Ladies and gentlemen, thank you for standing by, and welcome to Telefonica's January to December 2016 Results Conference Call. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Pablo Egaron, Head of Investor Relations. Please go ahead sir.
Good morning, and welcome to Telefonica Conference Call to discuss January, December 2016 results and Pablo Yaron, Head of Investor Relations. Before proceeding, let me mention that financial information contained in this document related to the year 2016 has been prepared under International Financial Reporting Standards as adopted by the European Union. This financial information is outdated. This conference call webcast may contain forward looking statements and information relating to the Telefonica Group or otherwise. These statements may include financial or operating forecast and estimate based on assumption or statements regarding plans, objectives and expectations that make reference to different matters.
All forward looking statements involve risk, uncertainties and contingencies, many of which are beyond the company's control, and all of which make out actual results, plan objectives or expectations to differ materially from those expressed or implied herein. We encourage you to review our publicly available disclosure documents filled 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 team in Madrid by dialing the following telephone number, 3491 4828700. Now let me turn the call over to our Chairman and CEO, Jose Maria Alberto.
Thank you, Pablo. Good morning, and welcome to Telefonica's 4th quarter 2016 results conference call. With me today is Angel Villa, Chief Strategy And Finance Officer. And during the Q And A session, you will have the opportunity to address us with any questions you may have. We are positioning Telefonica for future sustainable growth after closing out a year in which we performed notably well.
With top line OIBDA, EPS and free cash flow increasing year on year. Thus, we are reaping the benefits of our transformation initiated some years ago. There are many examples of it. One is that we have reached the peak in CapEx, having the best infrastructure which gives more value to free cash flow expansion. This is reflected in strengthened balance sheet reinforced by recent announcement in Telxius, and the long term financing raised, thus supporting sustainable shareholder remuneration in 2017.
Slide number 4 shows how in 2016, we have consolidated and even accelerated the growth trends initiated 2 years ago. Higher revenues, class wide and margin drove the robust 24.4% year on year increase in free cash flow. Upgrading the performance versus 20142015 and being more balanced despite including significant CapEx efforts. Again, we have led very solid foundations for the future. Turning to Slide 5.
We can see the consistent organic growth in service revenue of 2.6% year on year. Improving to 4.7% in OETA and 5.6% to operating cash flow. Also, We continue to demonstrate how our fundamentals are steadily improving, as shown by our underlying EPS increase of 5.1% year on year, to per share despite FX impact. Let me mention that we have implemented different restructuring measures to improve efficiency. Productivity and cash flows over the coming years, which affected our fourth quarter.
Ashel will explain this in detail later. Turning to Slide 6. Our 2016 performance has been below our 4% guidance on total revenue but service revenues have performed better, up 4% year on year. The gap then is explained by weaker and volatile handset sales. In line with market dynamics.
We exceeded the year EDA margin target as it was up 0.9 percentage points versus the guided stabilizing trend versus 2015, while CapEx over sales ratio was in line up 17%. We confirmed our 2016 dividend with the 2nd tranche of per share to be paid in cash in the second quarter of the year. Our focus on attracting and retaining quality customers has led to Jet another quarter of a strong double digit increase in LTE, fiber and cable and smartphones. We've made progress in our selling upselling strategies in both mobile and fixed. Encouraging customer stickiness which has led to Q4 churn dropping half a percentage point year on year.
A reflection of this The growth of average revenue per access accelerated in the quarter to 180 basis points to 4.4 percent year on year. On slide 8, we highlight the quality of our revenues and how they are transitioning to a more sustainable mix. Service revenues performed attractively, ramping up 230 basis points on a sequential basis to 3.7% versus the fourth quarter of 2015. And with all business segments increasing except Germany. Total revenues returned to growth in the quarter.
2.7% year on year. Meanwhile, sustainability improves as broadband and serviceable over connectivity represent already 47% of total revenues. Slide 9 shows key data points on our data monetization story. LT base continued to grow very rapidly, 77% year on year. And continue to push data usage per user app this quarter by 65%.
SD adoption is clearly an engine to boost traffic. On top of that, different pricing strategies, such as more for more, already in place in six countries, recurring prepaid plans in LatAm, or data sharing plans among others, are proven successful tools to drive ARPU up in 4G and 20% organic increase in non SMS data sales. It is also worth highlighting the pricing power and the usage increase seen in fiber users, driven by its superior quality. Over recent years, we understood upon transformation of the company with a long term perspective. Firstly, we deployed Ultra broadband networks to differentiate ourselves and offer the best connectivity for the rocketing data traffic.
By 2016, premises passed with fiber and cable expanded significantly to reach 39,000,000 premises passed and healthy coverage in Europe was extended by 28 percentage points. Secondly, we paved the way towards end to end digitalization. A key piece of the transformation that make us more agile, flexible and in the end, more efficient. Full stack projects went live in 6 countries and simplification initiatives were reinforced, turning off applications, consolidating data centers, and increasing virtualization. At the same time, since 2014, the total capacity of our big data platforms was by 7x to 27 petabytes.
Thirdly, we accelerated the change in our revenue mix from traditional services towards connectivity and new services. Main accomplishment delivered by Global Resources in 2016 as shown on Slide 11. Ultra broadband deployment was accelerated to enhance speeds and capacity. On the access side, premises passed with fiber and cable increased significantly in Islam, Spain and Brazil. And healthy coverage grows to 62%.
