Ladies and gentlemen, thank you for standing by, and welcome to Telefonica's January to June 2016 Results Conference Call. At this session. As a reminder, today's conference is being recorded. I would now like to turn the conference over to Mr. Pablo Eguiran, Head of Investor Relations.
Please go ahead, sir.
Good afternoon, and welcome to Telefonica's conference call to discuss Generation 2016 results. Before proceeding, let me mention that financial information contained in this document related to the first half of twenty has been prepared under International Financial Reporting Standards as adopted by the euro Union, and that this financial information is unaudited. This conference call webcast, including the Q And A session, make on in forward looking statements and information relating to the Telefonica Group. These statements may include financial forecast and estimates, but based on assumption our statements regarding plans, objectives and expectations that make different that make reference to different matters such as the customer base and its evolution growth of the different business lines or on the global business market share, Portugal decisions, divestitures or other transactions, company results and other aspects related to the activity and situation of the company. 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 relations team in Madrid by dialing the following telephone number. 3,491, 402-eighty 7, double 0. Now let me turn the call over to our Chairman and CEO, Maria, Alvarez Paliete.
Thank you, Pablo. Good afternoon, and welcome to Telefonica's second quarter 2016 results conference call. Today with me is Angel Villa, Chief Financial And Strategy Officer. And during the Q And A session, you will have the opportunity to address us with any questions you may in the second quarter of 2016. Firstly, and this is the basis for the rest.
Profitable growth has remained solid. Service revenues growth is leveraged on positive data monetization and higher customer lifetime value. The service revenue growth together with efficiencies and merger synergies are the drivers of OEDA margin or operating cash flow growth. Secondly, we have built on best in class technology platforms, with fiber premises pass reaching $33,000,000 and LTE coverage expanding to 55% or 84% in Europe. Thirdly, our competitive position is superior in main markets.
Spain is back to growth in operating cash flow. Brazil and Germany expanded margins. Espana is leading value growth, and UK stood out in customer acquisition and loyalty The 4th element I'd like to stress is that we are committed to deleveraging through better business trends and lower FX headwinds, flowing directly to free cash flow along with a broad diversity of financial and portfolio measures and attractive debt refinancing. Finally, we are 16 guidance and dividend, along with midterm leverage target. Turning to Slide 2.
You can see that our organic growth profile is supported across our key financials, from service revenues to operating cash flow. FX has impacted reported headlines. However, I'd like to highlight that these negative FX effects at OIBDA level were offset at the free cash flow level. Net income for the quarter was EUR 693,000,000, leading to a reported EPS of 0.13 On Slide 3, we explained the impacts that FX and our parameters have had on our first half results. Although these factors have been reduced in the second quarter, FX drag 11.7 percentage points in revenues and 10.7 percentage points in OITA in the first half of this year.
However, this effect will ease in the 2nd part of the year as main depreciations took place in the second half of twenty fifteen The limiter had a positive impact of 3.3 percentage points in revenues and 2.3 percentage points in OIBDA in the first half of the year with no impact to be had in the second half of this year. As the consideration of GBT and DTS took place in May 2015. As shown on slide 4, we are on track with our full year guidance. Following its criteria, we are growing 5% in revenues, 0.1 percentage points in margin and reached a CapEx to sales ratio of 15.1 percent. We confirm that we will pay the 2016 dividend of per share in two tranches.
The first will be in the form of a voluntary script of per share in November this year. With the second tranche of EUR 0.40 to be paid in cash in the second quarter of next year. In addition, the Board of Directors will decide in the second half of the year regarding the potential amortization of 1.5% of treasury. Finally, we maintain our midterm net debt to EBITDA target of lower than 2.35 times. On Slide 5, we demonstrate that our free cash flow generation is improving, both sequentially and year on year.
Shown in graph on the top left of the slide. Free cash flow is up 1,000,000,000 in the first half of the year versus the previous one thanks to improved operating cash flow, lower spectrum CapEx financial payments and minority, despite higher working capital consumption, and slightly higher taxes from nonrecurrent last year. Free cash flow is also up versus the previous quarter, due to working capital and financial payments. For the second half of the year, we expect free cash flow to improve further due to better operational performance, lower FX drag and other seasonal effects. The quality of our customer base continues to expand as seen on Slide 6, driving service revenue growth and average revenue per access.
We are increasing penetration year on year in the different value segments, namely smartphones, LTE, fiber to the home and VDSL. As such, the bundling of these LT and FTTHs is allowing us to have high end pricing power. Finally, Churn levels were down versus the last quarter and last year. Clear proof that the award winning proposition is creating customer loyalty. To review the quality of service revenue growth, 1.5 year on year in the second quarter, have outpaced total revenues and also across all segments offsetting the decline in handset sales, which impacted all businesses.
Revenue growth is mainly levered on broadband connectivity and service over connectivity, which are fueling service revenues, maintaining similar growth trends as in the previous quarter, in most markets. We review our sustained OIBDA growth. Organic OIBDA grew 48th consecutive quarter. Mainly due to impressive OpEx control measures, which led to a 0.8% year on year decline. This mainly included the synergies from the GBT and IPLOS mergers, and the global simplification and efficiency programs, such as personnel, IT and networks and on others.
Profitability continues to improve, with margin expansion in all regions except East Pan America. And operating cash flow back to growth in Spain and continuing to show a powerful expansion in Brazil. Lastly, We have a highly diversified portfolio, which is impacting positively on OIBDA performance. Slide 9 shows the tangible results of data monetization. LP customer base doubled versus June 2015.
And average usage increased by 68% driving an ARPU uplift of around 10%. In particular, increasing prepaid data penetration in Hispam and a wider implementation of recurrent data plans is boosting data prepaid ARPU delivering an 18% uplift in the second quarter. Non SMS data revenues growing the quarter 16%, leading to a 9% year on year increase in data revenues. On the other hand, fixed data traffic is accelerating its growth up to 50% year on year, due to fiber expansion over the top video and multi device proliferation, which open up a huge monetization potential. Turning to slide 10.
