Ladies and gentlemen, thank you for standing by, and welcome to Telefonica's Danery Tamaric Twenty 16 Results Conference Call. At this time all participants are in a listen only mode. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Pablo Tiguron, Head of Investor Relations.
Please go ahead, sir.
Good afternoon, and welcome to Telefonica's conference call to discuss January March 2016 results. I'm Pablo Yaron, Head of Investor Relations. Before proceeding, let me mention that financial information contained in this document related to first quarter 2016 has been prepared under International Financial Reporting Standards as adopted by the European Union. This financial information is now detailed. This conference call webcast may contain forward looking statements and information relating to Telefonica Group or otherwise.
And these statements may include financial forecast and estimates based on assumptions or statements regarding plans objectives and expectations that make reference to different matters, such as the customer base and its evolution growth different business lines and of the global business market share, possible acquisitions, divestitures of our transactions. Company results and other aspects related to the and situation of the company. We encourage you to review our publicly available disclosure documents filled with the relevant securities market regulation. 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 of 3 4914287, 87, double 0.
Now let me turn the call over to our Chairman and CEO, Jose Maria Martinez.
Thank you very much, Pablo, and good afternoon to all of you. I'm pleased to show on Slide 3, this quarter means a very good start. Our sustainable growth profile has once again accelerated with organic revenue growth at 3.4% 5.5% in OIBDA year on year, levered on an expansion in their higher value customer base, which is enforcing digital experience and loyalty. All this, along with capture of synergies and enhanced efficiencies allow us to maintain margin at 31% level, expanding 0.6 percentage point year on year. We have continued to enhance our differential network experience through sustained investment.
Spain has returned to simultaneous organic revenue and OIBDA growth for the first time since 2008. Brazil and Germany are delivering strong OIBDA and operating cash flow growth on synergies. And Spain, is accelerated its top line growth on a strong performance in value customers. This proves that our market positioning strategy is paying off. On the other hand, Telefonica UK has posted a continued strong profitability, while continuing to lead the market in contract churn.
We started the year with a robust liquidity position after achieving historically low rates on financing. Let me highlight, we have $20,000,000,000 liquidity, including the Eurobone issued in April, which covers all our maturity through to December 2017, and that's not taking into consideration any cash flow generation. Our mid term net debt to EDA target remains at below 2.35 times and we reiterate our 2016 guidance and dividend. To review Telefonica key financials, please turn to Slide 4. Organic growth ramped up in the quarter, with revenues, OIBDA and operating cash flow accelerating the year on year growth trends versus the previous quarter.
Reported figures were negatively impacted once again by the devaluation of LatAm currencies. So this impact was partially mitigated by the positive contributions from GBT and DTS. It is important to note that the negative impact of FX at OIBDA level did not leak through into free cash flow. As was offset by lower CapEx, tax, interest and other payments. So as in previous quarters, FX impact is mitigated at free cash flow level.
Lastly, earnings per share stood at versus EUR 0.37 last year, which was positively impacted by EUR 1,200,000,000 defer O2 UK tax assets. Excluding this impact, EPS would have grown 21.7%. I'm also pleased to confirm that we are fully on track to meet 2016 guidance as our Q1 figures are in line with expectations. In terms of shareholder remuneration on May 19th, we will pay per share in cash. Corresponding to the 2nd tranche of the 2015 dividend.
Our proposals for the cash dividend subject to the receipt of O2 UK proceeds Our voluntary scrip dividend of per share to be paid in the second half of twenty sixteen, and the 1.5% of treasury stock to be canceled are both included in the agenda of the annual shareholders meeting which will be helped on the 12th May on second call. So again, 2016 dividend is confirmed at per share. On Slide 6, we show how the quality of our customer base is incrementally improving. The main pillars of growth continue to be high value services that also drive data consumption, LTE, fiber, smartphones and pay TV. The penetration of these high value accesses in the overall base is also noteworthy.
As Candice can be seen on the bottom left of the slide. We can present growth across the board. This shift towards higher value offerings has resulted in tangible growth in customers' value. If average revenue per access, up 5.2%, and in customer loyalty, which churned down 0.6percentage. Quarter on quarter.
On Slide 7, we explained the drivers behind our 5.5 year on year organic OIBDA growth. Let me highlight that OIBDA grew for the 7th consecutive quarter and more importantly, all of our regions Revenues also approved their sustainable track record, expanding for the 12th consecutive quarter. New revenue streams are leading the way to becoming an on live telco with a strong performance in connectivity. Organic growth is ramping up versus 4th quarter, mainly on Espana and Spain. It is also remarkable that revenue growth is driven by an acceleration of service revenues in the quarter to 4.2% which is partly mitigated by lower handset sales and regulatory effects, thereby increasing the quality of our growth.
Operating cash flow accelerated to OIBDA growth, deceleration in OpEx and margin stabilization. The latter has been driven mainly by the savings arising from synergies, delivery and efficiencies from our simplification program and cost rationalization. Slide 8 shows the continued evolution of main data monetization metrics. Smartphone traction continues and average users for gas smartphone was up 13% year on year, while LTE customers using 60% more data than 3g customers. LTE penetration represents 15% of the total.
In addition, we have is at just 29% and ARPU uplift once a customer is producing data is approximately 20%. All this translated into data revenue growth of close to 20% year on year. As a result, of the double digit LTE ARPU athlete. In terms of fixed data, we are starting to address the opportunity as traffic expansion leads to increased demand for faster speeds. Digital services as seen on Slide 9, are driving impressive revenue growth, 19% up year on year, accelerating nearly four percentage points versus the previous quarter.