While in the backbone, we transformed the transportation network and manage legacy. In parallel, we continue to increase efficiency by the enhancement of our digital capabilities. Initiatives such as voice over LTE and voice over IP made that advance toward our IP company. Of our global centers designed smarter customer equipment and mobile applications and innovative software and technologies were introduced in the network. In addition, full stack projects are being deployed in 9 additional countries, and the single online charging system is already available for 59% of our customers.
Lastly, let me stress that big data initiatives are delivering benefits at different levels network management, video platform evolution and real time decisions. Moving to Slide 12. In digital services, we continued to grow revenues at double digit rates as we bolster our trust of our proposition in this space. Video continues to be the main pillar of this. And a proven tool to monetize fixed data.
We have built a cutting edge TV service on content, connectivity and customer experience. Driving growth in both customers and ARPU. Adjacent Services are increasingly contributing to overall growth. Namely cloud, machine to machine and security. I'd like to highlight the launch this quarter of Luca, our big data unit aimed at helping businesses extract value from insights.
Let me now outline the guidance for this year. We are targeting for 2017 stable revenues despite negative impact from regulation of around 1.2 percentage points. Growing OIBDA margin up to one percentage point and CapEx to sales ratio around 16% after reaching the peak in 2016. We confirm our dividend for 2017 of per share in cash. Let me remind you that the interim payment of will be payable in the 4th quarter.
And the final payment of Our objective for 2017 will allow us to maintain a solid investment grade credit rating through growing cash flow and organic deleverage. Looking to 2017. We have set key strategic priorities: 1st, growth in main P and L headlines and cash flow. 2nd, as a platform and data driven company, we will make targeted investment in ultra broadband and 4G. 3rd, cash preservation and organic deleverage complemented with a transversal asset review, leading to improved balance sheet.
Now, I hand over to Assal.
Thank you, Jose Maria. Moving to Slide 16, 4th quarter results reflected the strength of our business as group year on year organic trends clearly improved versus the prior quarter. This is particularly visible in the plus 6 point in OIBDA growth rate and the easing of the negative FX impact. This pan America, Spain and UK, mainly explained the acceleration in growth, while Brazil and Germany excelled in attaining synergies. Our growth was reinforced through higher levels of investments, improving the quality of our networks and customer base driving data monetization and setting the basis for future differentiation.
Free cash flow was very solid. Generating 1,000,000,000 in the last three months and net debt progressively reduced to EUR 48,600,000,000 at the year end. Finally, underlying EPS grew threefold versus Q4 2015 to EUR 23. Turning to Slide 17. Let me summarize the key financials for the quarter.
Reported P and L figures were significantly impacted by non cash factors. Including restructuring charges, capital gains and goodwill impairments. In organic terms, revenues and service revenues grew 2.7% and 3.7%, respectively, versus October December 2015. While OIBDA ramped up to 9.4%. Margin expanded 2 percentage points and operating cash flow was up 5.4%.
The underlying increase in euro terms ramped up in the last three months as Forex Direct faded on the Brazilian real appreciation and easier comps year on year. Underlying net income surpassed 1,000,000,000 2.5 times higher than a year ago. Please turn to Slide number 18 to see in more detail the effect impacting the quarter. These factors deducted OIBDA and net income by one point and 1,000,000,000, respectively, with restructuring in Spain accounting for twothree. Moving to Slide 19.
We have delivered a very strong and healthy free cash flow of EUR 4,400,000,000 in 2016, exceeding our stated objective. As shown in the first graph, free cash flow improved throughout the year by EUR 0.9000000000 on better operating trends and savings in all items. And despite a lower contribution from working capital. As such, our free cash flow has accelerated even with record high CapEx levels, which, as we said, are expected to be lower starting in 2017. As you can see on Slide 20, operating leverage has strengthened.
Organic OIBDA posted an outstanding performance in the 4th quarter accelerating 630 basis points to 9.4%. Mainly due to Spain and Espam. Synergies and savings from different simplification initiatives drove efficiencies across the board. In addition, in the full year, there was OIBDA growth across segments. Looking at OIBDA in more detail.
If you turn to Slide 21, you can see that while organic OIBDA trends have accelerated, the impact of FX has faded sequentially, on the back of depreciation of the Brazilian real and despite the depreciation of the sterling pound and Argentinian peso. This led to a positive net impact of both factors of EUR 300,000,000 in Q4 year on year, improving sequentially versus the minus EUR 53,000,000 posted in Q3 and versus the minus EUR 323 1,000,000 in Q1. The negative FX effect in 2016 was neutralized at free cash flow level, as can be seen in the graph at the bottom left of the slide. Looking ahead, at current spot rates, FX should become a tailwind in the first quarter of 2017. Moving to Slide 22 CapEx intensity is paying off and has been the driver of our network leadership.
Up to December, 79% of total CapEx was devoted to growth and transformation, and we are building the future using big data to allocate CapEx and to create a differential experience. On the back of our OIBDA growth profile and despite our consistent investments in CapEx to support the network transformation, operating cash flow is increasing at mid single digit rate, Spain and Brazil are both contributing almost 2 thirds of the total and are both growing. In slide 23, we show the performance of the Spanish business. New steps in the development of the more for more strategy continued to deliver positive results in terms of bundling, churn and volumemix. The enhanced Movistar Fusion levered on the leading infrastructure in Europe allowed us to attract more new customers, and to foster existing ones to move towards higher end bundles.