Digital services continued to show solid growth. With total revenues up 15.7 percent year on year in the quarter, leverage in particular on video, security, machine to machine, and cloud. I am pleased to highlight the continuing integration of our own platform products and services into our customers offering and into our own internal processes. Consumers businesses and institutions are increasingly seeing the benefits of having Telefonica as the digital solution provider. And helping them to transform their business models, thereby increasing efficiency and productivity.
On Slide 11, we show the good progress made in enlarging our ultra broadband footprint as shown by the double digit growth in premises pass with fiber and the expansion of our LT coverage with voice over LTE already available in 6 countries. Network modernization towards all IP advance in order to have a more efficient network with more capabilities with the deployment of a new Metro network in Spain with optical transport and the launch of a native voice over Wi Fi solution in Germany. Additionally, we continue to work to have smarter systems with full stacks projects in 15 countries and a strong push in our big data platforms by tripling their capacity year on year with the aim to provide extremely valuable real time information. Ajell will now explain in more detail the performance in the quarter.
Thank you, Jose Maria. Please turn to Slide 12 for a review of our domestic business. Over the past years, we have invested heavily to build a very robust platform. And the continuous improvement of the offerings quality have translated into a very high level of customer loyalty As a result, Q2 trading is gaining momentum on the back of churn reduction across the board and our convergent offer continues to deliver outstanding KPIs. Double digit year on year growth in subscribers and ARPU driven by customers upgrading towards higher value packages.
In July, we launched a new Fusion Plus portfolio. Now updating tariffs, while adding again more value namely TV content and additional mobile lines. Moving to Slide 13. Our successful upselling is flowing into revenues. Posting sustainable growth in service revenues across all segments.
Despite tariffs update having a lower impact in the Q2, year on year comparison. On profitability, we capture the first savings from the restructuring program, which are reflected in the 2.6 percent OIBDA growth year on year and 1.1 percentage point margin expansion to 41%. I would like to In an increasingly dynamic market in Germany, on Slide 14, we maintained operational momentum, with a higher contribution from partners. These, together with lower handset sales, impacted revenue trends in the quarter. With integration activities on track, we posted an OIBDA margin expansion of 1.9 percentage points year on year, 25%, which will continue throughout the year.
As we will have incremental savings in the second half, and as transformation OpEx peaked in Q2. Margin increase is reflected in the 17.3% growth operating cash flow in the quarter. Narrowing the range of mobile service revenue outlook to slightly negative and lowering the CapEx outlook due to more efficient spend and LTE rollout phasing, therefore improving the implicit operating cash flow expectation. Very importantly, the company is committing to midterm dividend growth over the next 3 years. Please turn to Slide 15 for a review of O2 UK.
O2 continued to post a solid performance in Q2 after posting the strongest net adds in six quarters and an all time high customer loyalty. One of the main drivers of this was the outstanding LTA adoption with penetration up 17 percentage point year on year to 43%. On financials, mobile service revenues, excluding auto refresh, remained stable year on year in the quarter as the benefits from customer base and subscription growth were offset by the impact of roaming and MTR cuts. Top line growth in the quarter was also affected by a market wide slowdown in handset sales. Profitability remained strong, and was broadly flat year on year at 26.6 percent in the quarter.
To review Telefonica Brazil, please turn to Slide 16. With a rational and data centric strategy, we continue to lead in contract. We captured 55 percent of new contract customers in the last 12 months, reinforcing our leadership with market share over 42%. Q2 data ARPU accelerated to 41% year on year, thanks to high 4G adoption. In the fixed business, 50% year on year growth in Ultra broadband and APTV led to a very solid ARPU performance.
Moving to Slide 17. It is worth highlighting that service revenue accelerated its year on year growth to almost 2%, thanks to mobile, with data revenues increasing their way to 52% of total mobile service revenue. Once again, OpEx improved year on year trends through efficiency, and better than expected synergies. This allowed OIBDA to increase 6% year on year. With a margin expansion of 1.5 percentage points to 31.7%.
As such, Vivo posted an outstanding growth of 35.3 percent in operating cash flow in Q2. Resulting from consistent OIBDA and optimized CapEx. Finally, we have identified additional opportunities in terms of synergies. Allowing us to build the case In Hispam, as shown on slide 18, we are reinforcing our leadership in high value segments as investments in quality are paying off. In mobile, contact net adds more than double versus Q2 2015, despite intense competition, which particularly affected prepay.
Smartphones and LTE continue to thrive, but still penetration is far from the group average. Meanwhile, in fixed, the growing adoption of bundled services, leverage on the differential pay TV offering and higher speeds in fixed broadband, led to an improvement in churn levels across grew 3.6% year on year organically in Q2. Leveraged plus 16% year on year, in which all operations accelerated and registered positive growth. OIBDA was impacted by Forex depreciation and a strong competition, which also resulted in higher interconnection costs. Let me now move to As a traditional seasonal effect, net debt in the second quarter grew by nearly EUR 2,000,000,000.
Mainly stemming from the cash dividend payment despite the progress made in free cash flow generation, which reached almost EUR 750,000,000 in the quarter. Consequently, our leverage ratio has topped 3.2 times as no deleveraging measures have yet kicked in. As is the case, with the announced voluntary script dividend for the EUR 0.35 dividend payment during November this year, or the recent disposal of 1.5% in China Unicom for over EUR 600,000,000. This and other corporate actions Generally with our expected improving cash flow performance will be key in showing de leveraging process for the remainder of the year. On Slide 21, we continued reducing the effective interest cost which has moved down by 96 basis points year on year to 4.35%.
Our liquidity cashion is robust at EUR 17,300,000,000, including cash and undrawn facilities. Such cushion has been strengthened with our EUR 5,500,000,000 long term financing year to date, accessing different pockets of liquidity and benefiting from lowest historical benchmark rates. I will now hand back to Jose Maria To recap.
Thank you, Angel. To finish, please move to slide number 22 for our final conclusions. Today's results demonstrate our ability to execute while building for the future as we bear the fruits of structural transformation. As such, network upgrades and product differentiation drove good operational momentum on value and quality. Improving business sustainability, profitable growth and market positioning.
