatAm. On Spain, there were some recent press reports saying that you could launch a new low-end brand after summer. Can you talk about whether you're happy with your current brand strategy, whether you think #0 is serving the low-end sufficiently, or whether you think there is a role for more brands within your Spanish business? Secondly, going back to the question around LatAm and your return on capital there. I think Chile and Peru are two markets which have been reshaped by the smaller players and new entrants through the past few years. Do you think there is any scope for consolidation in those markets? Thank you.
Thank you, Keval. Regarding the possibility that has been speculated in the press about a potential new brand. At the moment, Movistar and Tuenti are suiting all market segments. We are getting good traction on both brands, which are positioned at different segments of the market without cannibalizing or competing themselves. We constantly work to improve our offer segmentation to provide to all of our different types of customers with the most appealing and competitive products and differentiate customer experiences. Nothing has been decided on this front so far. I think you were talking about Chile and Peru and the possibilities of consolidation. In those markets, we are focused on organic development. These are two markets that have suffered a lot of pressure from new entrants. We think that the situation in both is different.
Potentially, Chile may have touched the bottom, and we're seeing very encouraging developments on Chile. Peru is still in a more competitive position. However, we are back to positive commercial traction in Peru in terms of net adds in mobile, in terms of portability, and we continue to have a strong fixed performance in Peru. Turnarounds normally start by better commercial traction, which then turns into better revenue traction, which eventually, through efficiencies, transforms into better profitability. We're still in early stages in this turnaround, but we are seeing the commercial good part in mobile, and we continue to be strong in fixed. It's difficult to speculate about potential consolidation in those markets. We always monitor developments that can result in better value for our operations in the markets where we operate. At this stage, we are focused in organic development.
That's clear. Thank you.
Thank you, Keval. Next question, please.
Next question comes from Georgios Ierodiaconou from JP Morgan. Please go ahead.
Hi. Georgios from Citi. I have two questions, please, one on Germany and one a follow-up on Keval's question from earlier. The follow-up is around Chile and Peru. There is a change, as you mentioned, of your commercial approach. In Peru in particular, if I'm not mistaken, the margin of 20%, even if we strip out mobile, will imply fixed line margin of around 40% and mobile of around 0%. I was just trying to understand from your perspective if
There is scope for margins to start stabilizing. You mentioned the commercial improvement, or whether you think you may need to go into negative territory in margins, which is where your competitors are, in order to stem the mobile competition. My question on Germany is just to get an understanding of the partner revenues, O2 yesterday reported a significant slowdown, and obviously there is significant growth in usage of partner revenues, both within the MVNO contract and from some of the other partners you have in aggregate.
I understand it's difficult to comment on a specific contract, for the wholesale revenues as a whole, is it possible to give us an idea of whether you are expecting a further slowdown, perhaps even a decline, or whether you believe this is a temporary phase and even the significant growth in accesses you are seeing there should be a re-acceleration at some point in the next few quarters. Thank you.
Sure, Georgios. First on Peru, let me give you some more color. I was telling as a response to a previous question that we are turning around commercial trends in Peru. Let me give you some figures. In postpaid, we are in positive net adds after seven quarters. In prepaid, we are also in positive net adds. We are in positive net portability. In fixed, where I was stating that we maintain our strong position, we are focused in cable development with record fixed broadband and Pay TV gross adds. Pay TV accesses posted a 9% year-on-year increase, and fixed broadband, 7% year-on-year increase. We are having very positive commercial traction. Prices continue to be under pressure, especially on the mobile side, and you can see this in the revenue evolution. OIBDA, I think you were talking about the margin.