This boost is built on our key digital pillars, video, security and Machinto machine, which have all seen strong improvement. Video continues to drive traffic and ARPU growth thanks to our expanding presence in Latin America with high quality services and our own productions and exclusive content in Spain. We are also proud to continue to offer customers an increasing number of digital services bundled into traditional connectivity packages. On Slide 10, we demonstrate how TGR is adding value for the company. We have continued to accelerate our rollout of future proof ultra broadband networks.
With 32,000,000 premises passed with fiber, up more than 25% year on year, on fiber to the home and LTE coverage of 50%, up 16 percentage point. Our current progressions towards an all IP network is solid with voice over IP accesses at 5,200,000 and VoLTE available in 3 countries after deployments in Peru and Colombia. On the IT side, Our end to end digitalization strategy is fostering transformation via full stack projects and our IT transformation are having a significant impact on business, providing us with new digital capabilities. Lastly, we deployed a new big data project to improve customer experience and a successful SDN IP trial in Peru. Now, Ansel will give you more details about our performance in the quarter.
Thank you, Jose Maria. Let me turn to Slide 12 for a review of our business in Spain. Commercial activity in the quarter slowed down and reflected a momentary pickup in churn following tariff's repositioning. However, Commercial momentum progressively recovered as net adds and churn improved throughout the quarter and normalized in March. Fusion delivered a strong quarterly ARPU growth to plus 14% year on year, underpinned by a better customer mix status adjustment and the end of the TB Premium promotion on December 31.
I would like to highlight that around 75% of customers who had subscribed to the promo have stuck to at least one TV add on Overall, this outstanding increase in customer value is the result of the strong effort deboted to building a leading proposal, placing us in a very solid market position. The fiber network now reaches 15 premises passed. LTE coverage 83 percent of population, and the cord play offering is the most complete and competitive nationwide. In this first quarter, Spain returns to a simultaneous year on year organic growth at both revenue and OIBDA level, starting a new growth cycle. Top line posted a 0.2% year on year organic growth on the back of a strong transformation.
Turning to segment's performance, consumer revenues are growing, underpinned by solid Fusion revenue, plus 26% year on year. While business revenues are improving, driven by a change in the mix from pure communication services towards a richer IT offering. More significantly, OIBDA posted a turnaround with a 2% organic increase leading to a benchmark OIBDA margin of 40.5 percent, up 0.7 percentage points year on year organically. Let me mention that the voluntary redundancy plan still did not show any positive impact in the quarter as employees' leaves have started on April 1. And finally, operating cash flow trend improved also significantly, being virtually stable year on year in organic terms up 7 percentage points sequentially from a decline of 7.5% in the previous quarter.
To review Telefonica Deutschland, please turn to Slide 14. We are our momentum in a dynamic environment with a focus on retention of our acquisition with continued traction from partners. In this context, partner share of contract gross adds has been broadly stable around 45%. LT is the main lever of positive data monetization with customers up 10% quarter on quarter and usage 50% higher year on year helped by video music streaming. Total revenues declined 2.3% year on year, affected by lower handset sales.
Fixed revenues maintained trends sequentially with record VDSL net additions. Partner progress on integration is shown in Slide 15 with the repositioning of the O2 brand, customer based migration, network integration and IT transformation. These initiatives require significant investments in terms of OpEx in the first half of the year with incremental synergies in the second half. In parallel, network improvements are recognized in customer survey based tests. On profitability, We captured EUR 55,000,000 of OpEx and revenue synergies in Q1, which are reflected in the 6.2 percent OIBDA growth year on year, and the 1.8 percentage point margin improvement.
CapEx was down 1.2% versus Q1 2015 as cost of integration efforts are back end loaded. And as a result, operating cash flow grew 16% to EUR 173,000,000. Please turn to Slide 16 for an update on Brazil. In mobile, we continue increasing penetration in high value products, leading to an ARPU growth of 14% year on year despite the weaker macro environment and regulation impact. In the fixed business, our strategy is paying off.
Fixed broadband ARPU increased 8% year on year as a result of the fiber network expansion outside Sao Paulo, and the improvement of the legacy copper network. And pay TV ARPU accelerated 13% year on year thanks to our differential value proposition. Let me also remark that Brazil finalized the successful execution of the brand unification in April 2016. On Slide 17, we continue outperforming the Brazilian market. Posting positive revenue growth in both businesses, thanks to our data centric strategy.
It is worth highlighting the 7 percentage points sequential improvement in year on year OpEx evolution. Despite inflation pressure due to 1st, a more selective commercial approach second, credit and collecting actions to improve the bad debt trend And finally, the early synergies, the company has started to capture, which amounted to EUR 48,000,000 in OIBDA. As a result, OIBDA growth accelerated to 8.2% and operating cash flow to 32.1% year on year. Turning to Slide Commercial momentum was maintained in Q1 with the adoption of high value services. As such, contract accesses grew by 7% with net adds 8 times higher than in first quarter of 2015.
Fixed broadband and pay TV continued to show solid growth rates and increasing penetration over fixed lines. In Argentina, smartphones posted strong net adds, boosted by LTE deployment and fixed broadband maintained low levels of churn. Chile posted the best growth in contract accesses in the last 4 years, while continuing to improve speeds on fixed broadband. Peru once again presented outstanding figures in fixed broadband and TB on the back of its differential assets and quality. Colombia posted strong net adds and low churn.