Furthermore, let me highlight that organic growth, free cash flow and FX drag will improve in the second half of the year. Finally, we reiterate all of our commitments, including the dividend and leverage. Thank you very much, and we are now ready to take your questions. Thank
Thank you. Per participant. And if possible, we recommend you not to use your cell or transfer phone. There'll be a short silence while questions are being registered.
Our line.
We will take our first question now from Georgios Eira Dukarya from Citi. Please go ahead.
Yes, hi. I had two questions, please. The first one is around CapEx levels. You are both in Brazil and Germany You mentioned maybe opportunities for slightly lower CapEx. Is it possible to give us some idea of how you expect CapEx to progress later this year, but more importantly in 2017 across the group.
And my second question is on the UK. You highlighted some of the headwinds you had in the second quarter, but I wanted to better understand why you've seen the margin improvement reverse in this quarter? And whether it's something that's going to carry on because of the change of the mix of the revenues with the roaming regulation?
Thank you for your questions. In terms of the CapEx level, we stick to the guidance of 70 around 70% CapEx over the sales ratio this year. There is a phasing effect in the second half of the year that always occur And therefore, before reviewing that, we need to check what is the impact of that seasonal effect as the approval process of the CapEx takes basically 6 months to get through. So we will revisit at the end of the year. We expect over revenues to continue growing next year.
And we expect the CapEx over sales ratio to be reduced in 2017 as our CapEx effort during the last 4 years is starting to pay off in terms of value. Revenues coming through our accounts. So, on summarizing, I think that before reviewing this year CapEx, we need to check what's the trend during the second half of this year. And remember that FX also have an impact on CapEx. And secondly, we do feel that going forward, CapEx intensity will be progressively reduced.
In terms of the financial performance, namely in margins, in the UK, the improving trends that we have been seeing in subscription rates has been offset by lower roaming margins. And this is a trend we also think that due to phasing of marketing spend and underlying cost saving, we might have lower functional costs going forward. Namely in the second half of this year. Also, taking into account the lower canceled sales due to the market slowdown, is resulting in lower, higher margin. And therefore, that's also affecting our margins.
So the roaming effect the termination rate cut and the handset impact that has a positive impact last year is not here anymore. So that's what has been affecting our margins. And depending on the handset activity going forward, the margin will evolve accordingly. So there are some effects that are here to stay at some others that would depend on market evolution, namely on the handset on the hardware margin part of the business.
Thank you. We now have a question from Matthew Robilliard from Barclays.
Yes, good afternoon. Thank you for taking the question. First, with regards to Espano America, So obviously very strong performance in fixed, but we've seen some decelerations on the mobile side across different markets And I wanted to understand, please, if, this is something structural that is affecting the region, or it's just a coincidence and, and is something that could revert in the next few quarters. And the second question had to do with your leverage you highlight that you expect deleveraging by the end of the year. I just wanted to understand if that was compared to H1 or at the end of last year.
And also when you talk about the midterm target being still below 2.35 times OIBDA, What do you mean by midterm? Is that 'seventeen, 'eighteen, 'nineteen?
Thanks for your question. In terms of ispand, let me highlight first that we do think that we are the best position operator in the regions. And we I would like to highlight that we have outperformed across all core markets, our major competitor in the region. It is true that we have had a weaker performance in terms of the mobile side. But on the fixed side, it has been our performance, our growth has been accelerating.
And in spite of everything, we continue posting growth in the revenues in the region. We do think that going for and it is true that some of the markets, namely Mexico, and on the mobile side, somehow Peru as well has been weaker compared to the first quarter. There are some effects that has been affecting our performance, namely MTR cut, significant MTR cut in some of the markets. And in the specific case of Mexico, is a very aggressive competitive landscape that has been significantly affected our revenues. On that regard, I would like to say that Mexico is 3% of our total and 3% 3% of the total group.
And therefore, the impact is more limited on our side and some of our competitors. Going forward, we think that some of those trends will ease, namely the mobile termination rate decline, the rate of decline should at some point start to diminish. And we do see a more rational and overall a more rational environment in Islam. Most of the markets some of the 0 rated tariffs are starting to disappear. The unlimited data tariffs are also starting to disappear.
Because of the financial situation of some of our competitors. And we do think that also overall Forex impact will ease progressively during this year. So, summarizing on the fixed side, the growth has been accelerated all different units. On the wireline side, weaker trends in Mexico in Peru and somehow in Chile as well because of termination rates. But overall, a sound competitive positioning, and we do think that some of those effects would start to ease progressively.
And again, let me stress the fact that we see overall a more rational environment in the region going forward.
Hi, Maty. Regarding leverage, we maintain our commitment to a mid term target of 2.35 times. What do we mean by mid term that would be end of 2017? And we also plan to make a visible progress in that direction during 2016. To this end, you have to bear in mind the seasonality that our debt level has.
It's been traditional in the last several years. To have a lower level of debt at the end of the year compared to the one at June, maybe out of the last 5 years, maybe one because there was a big Venezuela devaluation. This was not the case. But in all the other years, net debt at year end was lower than net debt in June. So bear in mind, the seasonal effect we will have very strong free cash flow generation in the second half, as you also saw last year.
We plan to implement financial measures we will execute on portfolio management.
Thank you. We have a question now from Giovanni Montality from UBS.
Hello. Thank you for taking the question. If I may, can I ask you to guide us through your different deleveraging options? Obviously, you have many, but I think it will be good if you can help us have a framework discussing briefly. Each of the options you may consider.
Thank you.
Hi, Giovanni. First and foremost, strong free cash flow generation. You saw that in the first half of the year, our free cash flow is 1,000,000,000 higher than it was last year. For the second half of the year, we expect a strong performance on this metric. Why is that the case?
Well, first, because as per our guidance, you will see that operating cash flow is going to perform strongly as Tom Maria was saying, the FX impact, the FX drag will ease very substantially in the second half, the big devaluations took place in the third fourth quarter of last year, so comparisons will improve. With respect to Spectrum, to unit has been not significant. And the figure that we will have for the full year, could be in the few 100 of 1,000,000 compared to what was 1,600,000,000 last year. So substantially lower figure in spectrum. Working capital is going to contribute positively, although it's already normalizing.