OIBDA has taken a decline, and the margin has been reduced, but we are still at 19.6% OIBDA margin. This is, I think, an example or a reflection of how our Peruvian colleagues are managing, not only to reactivate activity on the commercial side, but also work very strongly on efficiency measures to maintain the profitability of the company. Which, by the way, is generating positive operating cash flow in spite of accelerating part of their CapEx. We don't think that we need to erode OIBDA margins to levels that some of our competitors are displaying, because we have already been working for a few quarters on this Peruvian turnaround, and now it's starting to show the signs. With respect to Germany, I thank you for the question, we believe that yesterday concerns regarding this topic were overdone, and probably because we didn't explain ourselves well yesterday.
According to our German team, the B2B segment in Germany is in good health, with positive commercial traction and financials growing year-on-year. We are seeing higher migrations to the MBA contract that will derive additional revenue opportunities in the future. At the same time, we are optimizing low-margin service providers, including shifting some business to our customers. This internalization of reselling to own business is neutral on top line and neutral to positive on OIBDA. In any case, what created the concern yesterday is a negligible effect on OIBDA, about EUR 1 million or less, which is marginal for a company that generated over EUR 400 million in the quarter. I'm sure that the Telefónica Deutschland finance and IR department stand ready to give you all the additional proper explanations that you may need.
Again, concerns are, in our opinion, overdone, and the B2B business is doing just fine.
Okay. Thank you.
Thank you, Georgios. Next question, please.
Next question comes from Akhil Dattani from JP Morgan. Please go ahead.
Hi, good morning. 2 questions from me as well, please. Firstly on Argentina, I guess a big picture question. If we look at the last five, six years, we've had sort of a compound 20% currency pressure each year. Yet despite that, if we look at the EUR-denominated financials, you've managed to keep a broadly stable EBITDA performance of about EUR 1 billion. I guess just keen to understand, what are the moving parts here, how sustainable you think it is? Is it down to underlying price increases? Are there any accounting issues in that? Just how do we think about that? The second question was on the U.K., and I guess it's a follow-up to Mandeep's question. You've talked about the U.K. strategic. I guess what I'm trying to understand within that is, firstly, fundamentally, operators in the market are introducing CPI-based price increases.
Is it partly down to revenue outlook? Can you comment on that? Is that partly down to what's making you more comfortable? Linked to that, you're still talking about IPO in the asset. I guess keen to understand if it's strategic, what is the merit and rationale behind considering an IPO? Thanks a lot.
Thank you, Akhil. First on Argentina, I think that, to summarize in a sentence, Argentina is growing very strongly, even when converted into hard currency. We are managing to grow the revenues through price increases, through higher consumption, to growth in high-value customers, both in fixed and in mobile. We're managing to achieve, I'm talking historically, because I cannot talk forward looking on this asset. We are managing to grow above inflation, and also cost or efficiencies are allowing us to grow costs below inflation. Our EBITDA is again, growing above inflation, and this is what is allowing for us to have a performance that, in spite of the FX evolution, is allowing our Argentina asset to be growing and growing strongly, even when converted into hard currency. With respect to the U.K., the asset or the company, again, is performing nicely on the commercial front.
Our customer base in a market which overall is not growing that much. We are managing to grow our customer base. We are improving our ARPU. We are having the lowest churn in the industry. We have a strong customer base. We have, yes, in our revenues, there is impact from items like CPI. As you saw, we are expanding margins in our EBITDA. Part of that has been from the reduction in annual license fees, but also the commercial or the revenue traction and efficiencies are building into that, the company generates substantial cash flow. We think it's a very attractive asset, again, in a market that we believe is at the forefront of the digital customer revolution in Europe. For us, it's an asset that is strategic.
The merits of a potential IPO, if market conditions were there, is this company can grow faster, depending on how the market evolves in the future. Being a listed company can provide strategic and financial flexibility, proceeds from such potential IPO would also be helping in our continued and recurrent effort to improve our balance sheet at the group level.
Great. Thank you.
Thank you. Thank you, Akhil. Next question, please.
Next question comes from Julio Arciniegas from RBC. Please go ahead.