And finally, in Mexico, Contract net adds grew four times year on year despite the higher level of competition. Moving to Slide 19, the outstanding commercial performance is flowing into revenues. Revenue accelerated to 11% year on year, thanks to the improvement experience, mainly in Mexico, Colombia and Argentina. It's worth highlighting the growth registered in strategic services, like mobile data, fixed broadband and pay TV. Despite the negative impact of the depreciation of LatAm currencies, the intense competitive environment in some countries, and the pressure of inflation in some others.
OIBDA grew 1% year on year, thanks to outstanding data growth efficiency measures and a more rational commercial approach. On Slide 20, we give you a brief overview of our operation in the UK. Commercial traction continued leverage on a best in class customer experience and unsuccessful propositions, which resulted in sustained contract churn at market level of below and 15,000, driven by LTE and a penetration of 38%. All these formed the foundation for the 7th consecutive quarter of mobile service revenue growth, plus 2.6% year on year ex refresh. Lastly, profitability is worth noting.
OIBDA and operating cash flow were up 5.5% 16% year on year, respectively. And OIBDA margin, OIBDA margin increased by close to two percentage points reaching 26.3%. Let me now move to the financial slides, starting on Slide 21. Net debt at the end of the quarter stood at 1,000,000,000, almost flat versus December 2015 figure. Despite seasonality impacts that usually take place in Q1, partly thanks to the savings related to the British pound hedging.
For the remaining of 2016 and beyond, our leverage will reflect the cash flow generation from improved operational performance combined with core protections. All in all, we are on track to achieve our medium term leverage target. On Slide 22, we continued reducing the effective interest cost in the first quarter, which has moved down by 39 basis points year on year to 4.66%. Our liquidity cushion after the last Euro bond issued in April reached 1,000,000,000, covering the full amount of 20162017 maturities without considering cash generation, additional finance in our credit line extensions. Also, discussion has been strengthened through EUR 9,000,000,000 long term financing since November 20 15,000,000,000 year to date, accessing different pockets of liquidity and benefiting from lowest historical benchmark rates.
Please turn to Slide for an update on Telxius, our infrastructure company, one of the leaders in the sector in Europe and the Americas. Nensus was created with a selection of Telefonica's well diversified assets and includes approximately 16,000 towers in Spain, Germany and some countries in LatAm, less more than 65,000 kilometers of fiber optic submarine cable, of which around 31,000 Kilometers are owned. TELSIUS attractive proposition includes a high level of revenue busy going forward. Given the long term contractual terms and the strong cash conversion based on the low levels of recurrent maintenance investments and the strong profitability, around 45 percent. In terms of financials, initial 2015 pro form a figures indicate that revenues would reach around 1,000,000 and OIBDA around 1,000,000.
Now I hand back to Jose Maria for the concluding remarks.
Thank you, Angel. To recap We had a solid start of the year. 1st, our growth is accelerating, leverage on a strong execution in fiber PayTV and LTE, which are delivering a differentiated network experience. And as such, OATA is growing across
the board,
2nd, Spain achieves both revenue and OIBDA growth, while operating free cash flow is stabilized 3rd, synergies capture and efficiencies led to a strong OIDA growth and margin stabilization. 4th, operating cash flow is sequentially improving growth with targeted CapEx. And finally, we confirm our outlook and dividend for 2016. Thank you very much for your attention. And now we are ready to take your questions.
You. We will kindly ask you to ask a maximum of 2 questions per participant. And if possible, we recommend you not to use your cell or hand Our first question comes from Matthew Robilliard from Barclays. Please go ahead. Your line is open.
Good afternoon. Thank you very much. First, I had a question with regards to the potential UK transaction. If we assume for a moment that it may not proceed, or as expected.
Are you in
a position to explore different strategic options right after that decision has been disclosed, or would you have to wait, for example, in case your partner decides to appeal to the decision before you can take any action. The second question has to do with Spain, where obviously you had a very strong performance was wondering if you could elaborate a little bit about how you think you can continue to differentiate in the fixed business considering on both Vodafone and Orange are expanding a fiber network and will also have access to content. I mean, notably soaker? Thank you very much.
Well, taking your first question. First, allow me to say that, Telefonica's convinced that the remedies that have been offered for Hutchison, we think address all commission concerns. We think that those remedies are unprecedented. And therefore, nevertheless, we cannot exclude that level of political interference that, can afford that can affect the decision of the commission. We have several reasons to think that the merger merits a clearance decision.
First, this transaction, we have we think will have a positive impact on effective competition in the UK market. In particular, with regard price competition, network quality and consumers choice. We think that the field that non merger is not comparable and that this transaction is more similar to the Austrian or the IETs or German cases. We also think that the preliminary concerns that were exposed by the European commission in the statement of objections are not materially different from the concerns that we're raising in those previous cases, which, by the way, work here. I think that they're very similar to the German or the iris case.
I also think we also think that, the remedies that have been offered by Hutchison had unprecedented in terms of divestment in Tesco Mobile, which is 5% of the market share, offering a fractional ownership of the combined network on a perpetual capacity based deal. Another capacity deals that were amounting off more than 40% of the combined network enhanced of the near end to end. All those remedies are substantially larger than the ones that were given by Telefonica in Germany, which, by the way, the commission recently described as, quasi structural in nature. Conceptually close to an MNO. So basically, we think that the revenues that were proposed by Hatch were more than enough to address those concerns.