So the figure that you should expect could be around 1 third of what we had, what we had last year. Financial payments, taxes are declining, will decline for the full year in the low teens versus 2015. So in all, we expect a very strong free cash flow performance in last year. If you remember, in the second half of last year, we generated free cash flow well in excess of EUR 3,000,000,000. And this year, we feel that it should not be different, should be similar.
So 1st and foremost, strong free cash flow generation. 2nd, we're implementing already financial measures. The script dividend, the voluntary script dividend is already approved. By the by the shareholder meeting. It will depend obviously on the take up of shares by the shareholders, but this will not continue to a huge cash drain from the cash generated in the second half, and this will help deleverage.
We have other potential financial measures available to us. Like hybrids and so on that we could use, but we will be pragmatic, but prudent on those because those are expensive instruments. So if anything, some single tranche benchmark issuance at some point, still undecided. And then on portfolio management, that we have been active and pragmatic in the last few years. What we do not want to do is to not realize the value of stakes or assets that we may divest.
But we have very attractive opportunities ahead of us. Telxius is something that is public that we are working on. We also by having consolidated the UK. Back this helps us our debt service and we will evaluate, and are already starting preparatory work for potential minority divestment in the UK. Beat on the public markets or on a private transaction.
And we also have noncore assets. We have stakes transparental businesses and the geographic review of our portfolio of assets, which we have all the time. So we have several of multiple options. We plan to make progress already in 2016 towards the target of leverage by the end of team.
Thank you. Sorry. If I may follow-up, among all these options,
Sir, I
don't know if you can hear me because I hear my voice.
Hello? Hello? Giovanni, please go ahead. We can hear you.
Sorry. So among these options, should for any reason, the operational performance be less, let's say, less good than expectations should any of the portfolio management options not be viable for market conditions or anything to dividend as you have showed already this year, considering a larger portion for the scrip. I mean, can we consider that your priorities deleverage. And therefore, if needed, you will be pragmatic about the dividend, at least for, let's say, the balance of Q2 for the balance of 2016 dividend eventually for 2017 dividend if needed. Thank you.
Thank you.
Let me take that question. But first of all, let me stress that the free cash flow trends that we see and that Angel has mentioned are improving, are improving at the group level. Let me try to cover that in a little bit more of detail. The 2 largest units that contributes more to the free cash flow generation of the group, namely Spain and Brazil, both turn the corner. And in fact, in the case of Spain, it's a turnaround move that took place after 4 years of decline which has significant CapEx effort.
In Brazil, we are talking about double digit local currency, free cash flow growth, Germany is improving as well. And we have a much more balanced quality of free cash flow generation. Therefore, more recurrent with much less on working capital contribution. And we are seeing an acceleration contribution of OADA minus CapEx of operating cash flow. As a result, the free cash flow estimate that we have for 2016, comfortably covers nominal dividend including the script part that we have just announced that we will make.
And therefore, we count on that part to accelerate our deleveraging process. Overall, we foresee a very robust free cash flow generation in the second half of the year as Angel was said. And keep in mind, that free cash flow has already grown with negative FX headwinds in the first half of this year more than EUR 1,000,000,000 compared with the previous year. As a result, going forward, we think that the simplification effort that we have been doing and that we plan to accelerate jointly with the synergies programs that we have in place in 2 of the largest units of the group like Germany and Brazil should help us to grow EDA. All of that jointly with the measures that Angel covered make us think that the current level dividend is comfortably covered and that we can do both things that we can show that we can deleverage and that we can show that the 0.75 of dividend is compatible and sustainable at this level.
So at the end of the year, we will review and we will revisit But those are the trends that we see right now. And keep in mind also the answer that we give to the first question, we see CapEx intensity being more moderate. In the coming years as a result. And therefore, that should also contribute to this acceleration of free cash flow.
Next question please.
Thank you. Andrew Lee from Goldman Sachs has our next question.
Yes, thanks. Good afternoon. Just a question on UK and then on Brazil, please. In the UK, I just wonder if you could talk to us about your plans to address what looks like increasing convergence pressures in the absence of consolidation, which would have you could have helped lower the cost base what can you do to compete more effectively on a quad play basis there? And do you think that's a problem?
And then secondly, on Brazil, I just wonder if you give your view on the macro picture there and how you see this impacting the telecoms market through the second half? Thank you.
Well, thanks for your thanks for your questions. First, let me let me say that after the failed approval process of the European Union level of the O2O3 transaction, we have now a much clearer picture of what other players in the UK markets are really looking for in the different layers, in the different segments of competition. We do believe that with the current market structure, there is room for a pure mobile leading brand mobile player. And let me remind you that O2 is the best mobile asset in the UK market. It has the best operational performance among the MNOs.
It's the best brand in the market. It has a differential value proposition to customer and it has effectively the lowest churn and it has an outstanding commercial activity during these two quarters. Actually saying, we are exploring all alternatives and we will be analyzing the different moves in the market. It is inevitable that the UK's convergence take up will increase. But it is also true that this is starting for a very small starting point.
As some customers, we always seek, we look for value versus discount, quad play services. Convergence is not new in the UK. PG and media is suffering in it since 2007, but it has had so far a relative low take we do think, according to our own experience at the group level that converging so far, it's not demand driven is much more supply driven. And therefore, it implies that in order to be forced, you need to do significant discounts on the bundling. And we do not see BT going into that direction so far.
That's why the quad play traction since launch has been minimal. In fact, their overall mobile base has been declining. The last year, while our mobile base has been growing. And therefore, it looks like there is continued appetite for mobile only propositions. As a result of all of that, we will be analyzing the different movements that might occur in the UK market.
And that's why we are preparing our unit for those scenarios. But we do think that we have the best mobile asset in the UK market that it is increasingly valuable because of what we have been seeing as the different approaches that most of our competitors have done during the approval process, the failed approval process of the hatch transaction. And therefore, we think that we have optionality centered around the fact that we have the best mobile asset in the UK.
And on Brazil?
Talking about the macro in Brazil. We are more positive than the market overall. We what we see ahead of us is a Brazil that is better prepared than in previous occasions for the shop it has had It has been most of all a political crisis. It has affected the macroeconomy, but the the establishedators of the Brazilian economy in terms of internal consumption and in terms of domestic reserves. Are acting effectively.