By year end, more than 1 third of total Fusion base, Hatultra broadband and more than 2 thirds contracted TV. A significant improvement versus the previous year with significant upside ahead of us. This positive evolution in the customer mix, along with the tariff updates, drove a steady rise of 11.5% year on year in Fusion ARPU to almost Turning to Slide 24, quarterly service revenues and OIBDA posted a sequential acceleration in the year on year growth rate of 1.2 percentage points and 0.8 percentage points, respectively. Which was especially remarkable given the tougher year on year comparison on net content costs. As a result, 2016 marked an inflection point in domestic financials.
The company recovered its profitable growth profile and proved how operating leverage is starting to work in this new situation. In 2016, service revenues rose 1.1%, while OIBDA increased by 2.2 percentage the 2.2% year on year ex factors, thanks to significant efficiency gains. We also drove a margin expansion of 0.9 percentage points to 41.1%. Finally, and despite higher CapEx, cash generation was back to growth, up 1.8% year on year. In summary, our Spanish franchise, which has invested steadily over the last years, enjoys a high cash conversion and a superior positioning in a constructive market landscape.
To review our performance in Germany, please turn to Slide 25. Telefonica Deutschland met 2016 outlook and maintained operational momentum in a dynamic 4th quarter. Leveraging the successful launch and encouraging customer response for new premium portfolio O2 Free. Additionally, there are signs of easing competitive pressure in non premium. 4th quarter mobile service revenue fell 0.9% year on year when excluding regulatory effects.
Being stable versus the prior quarter. Quarterly OIBDA accelerated to 3.9% year on year and margin expanded 2.5 percentage points to 24.8 percent, leverage on incremental synergies. It should be noted that we are upgrading our to approximately EUR 900,000,000 of operating cash flow synergies in 2019. Now into our UK business. As you can see on Slide 26, we have been outperforming the market and the fourth quarter is no exception to this, with strong net adds, market leading customer loyalty, and accelerating ARPU.
All this has led to a solid financial performance in the quarter. Organic revenue growth accelerated to 2.5 percent year on year ex refresh, which coupled with robust cost control led to an OIBDA increase of 4.1 percent year on year organic. CapEx to sales were 13.6 percent in 2016 as we continue to invest heavily in our network to further reinforce this outperformance. Thus, our LTE network reached a coverage of 95%, up 16 percentage points year on year. In Slide 27, we show how our focus on value in Brazil and the superior quality of our assets are delivering successful results.
In mobile, our leadership in contract and the protection of the growing value in prepaid are driving the double digit ARPU year on year growth. In fixed, the average revenue per access is also growing at solid rates in both fixed broadband and pay TV as we are steadily upgrading our customers on our enhanced network quality. Let me turn to Slide 28 to review the financial performance The outstanding commercial results are leading to a robust service revenues increase, up 2.1% year on year in Q4. And to a consistent market or performance, capturing the full incremental market revenue growth along 2016. In addition, the ongoing execution of efficiency measures and the capture of incremental synergies drove the expansion of profitability in a context of strong OIBDA and operating cash flow increase.
Up by more than
8
led to beat initial target for CapEx over sales. Turning to Slide 29, we review Telefonica Espana America. Our focus on value, service funding and continued network improvement is reflected in the increase in quality access and ARPU growth. Mobile contract customers were up 3% year on year. Smartphones, 15% and LTE 86%, pushing ARPU growth to almost 7%.
In fixed, fiber and cable accesses, up 48% year on year, explained broadband ARPU expansion of 12% year on year. While pay TV is also growing in both accesses and ARPU, 4% 6%, respectively. This positioning is driving year on year acceleration in revenues and OIBDA. Both growing at double digit rates in Q4 as seen on Slide 13. By countries, Argentina is the main contributor to this performance.
Combining higher traffic volumes, tariff updates and easier year on year commercial comps. In Chile, top line ramped up in Q4, while profitability was affected by higher commercial trading, which also plays to Peru where intense competition and promotional actions drove Q4 lower contribution. In Mexico, After a tough 2016 on pricing pressures, Q4 is showing some improvements. Let me now turn to the financial metrics starting on Slide 31. Since we reconsolidated O2 in June Net debt has been reduced by EUR 3,600,000,000 to reach EUR 48,600,000,000 at year end.
That is 2.95 times net debt to APA. The recently announced Texas transaction will reduce net debt farther by 1,000,000,000, bringing leverage ratio closer to 2.85. A key factor in debt reduction has been strong free cash flow generation, EUR 4,400,000,000, up 24% versus 2015, of which EUR 3,600,000,000 were generated in the second half. This free cash flow generation is due to growth in adjusted operating cash low and declining financial and tax payments with a lesser contribution from working capital. We expect cash flow maturities while reducing interest cost.
As Slide 32 shows, the effective cost of debt in 2016 that 3.94 percent, 102 basis points lower year on year. European debt costs were reduced 109 basis points, thanks to debt refinancing at rates below average cost. Risk management measures and an exposure to short term interest rates, including EUR 5,000,000,000 of European Commercial Paper Program at rates close to 0%. We continue to strengthen our balance sheet with long term financing. In December, we issued a bond with a 35 year tenure, the longest in the company's history.
We keep on tapping different markets at historically low rates, further strengthening our liquidity cushion currently close to EUR 23,800,000,000, clearly exceeding maturities over the next few years. Our average debt life was 6.35 years at the end of December, and it has increased to 6.77 years including the additional refinancing activity of the last 2 months. I will now hand it back to Jose Maria to recap.