The decision of the commission should be coming in May. And we think that this was designed to really benefit the UK consumers. Having said all of that, The strictly legal analysis would justify a credit decision, but a negative decision cannot be disregarded, although due to political risk especially in the context of Brexit, which is basically contaminating all debates. And also, the strong opposition showed by the National Regulatory Authorities Oh, our UK asset is a very, it's a very attractive asset, and has been, by the way, continuing to outperform our competitors on most key metrics. Regardless of the final decision taken by the commission, we enjoy as we have been stating a very comfortable position in terms of liquidity because of the long term financing that we have been achieving throughout this year.
And therefore, we are ready to face a decision in whatever direction We have put in place audit initiatives to strengthen our financial flexibility. And in order to cover those, I handle the question to answer.
Hi, Matier. This is this is Angel. You had a very specific question, which was would we be bound by the contract when Hutchison would be appealing if the decision was an negative. The answer is that we will only be bound until the moment that contractually, there is what is sometimes call a drop dead date. That does not stretch beyond the end of the second quarter.
With respect to what could be, the financial implications were the deal to fall apart First, you have to take into account the strong free cash flow generation that the company is going to produce. 2nd, that while consolidating in that case, of the deal not going ahead, the UK activities, our debt service and our dividend coverage, would be improved. 3rd, we have already announced financial measures for that eventuality, including the voluntary partial scrip dividend in the November tranche of $0.35 4th We are executing portfolio management measures regardless of the outcome of the UK, for instance, releasing capital through transversal businesses like the potential Telxius IPO, we continue to review geographic portfolio of assets. We are looking at potential divestment of non core assets, and we're also evaluating minority stakes like Mediaset Premium, which has been dragged along by Mediaset. And finally, we would have several alternatives regarding the UK asset once the EU decision will become clear and final.
And taking your second question on Spain and our But in order to differentiate the word offer, first, allow me to say that we do think that we have a best in class platform in Spain compared with our local competitors and, namely, the level of European competitors. We we have the most extensive Ultra broadband network in Europe and, the most the most complete compared to any of our competitors here in Spain. We have seen 83% of LTE coverage we have one of the strongest, if not the strongest TV platform in terms of technological capabilities, catch up TV, BD on demand. Last 7 days recording. And on top of that, we have the best content of all the markets because remember that In terms of premium content, we are bound by the remedies out of the DTS transaction to offer 50% of the content premium to our competitors.
And therefore, they need to choose between the different ones. That's why we think we have best in class both and also best in class churn and customer loyalty around the Spanish situation. So you should expect from us to build on those on technological capabilities of the platform, of the network and therefore, features like, symmetric speed, ups and downstream. And upgrading our offer is the strategy going forward in order to observe our customers and therefore, to keep growing momentum on ARPU and customer base in Spain. So we feel in a strong situation, we acknowledge that there is strong competition, the infrastructure based competition, which we think is the sound of competition.
But we still feel that we have a very unique set of assets that allow us to be positive for the future.
Thank you very much.
Thank you, Matthew. Next question please.
Our next question comes from Mandeep Singh from Redburn. Please go ahead.
Hi, thank you for taking the question. I'm really focused on sort of developments of trends in Spain. Clearly, you had a slow start the quarter due to price changes and you said commercial activity picked up. Just want to get a sort of picture of how the rest of the year will develop. I'm not looking for quarterly guidance because I appreciate you don't give that, but when do the extra content costs kick in?
When do the headcount savings kick in? Is the revenue trend now that we're positive? Is it sustainable? Is the OIBDA trend now that positive. Do you refer to the slide as start of a new cycle, which suggests to me you think of it as sustainable?
So can you just sort of map out when the extra content costs kick in when the extra labor cost savings kick in and how the year could pan out, please?
Well, thanks for your question. In terms of the trends that we foresee, We think that those trends are, are going to be confirmed all around these years. In terms of revenues, we highlighted at the end of 2015 on the last quarter that we were aiming to have growth combined with DTS. We are already there. We have had to, offers upgrade in terms of putting more value for slightly a little bit more of price in the last 12 months.
In spite of that churn, relatively stable and in fact, the performance of churn in the last month of the quarter in March. And what we have seen so far in April confirm a better performance. And also, in terms of competition, we see a competition in Spain being much more focused on value than on price. And therefore, we think that the trends that has been built all along the last 4 to 5 years in Spain are sustainable and should be going into this direction. In terms of OIBDA impact, namely on content impacts, And in terms of the efficiency plan that we have put in Spain, in place in Spain, remember that this first quarter already includes an extra cost of the Champions League that were not there in the last quarter of 2015.
Therefore, the first impact of content cost has already been there. And we have been able to neutralize that in spite of the fact that we have been having no savings coming from the a voluntary retirement plan in Spain because that was the exit time for Amplagis was starting on the 1st April. So the first quarter of 2016, includes an extra cost of content and has no impact of positive impact from efficiency coming from voluntary retirement plan. As a result, we do think that OEDA trends are also going in into the right direction. Next stage is operating free cash flow growth, and we are targeting to get there.
So overall, more positive trends in the Spanish market. The overall environment in terms of competition is much more focus on value in upselling customers than in price overall. And again, I think that infrastructure based competition is motivating all of us to put more value on top of the table and that the customers are appreciating those attributes like speed connectivity, content, technological attributes of the platform, and we think this is the right market dynamics.
Thank you, Jose Maria.
Thank you, Mandeep. Next question please.
Our next question comes from Louis Prote from Morgan Stanley. Please go ahead.
Yes, hello. Two questions, please. First is on Fusion and the broadband market. Your net growth in broadband, clients is just below 1%. And you have now like 70% of the broadband base which is already in Fusion.