We think that the trends that we are seeing recently in the last weeks are more positive that in the previous year. And as a result of that, you can see that the Brazilian real has been significantly strengthening. And in fact, it's it's much stronger than it has been in the last 12 months. Remember that the move of depreciation move of the Brazilian currency started in September last year. And therefore, in the second half of this year, this positive effect of the translation effect should start to flow through our P and L.
So overall, Well, and in the meantime, we have been able to keep growing in Brazil. Our unit Vivo has been the only mobile operator the only telecom operator that has been able to grow in the middle of significant decline of GDP. So we do feel according to the market to the commercial activity that we see in the market that the worst is behind. And probably in our opinion, and again, this is just our own internal estimates recovery could be faster than what most people is anticipating. Just in our case, remind that the second half of this year The currency effects will start to flow positively through P and L.
And therefore, the headwinds that we have been having so far against the reais should significantly ease. So we are pretty positive, I would Brazil.
Thank you. We'll take a question now from Mandeep Singh from Redburn.
Hello. Thank you very much for taking the question. I just really have one question around sort of monetization of football rights. Previously, you were charging an extra EUR 25 for premium football now you're no longer charging that, and instead you're increasing the prices of various Fusi on packages. Can you just explain the dynamics of obviously not everybody was paying the 25 and some people on promotions?
Can you sort of explain to us the before and the after? And maybe give us some comfort that you're effectively able to cover the extra football costs that you've been incurring.
Certainly. Thanks for the question. First, let me try to clarify the impact that we are going to have namely for this year in 2016 because of the full world rights in Spain. We are going to have 2 wave of impacts. The first one already occurred happened in the first half of the in the first quarter of this year, which was that the fact that we were accounting for the champions league that we didn't have a year ago.
And therefore, that extra cost is already flowing into our accounts. The second one is going to be starting the end of August, September, which is the extra cost of the option of the next 3 years of the domestic championship. And therefore, there are going to be kind of 2 negative impacts on a more football rights cost in Telefonica Espana accounts. The strategy that we are trying to follow is the following. We have in increased the value of our basic offer by including 8 of the matches of the next season in the basic product.
And we have upgraded the value of that product. And therefore, now all our Fusion based product is already accounting for some of the football rights for a extra cost. And therefore, that applies to a significant larger amount of customers than the previous add on that we have on the football rights. And on top of that, we will have the add on of the best match of the weekend. And therefore, we have reserved some upselling effect for the most significant match of the weekend.
As a result, we expect to have a more positive effect on the impact of those cuts into Telefonica Espana revenues. But overall, I think that you should take into account the OIBDA global impacts. And therefore in order to judge our strategy, not just on the football rights, also in other exports like Formula 1 or movies or series, is the EOD margin is the only thing that is absolutely true. And on that regard, Telefonica Espana, in spite of having that extra cost of the 1st wave of the champions during the first half of this year, have been able to slightly increase OEDA margin in the first half of this year because of the efforts that we are doing in other front like the voluntary retirement plan in Spain and also the efficiency measures that we are taking on our distribution chain. So overall, at the end of the year, you will have a full year of the extra cost that is going to be here to stay for the next 2 years.
We think that overall, And by the way, this additional price upgrade that we have been doing already in the 1st week of July, has not been taken as a result, a pickup in churn. So it proves that the value proposition for customers is fair. And in fact, the churn levels of the fiber product or the Fusion products keeps being historically low levels. So I think that by the end of this year, we will have a full picture of our full year of the new equation of costs in Spain. And we stick with what we said previously, we think that the cost measure that we are taking to take down cost will more than compensate the extra cost of the content rights in Spain.
Thank you
very much. Can I just follow-up very briefly, if you don't mind? Yes. So I mean, you obviously absorbed the extra Champions League costs and the headcount reduction savings have kicked in to offset that along with other measures. Clearly, if you then end up not end up, but you obviously have to then absorb extra costs from the August, early September.
Can you still grow margins with that extra cost given that the headcount savings have already kicked in, or do you expect some margin pressure as a result of those extra costs from the end of August?
We have share. We are talking about the extra cost being more than compensated by the savings program we are talking at year end. Therefore, we do think that by year end, you should have a full picture. And we think that with the extra revenues that we are getting from the offer upgrade, jointly with the cost measures, we can more than compensate the extra cost of the content.
Thank you. Next question please.
Thank you. We have a question now from Kevin Caroya from Deutsche Bank.
Thanks. I've got two questions, both related to the headcount reduction. Roughly 3000 employees have now left the Spanish business versus the end of 2015. And can you give us some color on where we should expect that number to be by the end of the year? Just so we can get an idea of where the personal expenses should get to?
And secondly, related to that, could you give us some guidance on how much we should expect the restructuring charges to be within the cash flow statement for this year and the year after? Thank you.
I'm afraid I didn't get your first the first part of your question. Sorry for that.
No, that's okay. And so within the Spanish business, the number of employees is 3000 lower. Than where it was at the end of 2015. Can you give us some guidance on how you expect the number of employees to evolve over the year in the context of the LEAPA's plan?
Oh, yes. As we shared at the time of announcing the program, we were expecting 6000 people jointly the program during the during the 3 years of the program, more than 3000 already left in the first half of this year. And therefore, the program is going according to plan. I don't think I have the cash flow effects here. I will hand it over to Angel.
Yes. The treatment of this pre retirement is we took a hit in OIBDA at the end of last year. And then we are paying it in the sequent years. And you can see it in the waterfall of debt as an increase in debt after what we call pre determined commitments. So the figure of that will flow into debt of, due to pre determined commitments in 2016 is around 1,000,000 of which 1,000,000 have already been included up to up to the month of June.
In 2017, the estimate we have is slightly lower than 2016 in 2018, around 650,000,000
That's great. Thank you.
Thank you, Geva. Nice question, please.
Thank you. We have a question now from Lewis Prote from Morgan Stanley.