Thank you, Angel. To finish, please move to Slide 33 for final conclusions. 2016 was a year of strong execution and growth for Telefonica, one in which our free cash flow has accelerated. In the fourth quarter, we delivered a promising earnings momentum, while also being strong on infrastructure, via our NGN networks. And we have derisked our balance sheet.
We entered 2017 with confidence based on further growth, consistent organic deleverage and sustainable shareholder remuneration. Thank you very much. And
We will kindly ask you for questions. There will be a short silence whilst questions are being registered. We will now take our first question from Matthew Rabault from Barclays. Please go ahead.
Yes, good morning.
Thank you for taking the question. First, I had a question with regards to your revenue guidance, which you guide for flat for 2017. And I wanted to understand a little better what for the drivers. So I understand that there's a negative impact from regulation, but in 2016, you did deliver a 2.6% which is much higher than 0 plus 1.2%. And I wanted to understand, therefore, where you think that there could be a deterioration sequentially because when I look at Spain, it looks to be in a good position, certainly in Q4 and also Latin America, there was a nice rebound Q4.
So maybe not not sustainable, but basically wanted to understand why you're just going for flat in 2017 despite all these positives. And then second, in Spain, you point out, to, well, you have a big restructuring charge Could you maybe elaborate a little bit in terms of the cost savings you expect from this restructuring exercise? Thank you very much.
Thanks for your questions. In terms of our revenue guidance for this year, for 2017, We are, including, as you were mentioning, some significant regulatory impacts as some of our units have already shared with the market, both Brazil and Germany. But mainly Germany will have a significant impact terms of the roaming and termination rates. And that's also affecting all our other units in our perimeter. On top of that, we'll have some trends contributing to soften the revenue trends, namely wholesale in some markets.
But overall, we do see mobile service revenues, net of regulation and namely on both residential, the B2C and B2B segments with strong momentum. So it's a mix of effect And the overall, those effects, namely, including these trends of regulation, are calling us to give to guide on those stable revenues. In the case of Spain, in the case of the impacts of the restructuring of the Spain. And basically, I would refer also to margins in Spain. I think that you should take into consideration several facts.
First, the redundancy program has been extended to 2018, and that has allowed us that has forced us to include another provision. It's affecting overall 7000 volunteer employees. The direct cost savings, at a run rate of, with the at a run rate of 1,000,000 in 2017 and the extension would allow us to have another 1,000,000 going on. So far, leaves have been close to 4000 people, OpEx savings in 2016 has been out to for $207,000,000. And cash flow payments in 2016 have been of 156,000,000.
So those are the numbers that we can share in terms of the voluntary the suspension plan. And allow me to indicate to highlight as well that there are all the cost initiatives in Spain that are allowing us to significantly control margins. I would include the network simplification or the central office closure or the retail distribution simplification as well. So overall, including the the labor force effort that we are doing in Spain and in spite of a significantly high impact, higher impact of content cost. We have been able to perform robustly in terms of O EDA in Spain.
And that means that we are continually pushing for efficiency in all fronts and that we feel that we can control the impact of a higher content cost.
If I may just follow-up on the revenue question. Is there can you give us a sense of where you see Spain revenues moving to that guidance? In the sense that, do you expect the improvements to continue in 2017? Or are your guidance implies that it doesn't move much from where it is now?
Well, regarding the Spanish performance, I would like to highlight that Again, the improved terms that has been showed in 2016 with service revenues growing, OIBDA growing and operating cash flow growing. Despite record high CapEx levels. The focus now is on accelerating operating cash flow. Give me get back, allow me to get back in time a little bit. Going back to 2015, most of the questions were about revenue trends and stability of revenues.
2 years later, we can say that revenue trends are solid and we have a small ups and downs on quarters affected by year on year comparisons. Because of the calendar of promos, the diversities of tariff repositioning or other seasonal factors. But with all these revenue trends are solid and outperforming other European markets. In 2016, the questions were mostly about our ability to maintain margins. In a context of increasing costs.
And we have been able to do that and even improve margins. In 2017, we will focus on on all those trends and on top of that to accelerate operating cash flow. So as you know, we don't guide on a specific guidance per business. But I hope that I can give some light to your questions.
We will now take our next question from Mandeep Singh from Redburn. Please go ahead.
Hi, thank you for taking the question. I had a couple of questions please One was on the balance sheet. Can you just sort of give us a little bit more disclosure on the total liabilities including sort of hybrids and mandatory convertibles plus also workforce commitments, just to give a better picture of the total indebtedness And I noticed that you gave some greater disclosure this particular quarter on a net derivatives position. Could you just give us a little bit of color on why You've done that and obviously it wasn't, don't see it being disclosed before it was a 1,000,000,000 positive. That's the first question on the balance sheet.
The second question is on the free cash flow. Towards the very end of the presentation, you said free cash flow should grow in 2017.
Maybe you
could just give us a little bit more color on some of the moving parts whilst I noticed that the working capital contribution was significantly lower, you say, year over year, it's still a very important contributed towards your free cash flow, about 1,000,000,000 of your 1,000,000,000 of free cash flow is working capital. Do you expect to be able to continue working capital to contribute that order of magnitude towards your free cash flow over the medium term. Just wanted to get some how sustainable is that positive working capital? Thank you.
Hi, Mandeep. Thank you for this very thorough question. Net debt financial net debt at the end of, 2016 amounts to 1,000,000,000. This will be reduced inorganically during 2017, at least, with the announced TELSIUS transaction. And at its medically, it will be reduced with excess free cash flow over the dividend and over the lease retirement payments.