So what I want to understand is, what are your expectations in terms of the total broadband market growth in Spain. And also in terms of the migration of non Fuzion clients to Fuzion clients, whether you could give us the ARPU of the non Fusion clients now? And what are the dynamics in the migration of non Fusion to Fusion. What I mean is whether you expect reaching 100% of your broadband base being Fusion or this is not realistic for whatever the reason and maybe just 80 or 90 and how fast that could happen. So your thoughts on this would be very helpful.
And the second question I'm sorry for long first question. The second one is on the refinancing opportunity you have. I would like to understand what are your expectations in terms of lower interest costs? The next few years, you have above 1,000,000,000 upcoming maturities annually. So what could be the potential extra cash flow coming from this area taking into account the average coupon of those maturities and the potential new coupon of the new bonds?
Louis, a pretty complete first question. Let me try to address it. First, we still see growth in terms of penetration of Fusion customers on the total bundle. And therefore, we still see growth ahead of us in terms of bundling more customers and therefore, bringing more customers the competition to a bundled service from Telefonica. So we do not give up in terms of organic growth in terms of number of access In fact, remember that, during this, we have been growing, pursuant right now, customer base is 4,200,000, it has been growing 9% year on year.
And with 1,400,000 of additional mobile lines, which has been growing on top of that 9% year on year as well. It is true that this first quarter has been negatively impacted by the tariff repositioning and by the TV promo benefits that ended in December end of last year. But also remember that there is no retention clauses anymore. And therefore, now the market is much more dynamic. Remember that in terms of the gross adds of this quarter, 51% of those gross adds were totally new customers, which is 13 percentage point of growth year on year and 91% of those were bringing new accesses, which is again 9% growth year on year.
If you add on top of that of this organic growth, the fact that we see a huge amount of possibilities in terms of upselling the existing customer base, high value mobile has been a 74% versus 3% in the first quarter. Ultra broadband is also doing significantly better. We are also upgrading our TV customers. So we see growth on the Fusion part of the residential revenues coming from both the organic additional new customer base and also from upselling our customers. And in terms of calculating the ARPU, the non Fusion customers, I think that we have disclosed the number of non Fusion customers.
And you have also the figure of revenues of non functional revenues. So we can help you through the RR department to calculate those numbers. I think that those numbers have been disclosed. I handled that to Angel for the second part of your question.
Hi, Luis. Our guidance of effective interest cost is below 5% on a declining trend. At the end of the first quarter, we are at 4.66%. This 4.66 is a weighted average of the cost of debt in Europe and the debt in LatAm. Debt in Europe are cost right now, it's around 3.6% in LatAm, around 8.7%.
So an assumption you can make is from that 3.6 a reduction of 1.5% to around 2% cost You're going to play these 1,000,000,000 refinancing average that we have every year of this type of debt. And also this lead you to some substantial savings on interest costs.
Next question, please.
Our next question comes from Ivan Leal from BBVA. Please go ahead.
Good afternoon, everybody. Just two questions again on Spain. The first one is, I would like to understand if there's still some potential revenue erosion from the all digital plus pay TV subscribers are migrating to your platform. So I don't know if you could share with us how many PayTV subscribers are still digital to subscribers? What's their ARPU and what kind of ARPU to, we should expect from them when they migrate to Fuzion pay TV offer.
And the second one maybe on football, has your approach to the football rights changed at all since December where you think that football rights have the same value that you agreed to pay for in December 2015?
Well, in terms of your first question on the potential revenue erosion of customers coming from the former DTS customer base. Let me tell you that the initial overlap has been mostly covered in terms of customers moving from a to the movie star Fusion bundle, our customer just exiting or quitting the Telefonica group perimeter. So most of this process has already been made. And in spite of that, if you go to the reported figure of the telephonic overall pay TV customer has been growing year on year, which means that we have been adding more customers than the one that has been leaving us. And as a result, what I can share with you in terms of our overall number of customers, this overlap has been mostly still a minor, a significantly minor part of the customers that haven't decided yet.
We read out of that that some of them will preserve both platforms because it might be the 2nd residence. So basically, in our estimates, most of these process have already been covered And in spite of that, we have been able to grow pay TV customers in Spain and to grow pay TV ARPU. So I think that this migration was both databases being combined has been proactively managed in terms of outbound, outbound call center calls. And I think that we can read out of that, that this negative synergy coming from the ETS integration has almost been covered. So we have In order to give you an idea, we have, out of the total number that we have initially, we have something in the neighborhood of 15% of this customer is still 50% to 20% of the customer is still pending of a decision.
But most of them, we read that they will not be giving up both services. We'll keep you posted, but what we can share with you is that most of that migration process probably has already been completed. And in terms of the content, you know, that we signed with, media Pro, an agreement for the next 3 years. These extra content costs would start to flow, starting from mid August with the new, legal championship with the for the 2016, 2017. And all the other content that we have Formula 1 or MotoGP, we have also those right signs for the next 2 years.
So I think that overall this year, you will have a full picture of what could be the extra cost. Allow me to remind you that both Vodafone and Orange have decided to buy this, legal content on Dane as well and that we have one of the one of the packages, which is El Parthido and therefore, I think that's all along this year, you will have a full picture what could be this impact going forward for the next 3 years, both in terms of extra cost, but also in terms of extra wholesale revenues for Telefonica going forward. All in all, what I can share with you is that it's extra content cost We think it's less than the savings that we are going to be able to generate for the efficiency plans that we have put in place. And therefore, I think that the equation is tenable at least for the next 2 years.