Yes,
thank you. I have one question or actually two questions on revenues in Spain and whether you expect revenues to continue growing in the third quarter and the 4th quarter taking into account, 2 things. Firstly, lower wholesale revenues from football rights, from August and also the new Fusion tariffs that Mandeep was asking about whether while in the medium term, the value in terms of upselling and cross selling is obvious, whether in the short term, we could have some kind of small dilutive impact. And the second question is about the roaming contract with Joygo that apparently it's not going to be renewed following the acquisition by Masmovil. How are you seeing this impacting your revenues and EBITDA and from when please?
Thank you.
Thanks for your question, Luis. In terms of revenues from Spain, do we see revenues growing ahead of us? Well, let me remind you that this quarter, the second quarter of 2016 is a quarter in which we have we have not had any price upgrade. And on top of that, we are comparing with our previous quarter of 2015 in which we have price upgrade that was relatively significant. And therefore it's probably one of the toughest quarter in terms of comparison.
And in spite of that, we have been able to grow service revenues. Taking into account the fact as well that we are fully consolidated digital plus. If you were to do a apple to apple comparison, will be growing service revenue significantly in Spain, in spite of not having Now taking into consideration the fact that we have been doing a price upgrade in the 1st week of July of to the basic offer and to the second tranche. And therefore, we think that the 3rd and 4th quarter should help us to to keep going into this path of revenue recovery. Also, if you add to the fact that the SME segment is starting to recover as well.
And it's therefore farther contributing to revenue growth. I think that the overall picture for the Spanish business as we see it today is much sounder even than a year ago. Because we have been able to prove that we have upgrade the offer and at the same time keep lower lowest the lowest level of churn. So I do think that those trends are sustainable. In terms of the wholesale revenues that you were mentioning, it is true that we have on one part lower wholesale revenues coming from the football rights, but it's also true that because of the price increase of that offer, we'll have some other further contribution that side.
So I think that the overall picture is probably going to be much more compensated at what you were describing. And then finally, on the roaming contract with Jogo, we don't have any official statement coming from, from mass mobile. And therefore, I cannot answer you. But just to put it in context, it's 1,000,000 of revenues out of a total of 1,000,000,000 in Spain. So it's a relatively small issue.
Having said that, we are still waiting for the final resolution of on that.
Can I thank you, Jose Maria? Can I follow-up on the first points? So you don't see any major risk that clients that previously were paying for Football And in total, they were somewhere between 1,000,000 to 1,000,000 per month, depending on whether they were in the 30 megs or 300 megs offer. Now that you are offering everything, except the best much of the week, for 70 to 85, particularly the 85 price per month. Some of them are just saying, listen, I just missed the best football, the best match of the week, and I'm just sticking to 85 and that is giving rise to some dilutive implications in the third quarter or 4th quarter?
Well, two things. First, remember that we are it is true that we are putting 8 match on the basic package, but it is also true that that supply a much wider customer base than before. And therefore, in terms of marginal revenue contribution, it applies to a much larger number of customers than before. And then second, we have the best match of the weekend that is an add on. Allow me to remind you as well that Fuccion ARPU as the basic measure and the basic metric keeps growing.
It has been growing 12.8% year on year, if I remember correctly. And then finally, let me remind you that we have been adding a new mobile line the package. And therefore, we are adding also new mobile customers. So the answer is that overall, we foresee revenue trends in Spain keep to keep going into the same direction. And in fact, the equation is going to be affecting also to ADA as I was trying to describe before.
So I think that during the third quarter, you will have all the effects already embedded. The new content cost the new offer already in place and therefore, the new revenue trends already in place. The churn levels once we have been upgraded the offer for the 3rd time in less than 14 months. So overall, I can share with you that the picture that we see today of the Spanish market confirms the strategy that we were outlining in the previews in the previews 2 years.
Thank you.
Thank you. Thank you, Luis. Next question, please.
Thank you. We have a question now from Akhil Ditani from JP Morgan.
Two questions, please, if I may. Firstly, just to follow-up on the last few questions you've had around the Spanish revenue outlook. If we just look at this from a much bigger picture, and obviously, I appreciate there's lots of differences between operators. The service revenue growth that we've seen reported by your Spanish peers has been in the mid single digit range, which has obviously accelerated much more than we've seen from yourselves. Now you mentioned the tougher comps you've had this quarter your price increases are coming through a little bit later.
But as we look through into the second half of the year into next year, with all of these mix effects going forward, do you see some opportunities start to see that revenue difference converge or are there other structural differences we need to think about to make you feel that that's an overly optimistic view And then the second point, I guess somewhat related to that is that there's been some commentary from some of the players in Spanish market around JazzTel. And some of the aggressive offers they've got in the market. Maybe you could just give us a little bit of color in terms of what you think about that and to what extent that is or is not impacting how you think about the competitive environment? Thanks a lot.
Thanks for your question. In terms of the comparison with our closer competitors here in Spain and their performance and in terms of revenue growth I think that this comparison needs to be made it needs to be made in the context of comparable basis and that has to do with the phasing of the offer upgrades that each of us have been doing. Again, for us this quarter, we are comparing with a previous quarter and we will have a price upgrade and a value offer upgrade. And we don't have one this quarter. Our competitors have different phasing in terms of their offers in terms of their average.
So I think that, that will be progressively normalized because the trend that we see in Spain is more for more, which means that us being the leader on the market we are trying to show the path of data monetization in terms of capacity gigs included in the offer, in terms of speed, megabits per second included on the offer, asymmetry of connection. And therefore, we do not see we do not see a major structural difference going forward. Probably to other the opposite, we think that we are becoming again value brand in Spain. I think that the Jazzil brand has not reposition much in since it was acquired. I think that they are staying more aggressive than the rest.
And in fact, Vodafone has already been complaining around that. What we have been doing in our case is we have been trying to match some of the attributes of the brand. Preserving value differentiators. We have included a second mobile line in our Fusion offer. And that thing that with that is going to help us to mitigate the impact that aggressive offer for Jastela having on the value on the high end value customer So overall, to make a long answer short, I think that there is no reason why trend should be diverging I think that the market is going to one direction.
And I think it's the right one because this is infrastructure based competition Spain. It's a rational environment, and I think that data monetization is going into the right direction. And we are the leader on the we are the market leaders and we are starting to be back again in having the the best brand perception among the European and around the Spanish competitors. So we do not see a reason why we should be diverged from our competitors here.