Hybrids, you were asking, we have an amount outstanding amount of hybrids of EUR 6,500,000,000, including, 0.5 in Colombia. Regarding the mandatory convertible, It's 1,000,000,000. This expires on 25th September of this year. It will be obviously settling shares around 3% of our outstanding capital, bear in mind that we have in treasury shares 2.8% already. So this is not This is not part of our debt.
The payments corresponding to early retirement programs in the year 2016 have amounted to 7% and this increased debt as they get paid in 20 16 have been 1,000,000 for 2017. We're estimating around 1,000,000. 20 18, seven thirty, twenty eighteen, seven twenty twenty, that it would go lower to around 1,000,000. When you aim to do your projections on free cash flow for 2017. First, as per our guidance, with stable revenues, growing OIBDA margin by 1 percentage point.
CapEx on revenues, 1 percentage point down from 2017 to 2016. This translates to operating cash flow growth. Other elements into the free cash flow estimation would be spectrum payments. These have amounted to 1,000,000 in 2016 in 2017. Especially if there is a UK auction, this figure would be higher.
Working capital positive contribution in 20 16 has been $382,000,000 positive, much lower than what it was in 2015. For 2017, we expect it to be positive as well, but lower than 2016, so lower than the 382 we had this year. On financial payments, we are aiming to financial cost below 4%. And you should expect payments to decline both on reduction of cost and reduction of the debt figure, the net debt figure. On taxes, we expect to have a cash tax lower than 20%.
For 2017. And dividend leakage to minorities would be similar to what we had this year. Maybe slightly higher. So if you do the math and we don't guide on free cash flow, you can conclude that we will see free cash flow growth Although we expect, especially if there is a UK auction that the spectrum figure would be higher.
Thank you, Mandeep.
Thank you, Mandeep. Next question, please.
Our next question comes from Giovanni Montalati from UBS. Please go ahead.
Hello, hi. Thank you for taking the question. If I may, just as a very quick follow-up on the guidance, the revenue, I guess, now you're talking of service revenues flat in 2017. Is it correct or you are still talking of total revenues?
We are talking about total revenues on the guidance.
Okay. So I guess on service revenues, we should expect as a highly, let's say, stronger trend compared to the total revenues. Is it a core assumption or
We don't open that in the guidance for the guidance level. So I'm afraid I cannot comment on that.
We will now take our next question from Keval Kavura from Deutsche Bank.
Thank you for two questions, please. Of data which are related to that, Sam. Firstly, Argentina was obviously very strong this quarter. Can you talk around the sustainability that into 2017 And how do you feel around the change in the next asset in terms of ownership and also spectrum position? And then secondly, when we look at some of the other LatAm it's namely Chile Peru in Colombia.
As you highlighted some of that, I'm sorry, some of the EBITDA trends do remain still quite weak there. Do you see any signs of improvement at all in the competitive backdrop or should we still expect EBITDA trends to be quite weak in 2017 in those markets?
Thanks for your question. Overall in Argentina, what we see is help your company different environment. We have been having tariff updates from mostly all operators on the mobile side. We have been having positive net additions in contract. We are having, as we speak, better recharges trend in prepaid.
Overall, we see better consumption patterns and those tariff updates have allowed us to have ARPU growth year on year. And on the fixed side, we are basically upselling the customers at higher speed and therefore being able to introduce this more and for more strategy. We have been having a very strong acceleration unit revenues more than 30% and even handset sales has been up as well. And that has allowed us with the tariff update that we have been able to carry on finally in Argentina to have a significant impact in terms of OIBDA. OpEx is up 15% because inflation is still high.
But also on that side, the trend is improving because of the comps are becoming easier and inflation is getting down. So on the as a result of all of that OIBDA has almost doubled year on year and almost an OIBDA margin has improved for 11.5 percentage points. So we see a better outlook for Argentina, macroeconomically and also from a market stamp point. And we think that those trends should be sustainable. So we're all in Argentina.
We are much more confident. In terms of other markets, you were mentioning, for example, Peru. In Peru, we have we are facing a very tough competitive environment, namely mobile. Our contract access has been down 1% year on year. It is true that we have been in this quarter having portability positive numbers for the first time in the year and that we are moving our customer base towards a more value added services like LTE, and so on.
So on the mobile side, it's a very tough competitive environment, both in the high end of the market with one competitor namely Intel and with low end with another one beta. So we we need to focus on Peru. We see we need to focus on Peru in order to improve the overall Spanish and metrics. We are much more confident in Colombia. And in fact, we are we feel stronger because we have better mobile trends in Colombia.
So the effort that we have been doing in Colombia in the last year is starting to pay off. And also, we see some slightly better trends in Chile over operation there is performing better. So overall, we we are heading for a we think we are heading for another year of strong growth in ispam as a whole. Lastly, Mexico. In Mexico, the trends were very worried in the last in the first three quarters.
We've seen some better signs in the the last quarter and namely in this 1st 2 months of the year, it looks like some of the I would say not very rational pricing points are starting to become more rational And that's having already an impact in the 4th quarter and it's already having an impact in this 3rd quarter. So overall, if you ask me, in terms of the rank of rank inter priorities, I would say Peru should be the 1st priority to focus Mexico as well and then the others are getting better. Overall, we see a better we expect a better a better performance. And in terms of the spectrum in Argentina, you know that we have some disagreements with the government in terms of the spectrum being reform of re qualified for 1 of our competitors, as well as the allocation of the spectrum that we bought. Months ago, quarters ago, of the 700 megahertz that we need to have as soon as possible.