I thought you had to renegotiate your agreement with Mediabro because the regulator had for those 8 matches per week.
No, I mean, I, first piece of information.
Next question please.
Our next question comes from David Wright from Bank of America. Please go ahead. Your line is open.
Hello guys. Thank you very much for taking the questions and congratulations Jose Maria on your new appointment. I'm just trying to understand the commercial activity in Spain with the Fusion ads running significantly below run rate, you have said that that was restored in March. But clearly that does correspond to poor ads when there were no promotions and then better ads when you relaunched the promotions at the beginning of March with a €65 package for 'fifteen. So how should we read this?
Does this mean, dropping promotions means commercial momentum falls and churn ticks up? And in which case, how sort of confident does this leave you feeling with the midterm monetization of content costs given it was somewhat predicated on promotional spin off. And then just my second question, just to clarify, you said a moment ago extra content costs should be more than offset by cost savings on the suspension plan. Do you mean OpEx savings or do you mean the actual cash cost savings if we assume the pre retiree payments or the suspension plan payments?
Thank you very much for your first part of our of your question. In terms of the commercial activity, we think that we need to read the Spanish market in a way that we will need to combine promotions with upselling of the offer. And therefore, now that the market has become more value oriented, I think that there is a strategy that we should follow in terms of adding new customers and at the same time, trying to upsell and therefore, you should expect from us to combine both things. Tactical promotions are the one that we have been putting in place just for new acquisition, for new customers. Starting last month and that we have been extending.
And also in terms of, upselling the offer in terms putting more value for the existing customs or more optionality for the existing customers. Also remember that Again, there is no more retention clauses and that we keep deploying fiber to new zones in Spain. Therefore, I think that going forward, there is it is a smooth way of trying to combine new covered zones, new coming customers with a reshuffle of the offer in order to try to upsell our customers. That's why we think that combining both things, commercial aggressiveness in order to attract new customers, namely to the bundled product with with trying to monetize the new network that we are deploying should help us to keep the revenue growth momentum in Spain. And therefore, to cover the extra cost coming from a content cost And in terms of my previous comment, in terms of the content costs being more than covered by the efficiency, I was talking about OpEx.
But I have also highlighted that we are approaching a point in which operating cash flow in Spain, OIBDA minus CapEx is going to start to grow. So we are going to be putting in place other cash efficiencies. And we are putting in place other cash efficiencies that should allow us to be able to transfer this growth into a sounder or an increasing cash flow generation in Spain. So we are not giving up in none of the funds at the other level, none nor at the cash flow level.
I see. Just for the purposes of our understanding the modeling side, when you say operating cash flow, EBITDA minus CapEx, that clearly does exclude the 68 percent payments out to the suspension plan employees, correct?
Correct. At this level, correct.
Thank you, David. Next question please.
Our next question comes from Giovanni Montalte from UBS. Please go ahead.
Hello. Sorry. Can you hear me?
Yes, we can.
Hi, sorry. Going back to the UK, just trying to understand how we should think about these assets. Assuming that the deal with Arch doesn't go through, What would be your plan A staying in the UK? And let's say eventually seeking let's say, some strategic options that they could give you a conversion of the base or plan A is still leaving the UK market? Thank you.
Hi, Giovanni. Should reiterate what Jose Maria said at the beginning of the call. This is still pending a decision. In any case, the UK asset is is a very attractive asset. As I was saying in my when I was doing the presentation at the beginning, mobile service revenue is 2.6% up, margin is up 2 percentage points, above 26.3%.
Cash flow generation is very strong. It can be even improved through working capital measures. So it's a very attractive asset. In addition to this, the whole discussion of remedies, that has taken place with the Hutchison process has made everyone's priorities and intentions quite clear. So this provides a good visibility on what could be feasible alternatives And again, the asset is very attractive.
So, we have plenty of alternatives. Some of them could allow us to combine the UK cash generation with a partial divestment, a partial divestment. Some other alternatives would imply loss of control. We can have either capital markets or M And A solutions. And you should expect us in the case where this does not go ahead And once we are released from the contractual obligations that we would be expeditious, but we would be in no rush.
We have plenty of alternatives.
Sorry, if I may follow-up, no, absolutely, I'd want to push you in, let's say, discussing things you cannot say because I mean, the deal is still long. But again, assuming a scenario in which it doesn't go through, would an option of staying in the UK and looking for building up convergent asset base be an option that we will consider. Or again, the other scenarios are just implying, as you were mentioning, remaining eventually selling a part of the asset, eventually selling it as a whole. But I mean, staying and developing a different business model more comparable to a certain extent to what we are doing in Spain or in Brazil. Is this an option you're considering that does make sense to consider this scenario?
Thank you.
The answer is yes. If the transaction was not to be approved, we will be open in a strategic reflection of the UK. And because of the performance that we have been having in the UK and because of the of the information that we have right now out of the different remedy packages that have been offered by the different players. We will not exclude any possibility.
Thank you, Giovanni. Next question please.
Our next question comes from Justin Skanos from Credit Suisse. Please go ahead.
Thank you. Yes, just follow-up questions, please. On pricing, you've done a great job of getting pricing up in the last year. In Spain, probably best in the sector. But it becomes a bit of a problem, obviously, as you hit the anniversary of the price increases, I guess, May 2015 was a big one.