Thank you. We have a question now from James Ratzer from New Street Research.
Yes. Good afternoon. Thank you very much indeed. Two questions, please. The first one is just going back to some of the early questions around portfolio management, and I'm sure you talked about geographic review, are there any specific other markets you might consider for disposal?
And could you confirm, would you consider selling down part of your stake in Telefonica Deutschland at all as a means of deleveraging? And secondly, was wondering if you could talk a little bit more about the trends you're currently seeing in Peru, where you've seen some service revenue weakness in the second quarter, do you think that's a temporary effect or, are you seeing a kind of structural increase in competition there? And you mentioned a reversal of a provision supporting EBITDA in the quarter. I was wondering if you could quantify that please. Any final signs.
Hi, James. On portfolio management, 1st, let me elaborate a bit first. I would like to talk about TELSIUS, okay, which is something that we have been working a lot on Telicius is a very attractive company. It's a profitable and it's resilient. It's a company that enjoys long term contracts mostly denominated in euros and dollars.
So for instance, no pound exposure. Has an attractive free cash flow yield at the time of low interest rates. The valuation of its comparables is going to its as defensive an asset as it gets and the right asset to hold in the current volatile times. So on this one, as you would expect, we are monitoring market conditions and we'll be ready to move expeditiously. Moving to geographies.
The We have been saying, Jose Maria was talking about, UK is performing well. It provides us with a great platform in a key and an attractive market, we have decided to retain control of that business to realize its full potential have fully consolidated it back into our portfolio. And this allows us to have a better dividend coverage to have a better debt service and improves our geographic exposure. So we continue to explore alternatives for U. K, whilst maintaining a control position.
And as I said before, we are open to minority divestment, be it in potential public flotation or potential private transaction. And we have several alternatives that we're considering, and we are getting ready to act on that. Regarding Telefonica Dutchland, we have no such intention to reduce our stake induction actually. We may increase our stake over time. And regarding other geographies, as you know, we are always monitoring our portfolio facets along 2 axis.
1 is revenue market share in a specific market. The other axis being operating cash flow margin. And we try to get our businesses to the top right hand part of these metrics. Therefore, more share of operating cash flow, more share of value in the markets where we operate on those businesses that we feel will a strategic plan or the business plans cannot move in that direction. They are candidates to for some potentially in organic action.
So I hope with this, I've given you some color.
Taking your the second part of your question around Peru, Well, first, let me stress that we have been having in Peru solid results in terms of the value value part of the of the customer layers, namely postpaid smartphones and pay TV. It is true that it has become a very, very intensive competitive environment In pay TV, we are growing 15% year on year. In fixed broadband, we are growing 6% year on year. In contract, we are growing 1% year on year. And it is in prepaid in which we have been declining 11% year on year.
The 2nd quarter results on the mobile side are strongly affected by an MTR cut of more than 19%. And that's why our revenues have been down 2.1%. If you were to exclude the regulatory effect, our revenues will have been growing 1.4% in the 2nd quarter versus a decline of 0.2% in the first quarter. And therefore, this is the like for like comparison. We have been turning around the growth in the mark in the in our revenues in Peru if we were to exclude this regulatory effect.
On top of that, we have been having a very solid performance on the free business and has been accelerating its growth to 4.2% in the quarter compared with 3.3% in the previous quarter. And I'm afraid that we do not disclose the impact that you were mentioning so far. But overall, I'm acknowledging that revenues have been declining minus 2.1% keep in mind this regulatory effect because without that, our revenue will have around 1.4%.
Just quickly going back to the telephonica Deutschland comment, are you suggesting you might be willing to buy shares directly off KPN or did you have something else in mind there?
We may increase our stake over time buying shares and these are better shares.
Okay. Thank you.
Thank you. Next question please.
Thank you. We have a question now from Dunham J merchantani from Bernstein. Please go ahead.
Good afternoon, gentlemen. Thank you very much for taking my question. This relates to Spain. You have pushed through a number of price increases in the Spanish market. Firstly, so there are two parts of this question.
Typically you would observe 2 to 3 percentage points in incremental churn in the order of magnitude of price increases that you've pushed through. What sort of incremental churn rates have you observed on a hard, well measured cohort basis? The second question mid to long term, under what preconditions would you expect the competition regulator to step in and declare joint dominance, in what effectively is a 3 player market? Thank you very much.
Well, first, in terms of churn increases, I am going to try to give you the exact The exact number churn in the first quarter of this year was 1.3%. Churn in the second quarter is 1.1% on Fusion overall. So in spite and remember that we have a first price upgrade during the first quarter of this year. So we have not been seeing any major impact on that so far. And as far as the July upgrade, We feel that we are in similar levels in spite of the fact that it's been it's too soon to conclude So we have not been seeing any major impact of the offer aggregates because remember that this offer, average has been combined with much more value.
Putting in place, we are talking about more speed of access, 300 megabits symmetric speed. We are talking about more capacity on the mobile side. We are talking about a second mobile line. We are talking about putting the 8 football matches on the basic offer. So we try to compensate the nominal ARPU uplift with significant value.
And so far, the customers are starting to appreciate the fact that they are giving that they're taking more value. And thanks to that, the ARPU performance in Fusio and I said it was 12.8%. I was wrong. It's 11.8% year on year. But so far, we have been able to increase ARPU year on year roughly 12% with a level of churn that is below the one that we had a year ago.
So we think the equation makes sense. It makes sense for the customer. It makes sense for us. It allow us to preserve margins. And therefore, we'll be going into the same direction.
And in terms of the competition authorities, allow me to remind that in most places in Spain, you have at least at least 3 networks, which is not the case in other places, namely in the UK, on the wireline side. I think that the regulatory strategy that Spain has been applying during the last 5 years has significant positive effects. 1st, Spain is today a leader in Europe in terms of ultra broadband deployment. There is more fiber in Spain, fiber to the home in Spain than in any other market in Europe. And we are the 3rd country in the OECD.