So we are addressing those issues with the Argentinian government And we hope we can reach an understanding with them. But as you said, we are not in agreement with those condition of a assuring this kind of entry levels for the 4th competitors in Argentina.
Next question, please.
We will now take our next question from Gorgus Eirdiakinou from Citi. Please go ahead.
Yes. Good morning, and thank you for taking the questions. My first question is around the net debt and the financial cost. Obviously, we had some of the lifetime currencies. I appreciate quite materially in recent months.
Are you at all tempted perhaps to shift some of the weight of your leverage away from euro and spread it more evenly, across the different currencies you are exposed to with your asset. And how should we think about the financial expenses, if that's the case? I think you mentioned In answer to the first question, you expect the financial cost to come down. So I'm wondering if that will come down in spite of raising some debt in LatAm. And linked to that, actually, if you could comment at all on Colton's financial position and any thoughts of recapitalizing there, whether you could save some financial expenses from doing that?
And then my second question is just on the business trends in Spain. They've been very volatile during 2016, a weak in Q1, better in Q2, worse in Q3, much better in Q4. So Is it possible to give us any indications of what you should expect in 2017?
Hi, Georgios. On the financial cost, as you can see on Slide 32, we have reduced and 2 basis points in 2016. We're already below 4%. Our guidance for group wide cost is for 2017 to be below 4%. And all the financial expense and financial payments should decline not only because of cost reduction, but also due to a debt reduction.
In the mix of that according to currencies, we have a benchmark of 2 times net debt to APA in our European operations. Basically, this would apply to pound in the UK and then one time net debt to EBITDA in our LatAm portfolio. And we take a portfolio approach to this because depending on the depth of the markets of different currencies and different countries, we don't want to be exposed to the volatilities and limits certain markets. So we take a portfolio approach where we look at units like Brazil, Mexico, Colombia, and we have more than the benchmark debt in Colombia that you were asking about. And we have a bit less in Brazil.
We are taking a dynamic approach at the position we have of debt in each one of these currencies, taking into account the FX evolution, but also the evolution of interest rates and Brazil. Is improving in this sense. And we recently issued some debentures in Brazil, and we may do some additional refinancing. All in all, again, below 4% and and declining on the interest costs. With respect to Colombia, Jose Maria was saying before, it's a very attractive market.
The economy, the telco market and our operation, which is, as you have seen in our results, performing nicely and strong potential. And we are in talks with our partner, the Colombian government, 2, implement this way to finance and strengthen the balance sit off of the company. These conversations are underway. And when that is a result on those conversations, we would inform accordingly.
Taking your question on the Spanish outlook, in terms of revenues, Again, we do not provide guidance for business line. And I have already commented that we expect 2016 of being a year in which operating cash flow will accelerate. But in order to try to give you more color on the expected trend, I can reiterate that, we are not expecting big changes in trends versus 2016. Consumer and business revenues are expected to perform similarly to what they did in 2016. There might be small ups and downs in terms of specific quarters that might be affected by the basis of comparison, seasonality, or others, but as we had in 2016.
But again, in general terms in Consumer And Business, improving trends. In the others, line, which includes mainly wholesale. As you saw already in the 4Q numbers, It is affected by different factors that are dragging the growth into business such as lower pay TV wholesale revenues, regulation, termination, the lower base for ULL accesses, indirect access and lower revenues from MVNO. Most of these factors, we foresee them to continue in 2017. Having said this, we remain that some of those factors wholesale TV or interconnection do not impact OETA.
And that's why we are confident and so focused on operating free cash flow for the Spanish business in 2017.
Thank you, Julius. Next question please.
Our next question comes from Akhil Dasani from JP Morgan. Please go ahead.
Yeah, hi, good morning. Just two questions, please, if I may. So firstly, just on the Spanish pricing environment, I just wanted to share some thoughts around the price changes that you've put through year to date, both on the Fusion side and the postpaid side. And I guess specifically just keen to understand how you think those scale of price changes compared to last year? And secondly, just in terms of the strategy around that pricing.
For example, I see that if I've understood correctly, you're not putting those price changes through on the back book. It's just on the front book. The way in which you scale up data allowances within that has also changed. So just to really understand your thought process and also how you see your competitive environment in terms of how operators are reacting And then the second point, I guess, just following up on a number of the prior questions around the guidance, you've talked about operating leverage and that being a driver of EBITDA and operating cash flow growth, but obviously in the mix, the revenue guidance is for stable. So I just wondered if you could maybe just clarify a little bit further around the margins, maybe call out a couple of markets specifically in terms of where you're seeing the upside.
And I guess particularly keen on any thoughts around Spain.
In terms of thanks for your question. In terms of the overall environment in Spain, we foresee a rational market, basically. So But we are trying to do as the leader of the market is trying to upsell our customer, trying to make sure that the new attributes of the network like speed or capacity or the new features like content or technical features on the video platform. We are able to capitalize on and our customers are able to appreciate and value those new attributes. And this is namely as well for the call of the market.
It's precisely because of that, the first number that I would like to stress is the average ARPU Fusion. It has been up significantly over the year. And if you ask me which part of this increase in ARPU is coming from from tariff upgrades and which part is coming from upselling customers, customers that have been invited through a promo to enjoy those new attributes. And after the promo stays, I would say that roughly 60% is coming in 27 2016 from, tariff upgrades, and 40% is coming from upselling our customer base. So that's explained why we are running some promos and why we are running some promos in which we incentivate the customer base that we already have and also the new customers.