Do you think that's it for price increases, or can you do more? Is just a nice simple question. In terms of CapEx, you're pointing to the fact that OCF growth, EBITDA minus CapEx can grow faster than EBITDA perhaps. Are we starting to get to the end of the peak in the fiber CapEx in Spain? Is this sort of new trend that we're going to see actually over the next few years that CapEx starts to come down a it.
And then just, finally, in Brazil, can you give us sort of view on your outlook for the business over the next 2 to 3 quarters is obviously, on the one hand, economic pressures and a bit of pricing pressure the other hand, your strategic advance gen markets, you're ready to take share. How do you see that playing out is it going to get worse or is Q1 the low point for your revenue growth in that market?
For your questions, in terms of the anniversary of the year on year comparison of our upselling strategies in Spain. Remember that we are putting significantly more value for a little bit more of ARPU and therefore the average price per unit of value is is decreasing as we speak in Spain. Having said that, we have been able to do that in potentially. And again, with no retention clauses with very low levels of churn. And therefore, it looks like customer loyalty is there because they appreciate the new product that we are putting on top of the plate.
Now we have more 50% of homes passed in Spain with the best fiber to the home technology. We think we are the single player in Europe that is ready to offer massively the highest fixed broadband symmetric speed, and I'm talking about symmetry of speed at some point, which will be included in the order, more than 300 megabits per second, and even we can even upgrade that speed without significantly picking CapEx. And we have the one of the best 4G mobile network, which covers already 83% of the population. And we think we have the best nationwide TV content offer in the market. So I think that you should expect from us to keep upsetting our customers, to keep proposing our customers the ones that are ready to do that, to enjoy more attributes in terms of either more speed, more capacity or more features on the technological TV platform, for more content.
So I think that we will be strategically improving or proposing upgrades of the offer for the customers going forward. And we do see competition in Spain going probably into the same direction because they are also deploying fiber. They are trying to catch up with us, but still they are significantly behind. So I think that you should expect from us, further updates on our value proposition. And therefore, I think that this is trend probably In terms of CapEx, it is true that it's going to be depending on the new regulation of of coming in, in Spain.
Competition zones have already been declared. Also the way the wholesale offers are going to be calculated in terms of retail minus also offers a possibility in terms of wholesale revenues depending on what's the level of those prices. But it is also true that the bulk of the deployment has already been done. So probably still a few more quarters to go on CapEx. But yes, at some point, CapEx intensity should start to go down.
And therefore, that's why including the current, the existing levels of CapEx intensity, we are very close to reach OADA minus CapEx growth in Spain. I'm getting back to David, a question before. Including the, including the retirement costs that are being carried out for the last, for the last years from the previous retirement plans. The retirement cost impact. In terms of cash flow, in 2016, it's going to be lower than in 2015, despite the new plan.
So we do think that next pending issue in Spain is cash flow generation. And I think that we can keep going. In terms of summarizing the answer, we think that we can still outperform our competitors within that economy. Economic situation in Spain is also helping. The customers are focused more on value than on price.
Economic of them. And, we think that we can handle that. We have contained cost impact and therefore, with a sounder OETA. In terms of over a Brazilian outlook, we are more positive on the market in terms of the situation of Brazil. We think that the macroeconomic trends, once the political secured, would be covered probably sooner than what most people in the market is expecting.
And that's why we keep, being very confident on the Brazilian market. During the bulk of the crisis, and remember that the year on year comparison is going to start to ease, namely in terms of currencies, because the next quarters, the Brazilian cars, namely in the second half of this year, comparison should be more in our favor. Because the bulk of the impact on the reais occurred in the second half of the previous year. Operational trends in the middle of the crisis have been outstanding at the level of Bibo. And I'm talking about both Bibo, the former GBT and the former Bibo, including the wireline business.
The underlying trends are pretty sound. And it is true that revenue growth has decelerated, but it is also true that part of that deceleration is coming from ourselves stopping gross adds in order to control bad debt and also, coming from a regulatory drag of a drop of MTR, I know, FTR, that has an impact, and of course, the macroeconomic situation. Even scoring all of that, synergies of the GBT transaction are flowing. And that's why we are outperforming our peers in Brazil, both in terms of revenues because of gross synergies and because of the fact that we have the best customer base in Brazil. And because of the integration efforts that we are doing in terms of taking the best out of both worlds, the former GBT world and Vivo.
So we are pretty confident on the future of our Resideo Resideo unit. I think that our team headed by Amos is doing an outstanding job and is precisely in terms of, in terms terms of recession, when you check the quality of both your asset and your management team. And on that part, I think that we are clearly beating our peers.
You. Thank you, Justin. Next question, please.
Our next question comes from Georgio Iara Deaconou from Citi. Please go ahead. Your line is open.
Good afternoon. First question is on Mexico. And look at your numbers, clearly a very good performance, especially compared to of your competitors. However, I was just wondering how sustainable what we've seen in the first quarter is the rest of the year, not as you mentioned, there's been some, agreements regarding previous disputes with other operators that benefited their results I'm guessing also there's been some incoming benefit. So perhaps if you can talk us through those effects and what to expect for the rest of the year, given the price are there.
And my second question is more around, the options for deleveraging you have beyond disposals. So some of the rating agencies are talking about the option to issue more hybrid. I was just wondering, whether you can update us on the magnitude of this hybrid issuance, room you have, whether you would feel comfortable with that, I know the rating agencies could allow it, but still to a certain extent that So if you can talk us through how much of the shortfall if the UK deal doesn't go through can be bridged in hybrid? Thanks.
Thanks for your question in Mexico. Our results have been solid in this first quarter. It is also through the, that competition has significantly intensified. In Mexico. It is also true that our first quarter has been impacted by the reduction of interconnection fees of the non dominant players.