Yes, good morning. Thanks for taking my question. Two questions on Spain. The first one, based on the Spanish regulator, Telefónica's broadband net adds in January, actually, they were quite strong, 18,000 net adds. However, Telefónica ends the quarter with losses, I think like 6,000 net adds. Hence, it looks like competition landscape in Spain has increased after January. Can you give us some color on what are the drivers that has make a very good start for Telefónica in January to losing subscribers by the end of the quarter? My second question is regarding the comments on football rights. ARPU in Spain has been increasing with more for more, for example, giving football to customers. In the case the company decides not to renew the football rights, as it has been commented, how would the company avoid churn increase?
I would think that actually the satisfaction from customers will actually drop if that happens. Also, don't you think that actually this move might benefit operators like MásMóvil? Thank you.
Thank you, Julio. On your first question, I would draw your attention to slide number 12, where you can see at the top right that we've had a very positive commercial traction in the quarter in fiber, in NEBA fiber, in TV, mobile contract, and slightly negative, as you said, in fixed broadband. You should take into account that this fixed broadband is composed of fiber, but also is composed of copper. As you would imagine, through migrations and through normal commercial activity, and given the very strong offering and coverage that we have in fiber in this country, customers are taking up more and more fiber, either directly from us or through some of our competitors to whom we wholesale, and they are doing less of DSL and copper.
Fixed broadband, which includes both, is declining, but fiber, which is the important part of this, is going up. There was potentially some mishap in the publication of figures by the CNMC. With regard to your second question on soccer, as you can imagine, we are simulating all type of scenarios. We're simulating scenarios of what would be the economic impacts for us and for our main competitors if none of us had the soccer, if all of us had the soccer, if we didn't have the soccer, but some other players had the soccer. We are simulating all these scenarios. The biggest base of TV customers in Spain, we have lots of data about the number of customers which consume which type of content. We have a very good visibility on how to assign profitability to the different scenarios.
You must be assured that we are running all these scenarios, that we are making all these simulations, and that we are factoring all those into the decisions that we will need to take in the coming months on potential soccer rights auctions. Where again, we will be very rational. I already said that the Champions League content is attractive at the right price. La Liga is attractive at the right price. We will be applying very strict economic cost-benefit analysis to those decisions. We are simulating what could be the impact and the situation with respect to different scenarios, not only regarding current telco players, but if eventually, which has been rumored, and we have no certainty, some over-the-top players were also bidding for those rights.
Okay, thanks. If I make a fast follow-up, I get it right. The publication of the Spanish regulator is not correct about the broadband net as of January of Telefónica?
Was wrong in January.
Okay.
Thank you, Julio.
Okay.
Next question, please.
Thank you.
Next question comes from Sam McHugh from Exane. Please go ahead.
Good morning, folks. Two quick questions from me. First one on O2 UK. I just wondered if you could share what the book value is, and whether if you did an IPO or if you did do a sale, whether there would be any tax implications. Secondly, you raised an impressive amount of financing in Q1, EUR 10 billion, I think you said. What can you say about the rate at which you're raising financing year-over-year? Has there been a bit of pressure because of raising rates? Thanks very much.
Please repeat the second question.
Just on financing, how have the rates at which you're raising debt changed year-over-year?
On your first question, I think we do not disclose the book value of our assets, and we cannot disclose, would be premature, any tax implication. If there was a transaction to take place, which at this moment is uncertain, these impacts would be disclosed. At this stage, first, it's uncertain, and second, there are some figures that we do not disclose publicly.
Sure. No worries.
The second was? Sorry, Sam.
Just on financing. You raised EUR 10 billion of new debt in Q1 you mentioned, or year to date, and I just wondered what the rates were like year-over-year. Compared to the debt you were raising this time last year, has the average cost of interest gone up or down, or is it broadly stable?