To enjoy the new features. Out of the promos, I can share with you that roughly 58% of the customers that have been coming to the new promise were new customers. They are also helping us to increase the customer base. So overall, I think that you should expect from the Spanish market, first, to stay rational and second, to move into this selling of customers and improving the overall ARPU. As a summary for 2016, Fusion is up 18% year on year.
And 1 third of that is increasing subscriber base and 2 thirds of that is the ARPU increase of 12% year on year. So increased penetration of TV is the next is the next move, increased penetration of fiber. We keep expanding fiber, increased data usage, increased number of mobile lines, per solution line. So those are the features that we are using to drive our revenues in Spain. So I I think that you should expect this market to keep going into that direction.
Do we might be we might be having, new features during 2017 that should allow us to keep going into the same direction. So overall, on the B2C business in Spain, the trend is accelerating, and we think it's sustainable. And in terms of of the guidance. We don't guide by geographies, but as I have been sharing with you, I think that we will have some significant revenue impact through regulation, namely in Germany and some other Latin American territories, some wholesale effects in Spain, as we have mentioned, So that's why we are and it is hard for us to have a reading of the handset revenues going forward. So that's why we are guiding for the stable revenues.
And in terms of the margin, the overall guidance and margin, the simplification efforts are going as we speak all across the board the digitalization of the business that we have tried to describe during the presentation in terms of, basically running a full IP network and switching off legacies and switching off IT platforms and the case of Spain, we are starting to switch off central switches as well. And the synergy case in Brazil and Germany, the German case had just been upgraded. The Brazilian synergy case has been upgraded 3 times. So we are pretty confident that we can keep building on efficiency all over 2017 in all geographies.
Thank you, Achin. Next question please.
We will now take our next question from Joshua Mills from Goldman Sachs.
Hi there. Thanks for taking the question. It's just a follow-up on the B2B question earlier actually. So In the report, you're highlighting that the communications revenues, which I presume a higher margins or a lesser decline this quarter versus last quarter. Could you give some color on what that is as an absolute figure?
Is it a mid single digit decline you're seeing on the legacy B2 revenues or less than that? And then secondly, just if you can talk a bit about inorganic, delivering opportunities, it's in how many towers do you think there are potentially could still be sold to Telxius? And is there any opportunity to potentially sell assets in LatAm? Are there willing buyers there for some of those assets?
Taking your question. Thanks for the questions. Taking your one on the B2B trend. It is true that comps are under pressure. And in fact, they are going down like 3%.
Basically, we expect low single digit decline going forward. But what we are doing is bundling our comp services in our offers with IT. And IT is growing 13% year on year and will keep growing. So what we are trying to do is digitalizing our offers as well. And at the same time that we foresee a decline in comps, we are having a very strong and boost in terms of IT IT revenues.
And in terms of the margin impact, we are trying to control that by using value added services on top of IT, like security, cloud or internet of things, of others that are all growing double digit. So those are the trends that I can share with you on the B2B business so far.
Regarding the second question, we are very focused on organic cash flow generation, organic deleverage. You saw that our free cash flow is 0.86 above a dividend of 0.40 per share. So you should expect us, as we stated in the previous quarter, and we rated it now to continue delivering on organic deleverage. And we are very committed to maintaining a solid investment grade credit rating You also saw that M and A can play a role in all these efforts. We just announced the TELSIUS transaction, And M and A, if conditions are right, if it creates value and makes strategic sense, will also play a role in our efforts, but we would rather not discuss specific situations.
Thank you. Yes. Next question, please.
Our next question comes from Julia Archemagas from RBC. Please go ahead.
Good morning. Thanks for taking my question. So my question is regarding the competitive environment in Spain, I see that for example, Orange, they continue being very aggressive in the low end of the market with Azure brand. Vodafone has claimed that they are going to become more active with their low end brands. Do you see that this is a dynamic that might drag this good momentum of pricing in Spain?
That's my first question. And the second question you mentioned that FFDA Homes in East Pan America and there were an extra 5,000,000 homes. Can you give me some color of which countries did the company invested?
Thanks for the question. Overall, in Spain, environment still rational. And I would say, very focused on upselling customer. Again, all competitors are going on to this more for more strategy. And it is true that some of them are making promised, but they are becoming also more rational.
To give you some color, orange, increasing convergent prices from 2 to just in February or adjusted increased 1.65, the fixed line fee or Vodafone capitalizing football contents or started to charge from some for some services. And even mass mobile is removing some discounts on, so I can give you a lot of examples in which we think that all competitors are willing to capitalize the features of both the technological features of the network like speed or capacity or content or services. It has taken us a while. All of us in Spain, all the places in Spain to invest into transformed Spain to the most advanced European market in terms of ultra broadband. Heavy investments have been made in terms of fiber deployment and LTE coverage And I think that educating the customers on this more for more thing and the customer being able to value speed capacity and value added services essential.
So we might have some ups and downs in promos, but I think that those are all promise focused to upsell customers. And again, our reading is that the market is rational and is likely to stay rational in Spain. And in terms of your question around the fiber deployment in Espana America, apart from Brazil that is becoming has already more than 70,000,000 premises passed with fiber and more than close to getting close to 4,000,000 of our connected houses. Peru is increasing. We are basically upgrading our cable network in Peru.