And you have now 3 networks in Spain competing. And you have partial deregulation in the places where you have 3 networks ex post regulation in places where you have 2 networks and ex ante regulation in places where you have 1 network And in fact, the approach to wholesale pricing is on a retail minus basis rather than on a cost base I think that the regulation that has been put in place has allowed Spain to go into the right direction, has allowed Spain to become the leader the middle of the crisis because remember that Spain has been doing that as our overall in the middle of the crisis. And some of our competitors here have more fiber here that in their home country, which implies that they think this market is attractive with the current regulatory environment. So I think that probably Spain is a model in terms of regulation compared with other European countries.
I just follow-up on that very briefly?
Go ahead.
My question was specific to the price increases. I completely agree with your points around the structure of the market in but my question is at what point in time and under what circumstances do these price increases become a thorn in the eyes of the competition authorities, not the industry later?
Well, it's already there. I'm sorry. I didn't cover that part of the question. It's already there. Remember that in our case, in in our specific case, every single offer that we launch needs the specific ex anti approval of the competition authority in Spain because of the remedies that were imposed at the time of DTAs acquisition.
And remember that so far in terms of price per megabit or price per gig, prices have been declining in Spain. We are putting much more value, much more speed for a little bit more of price. So competition authorities are already analyzing every single offer. And in fact, we cannot launch any single offer without the previous Exane approval of the competition authority. So it's already there.
Sorry, sorry, I didn't cover that.
Thank you very much. That's crystal clear.
Thank you. Next question, please.
Thank you. A question now from Jerry Dulles from Jefferies.
Yes, good afternoon. Thank you for taking my questions. Two questions, please. In terms of Spain, you were very clear that you expect to be able to deliver an expanded margin by the year end. But would you anticipate pro form a revenue growth, including DTS, progressively strengthening through the second half as well.
Please And then in terms of the UK business, accepting your point that the operating trend that O2 has been reporting are certainly stronger than those that we see from Vodafone and EE, there remains the suspicion out there supported by independent network tests that O2's 4G network is perhaps not quite as good as that of EE and that somehow the cornerstone project with Vodafone might be a constraint on fixing network quality. I wondered if you could just talk about what you feel that you need to do to the UK network in order to maintain the leadership of O2 in the UK? And what constraints the network joint venture might place upon you?
Thanks for your question. In terms of Spain, we have said that we think that the cost initiatives that we are taking in order to take down cost will more than compensate the extra cost of the content acquisition and we stick to that. And in terms of revenues, there are we stick to the fact that we see a growing revenues in Spain, including everything, taking into account also the fact that handset revenues in Spain has been significantly declining. So in terms of service revenues in Spain, we are already growing in service revenue in organic terms pro form a with TTS, we are already growing in this first half of the year in terms of service revenues, and we continue we think that this trend will continue all along this year. In terms of the the UK in terms of, we have the best brand perception in the UK, including everything, including the network effect We believe that O2 have the greatest improved indoor coverage over the last 12 months, and we continue on build on that.
And at the end of June, other coverage is already of 91%. We according to some service, we have we and in fact, we have one the best coverage award in the last 2 years voted by customers. So the perception that the customers have on the overall impact of the brand is that O2 has the overall new working into that direction. And on that regard, we do not feel that the cornerstone or beacon agreement or joint venture with Vodafone, it's, it's refraining that from going to that direction. And in fact, we are having very positive conversation with Vodafone on that front because we are all we do both share the same interest.
So first, as an starting point, we feel that we are leading because the customers feel that we are leading. And we are the only operator that has committed to deliver 9 8% of 4g coverage by 2017, including the corners to our Beacon premium. So we do not feel that we are at a disadvantage. We feel that we are aligned with both a fundamental interest. And overall, the perception that our customer have is that we have the best brand, the best service in the UK.
Thank you, Gary. We have time for one final question, please.
Thank you. Our last question comes from David Wright from Bank of America.
Hi guys. Yes, I'll be super quick. Most of this has been addressed, but I guess just following up on Jerry's question, CapEx to sales for O2 UK, I believe, has stepped up to 13%, which is the highest it's been now for twelve quarters and looks like one of the highest prints historically. So you have increased investment a little. Is that anything intentional?
And is that a new level we should now be we should now be using as a benchmark. And just back to the whole Spain content monetization, etcetera, I did notice another low Fusion net addition print, very similar to Q1, which I think you admitted at the time was was slightly impacted by low promotions, but you have been promoting in Q2 and still, the Fusion ads seem to be structurally lower. Is that the kind of level we should now be running forward 50,000 dollars, $60,000 when you used to do sort of $150,000. And on that basis, given you raising ARPU, Is there even any incremental risk to that? Thank you.
Thanks for your question. In terms of the CapEx on the UK, continuing investment remains a very important part our strategy in the UK as we are rolling out the 4G at the fastest ever rate for the UK and especially after the failed merger. So we intend to continue to invest efficiently in order to serve this attribute of having the best brand perception. And in fact, I would stress the fact that we have are the only operator that have committed to this 98% 4G coverage in 2017. So yes, you should expect for us to speed up in 4G.
Because we are seeing profitable growth ahead of us. But including when I was making my comment about the CapEx intensity of the group going forward. We were already acknowledging this impact of the UK situation. So overall, we think it's worth to preserve that value because we have been having a good commercial reaction and we keep adding differential value customers to our customer base. And in the case of Spain, the net adds in the quarter were a bit lower because we have fewer gross adds.
But we have an improved churn, and that's and that has helped to preserve or to have a better. We have been having some promotions, but not structural promotions. And again, remember that the second quarter have a seasonality effect derived from the fact that after the end, of the Football Championship, there is a seasonality. Once we have been putting in place our new offer in July, in 1st week of July, we are starting to notice more traction. And remember that that offer includes not just more football rights on the basic offer for 3 more euros, But this also includes a second mobile line.
And thanks to that, we are having better commercial traction in the most recent weeks. So I think that by the third quarter, you will have more color of the impact of the new offer. But so far, trends are going into the right direction. To all of you for participating. And we certainly do hope that we have provided some useful insights for all of you.
Should you still have further questions, please contact our investor relationship department. Good afternoon. And for those of you that are leaving holidays soon. We wish you enjoy your summer break. Thank you very much.
Telefonica's January to June 2016 results conference call is now over. You may now disconnect. Thank you.