We couldn't understand the question at first place. As you've seen throughout this quarter, we've been very active in refinancing. We have refinanced with issues of EUR 10.7 billion. As a result of that, we have continued lengthened our average life of debt to over nine years. We are continuing increasing the fixed component to 72%. So far, as you've seen in the interest payment cost, our payment cost in the first Q is around 3.5% in cash terms. That's fairly similar to last year, which was 3.48%. You have to also, when you look at the difference between the payment and the P&L this quarter, we are accounting in payments, the majority of all of the coupon of some bonds that we issued the first quarter of the year, the first quarter of 2017. There's going to be less.
It's not going to be with that amount of payment coming throughout the remainder of the year. We will continue monitoring credit markets, diversifying investor base, and selecting the right timing. I think with the amount of activity we've done throughout these three months of the year, we will be more calm thereafter for the remainder of the year.
Awesome. Thank you very much.
Thank you, Sam. We have time for one final question, please.
Our last question comes from Nicolas Didio from Berenberg. Please go ahead.
Hi. Good morning. Thanks for taking the questions. I have plenty of questions. I need to choose two. One question would be regarding your credit rating with Moody's. The credit ratios showed that you should be upgraded, but still you are at a Baa3. I was wondering what could be the impact on your refinancing should Moody's upgrade your rating. The second question would be on your Spanish content and the upside from wholesaling that content to LATAM and potentially to Netflix. Can you give us a bit of an update on potential discussions you may have there? Thank you.
Yeah. We are quite comfortable with the credit ratings outlook at the moment. We are in the three cases in stable outlooks. Obviously, we will like an improvement from Moody's, I cannot deny that. Credit agents ratings are comfortable. We've had a strong free cash flow generation last year. Our net debt delivers a focus on organic growth, but also some inorganic movements, as we did last year with Telxius, and they're also happy with a hybrid activity. We are quite comfortable that with the stable outlooks we have at the moment. We go through regular yearly meetings, and we just have gone through the meetings with the three of them in the last month. I can tell you that we don't think Moody's rating is affecting at all our access to markets.
As you've seen, we've been very active this quarter, not only on the bond front, also in the syndicate facilities. We have achieved very competitive costs. We believe our investment grade rating is good enough for the access of the market. I think the numbers we show in the presentation today prove that it's not having any impact to the best of our knowledge.
Regarding own content of Telefónica. First, Movistar Cero is the most viewed pay TV channel in our platform after beIN, the soccer. We are also producing contents in motor, in MotoGP and Formula One, which are increasing significantly their audiences, and we are enjoying at this stage those in exclusivity. We are having excellent acceptance of our in-house series among Movistar customers. This, not only in Spain, where we are having very good traction, but we're also going to be selling this abroad. Movistar Series will arrive to 13 countries in 2018. We are aiming to reach, in addition to the close to 4 million pay TV customers in Spain with viewing series, more than 3 million in Hispam. Eventually through our top platforms, we can reach our more than 110 million Movistar mobile customers in Hispam.
Some costs will be recovered through foreign distributors as well, probably not to competitors in those geographies where we would aim to have that content for us. Our ambition is to recover 20% of serious costs via those foreign distributors. Finally, also in own production, esports, although it's still newborn, is already getting lots of traction, and we are the main reference on this. We are happy with our original production. It's giving us differentiation and lots of traction with customers, and we are being able to leverage it across our Latin American footprint quite successfully.
Can I ask a third one? Just I was looking at one news on Bloomberg quoting the expansion on the long-term incentive plan and the five-year plan. Can you give us a bit more color? They mention TSR. Will it be relative, absolute? What kind of targets do you set? Thank you.
The long-term incentive plan needs to be approved by the AGM. We have had plans of that kind in the past as well. We haven't had those plans for the last two years. It's a three-year plan, what we are taking for approval. In order to have the shares for the employees, it has to be a combination of the share price performance together with free cash flow.
Thank you, Nicolas. Thank you very much for your participation, and we certainly do hope that we have provided some useful insights. Should you still have further questions, please contact our investor relations department. Good morning, and thank you.
Telefónica January-March 2018 results conference call is over. You may now disconnect your line. Thank you.