And all across the board in terms of Chile, Colombia, we are also growing. We are waiting in Argentina. We are We are not deploying in Argentina because you know that we have been refrained from competing. We have not been able to give foreplay offers in Argentina till next year. So until we don't have a clear regulation in front of us that allow us to to have a more accurate calculation of returns of the investment we will be refraining.
So basically, the number is going up in Peru, China and Colombia and stable in Argentina.
Our next question comes from Justin funnel from Credit Suisse.
Hi, yes, just another sort of follow-up question on the revenue guidance, please. I guess, Brazil is still something was slightly in the dark on the company didn't provide an awful lot of guidance on its revenue outlook. I guess, your business is growing about 2% at the moment. Regulatory effects are 1% going into this year. There's sort of 1% underlying slowdown you're implying.
Is Brazil part of that trend as well or expecting Brazil to slow down? And then secondly, when you look back at the UK and Germany, obviously, they're performing reasonably well. But seem to be trailing a bit on network on some measures, Vodafone seems to be pushing harder in the UK. Is there a concern O2s falling behind a bit? And is have you sort of thought about a project spring type of strategy for the UK and Germany now that you've hit peak CapEx in Spain?
Thanks for your question. In fact, in Brazil, we feel pretty strong and pretty solid in our performance in 2016. And we think that we will keep going into that direction. So we do not spend major weakness in Brazil. Revenues in 2017.
We have the best network, we have the best distribution network, the best brand, we have been able to grab 100 percent of the growth of the market in 2016. And we have no indication that this is our position in this weakening. And in fact, we are also accelerating in healthy coverage. So you should not read out of the guidance any weakness in Brazil. Again, I'm stressing that we are just including the impact of of the regulatory effects, namely in Germany and also in the UK because of the roaming regulation in Europe, termination rates in other countries.
But overall, as underlying trends we feel pretty confident. So please do not read any weakness in Brazil through the guidance. In fact, in Brazil, we expect double digit growth, for example, in mobile data and digital and fixed ultra broadband revenues. So we do not foresee any major changing trends in Brazil. In terms of the UK, in fact, in the UK today, we have the lowest churn of the industry and the best network perception, quality network perception.
So our target for 2017 in the UK is the spectrum auction, making sure that we have the right share of spectrum. And we are actively participating in the consultation period with Ofcom and government officials. And we have a clear view of what should be the framework of that spectrum auction. So if you ask me, our priority in the UK for 20 17 is making sure that we have the same trends in terms of customer quality, lower the lowest churn levels of the industry. And making sure that the expected auction is structured in a way that is fair, for UK, PLC.
So we don't feel the need of accelerating. And in fact, we have the network sharing with Vodafone, which is in good shape. So we are and that contract is is in place. So we do not expect any major change in network investments in the UK apart from the spectrum. And in Germany, in Germany, our networks, our strategy has not changed.
We think and Marcus was sharing with the market yesterday, that we have all the ingredients to achieve the best customer experience in urban and super urban areas. We have the best spectrum and we have the most dense network And I think that the integration effort that has been carried out in 2017, 2016 and the effort that we are doing in 20 17. It's not just allowing us to upgrade the synergy case, but it's also allowing us to have or to build the best mobile network in Germany and urban areas. So we are not lagging behind, and we think that we can achieve that best network, in the next 2 years.
Thanks. Thank you, Justin. We have time for one final question, please. Thank you.
Our last question comes from Fernando Kordiv from Santander. Please go ahead.
Hello. Thank you for taking my two questions. And both are related with the Spanish market and particularly with the mobile only business, although I recognize that the vast majority of your retail business not only is convergent. But discussing on the recent offer update, where you are increasing the allowance as we are maintaining the prices, I would like to know which of you at which extent that limits the future mobile data growth monetization And also to get a clear view on the dynamics of this kind of offers and looking into the costs, but we just tend this effort of simplification and business are being translated into the cost or the unitary cost per giga opportunity of data. Related with mobile business also trying to understand if these new offers even maintaining prices are margin accretive or not?
Thank you.
Well, thanks for your question. The revamped portfolio that we have done in mobile has 2 tranches, I would say. It has a first tranche in which we give more formal in the low end. So we are trying to raise the value per gig at the entry level and more of the sending meter high. So it has been a structure in two tranches.
And in fact, we had a very good performance in Q4. As we are expanding our LT coverage, and we have now 96% geographical coverage on the regulatory criteria. And we have more than 6,000,000 Yield customers in Spain. And more than 81% smartphone penetration, we are able to capitalize this investment effort through those targets. But again, keep in mind that we are trying to do several things at the same time, upgrading the offer by giving more for more I'm trying to give, the sense or the perception for the customer that the speed and quality are attributes that should be valued.
We have been increasing our entry level by 2. And at the mid and high, we have been giving basically a little the same for we have been giving more for the same amount of money. As a result of all of that, we have been having record highs in contract mobile net adds, new And we are having more loyalty, which again, sticking to the fact that your calculation should include the churn effect of those offers and not just the extra gig that we are giving to those extra layers of customers. Overall, the numbers that we are running allow us to say that we are able to capitalize the investment effort that we are doing in network. But again, read through the promotions or through these offer upgrades, the 2 tranches, and read the churn target that we are pursuing.
At this time, no further questions will be taken.
Well, thank you very much for your participation. We certainly do hope that we have provided some useful insights for you, but the should you still have further questions. We kindly ask you to contact our Investor Relations department. Good morning, and thank you.
Telefonica's January to December 2016 results conference call is over.