Which means that the asymmetry of interconnection has been also in our favor, but it's less in our favor than a year ago. Because it has been also dropping. But it is as well true that we have been impacted positively impacted by an agreement reach with other players on over disputes on interconnection feeds or fees of our previous period. Having said all of that. And that's why, commercial momentum in terms of our revenue growth has decline.
We see several trends going on in the Mexican market. Some of the most aggressive promotions that were there in during the Christmas campaign and in the 1st 3 weeks of January are starting to be removed. And therefore, even though there is still a high level of price aggressiveness is still a little bit lower than at thebeginningoftheyear, though still very high. It is also true that we have our own differential features. I think that those are positive ones in terms of We have, for the first time, having some continuous positive momentum in contract, we have been multiplying by 4 times the net adds in contract year on year.
And contract accesses have been growing 25% year on year, and that should provide us in spite of this commercial aggressiveness with a little bit of more momentum going forward. Smartphones has almost reached 11,000,000 on our customer base in Mexico, and this is 47% year on year. And smartphone customer has significantly more data consumption than a feature phone customer. Smartphone already represents 44%, but yes, 44 of our customer base in Mexico. And our LTE accesses have been, have reached 2,200,000, and this is more than doubling the number of customers that we have a year ago, but it is still just 9% penetration of our customer base.
So commercial aggressiveness is there. It's still a little bit lower at the beginning of the year, but still there. There is some trends that are going to take a while to recover in terms of rebuilding the value per customer that we used to have in November. In Mexico, but we see some positive trends on our own business that allow us to be slightly more optimistic than the overall trend of the market. Having said that, we will keep you posted quarter after quarter.
Regarding deleveraging, let me give you some elements. In the case that the deal were not to go ahead. Debt service and dividend coverage would improve while consolidating the UK OIBDA and free cash flow. And this OIBDA and free cash flow from the UK helps to have a debt service 5000000 ish or a bit higher in terms of euros. Then to think also in free cash flow generation.
We have OIBDA and operating cash flow growing organically. And the FX FX headwinds will be lower in the second half. Please bear in mind that the big devaluation in Brazil in Colombia was in the third quarter in Argentina in the 4th quarter. So the second half is going to provide for better comparisons and all our units. All, ARPS simultaneously growing in OIBDA with a sequential acceleration.
Then we're going to proceed with, with, transactions like the potential Telxius IPO then with respect to financial measures, the voluntary scrip dividend for the tranche of $0.35 in November, if it has the same take up it did last year, but provide a cash preservation to the tune of 1,000,000,000 ish. And finally, specifically to your question, in addition to the partial voluntary script, if needed, we could consider other measures like hybrids. We have now 1,000,000,000 outstanding. The capacity could be equivalent to that and additional 5% to 6%. If needed, we could consider but not to exhaust that figure at all.
What we are not planning is any measures that may have dilutive impact.
Could I ask a follow-up earlier?
Thank you, Georgios. Next question please.
Our next question comes from Keval Tearoa from Deutsche Bank. Please go ahead.
Thank you for two questions and both of which are related to Spanish Football. On the slides, you highlighted that 52 percent of pay TV customers take an add on. Last quarter, that was 53% And if I've looked at DTS disclosure correctly, the absolute subscriber number taking TV add on hasn't really grown. Within that, can you tell us or give us an indication of how many customers take football today and what trend you've seen in terms of growth in that number, if at all, for the past 2 or 3 quarters? And then secondly, with the new agreements you have with MediaPro, can you tell us how those content costs will be split over the 3 years?
Will they be split evenly or is there a formula of how you split them over the 3 years? And are you able to tell us how much you've booked for Champions League in Q1? Thanks a lot.
Terms of the number of customers that have a EBITDA on some are, as you were mentioning, 52% compared with 53% a year ago, but also remember that we have been putting some football rights on the basic offer and we might be inclined to do so going forward in order to increase attractiveness of war offer and at the same time, reduce churn the value should be judged not just on the pure football right customers, but also on the value that provides in terms of lower churn on the basic offer of some of those packages. Therefore, I think that we should consider the full rights as has an overall impact on the revenues of Telefonica Espania than that specifically on the on the football package. We will not disclose for commercial purposes, the different customers that we have on the different premium packages. But allow me to say that the ARPU expansion that we are having on the overall Fusion year on year on that. Out of that, the ARPU expansion can drive.
And in terms of the agreement with Mediapro, they are not exactly linear, but they are mostly, I mean, there are some differences. We have not disclosed that in terms of the split. But again, allow me to stress the fact that in the next two years, including this extra cost not being put as completely linear we think that the savings that we have put in place more than compensate the extra cost of content going forward. Sorry for not being able to be more specific.
Thank you, Kevin. We'll have time for one final question, please.
Our last question comes from Jonathan Dunn from Royal Bank of Canada. Please go ahead.
Hi, there. Two questions. 1, do you see any benefits from the EC debt purchase? I mean, can you, could you issue debts at very low rates straight to the European Central Bank rather than say expensive hybrids? And then a second one is, I guess, with a clean sheet of paper, it looks like basically 2 of the main assets have a lot of fiber.
And then in Germany, there's a credible wholesale alternative, but in all of pretty much all of hispan America, there's no fiber at all. Do you is there an ambition at some point to start to add fiber in Latin America, ex Brazil?
I just want to say on the first one, the answer is yes, we are issuing at the lowest costs ever across the range. On commercial paper, we have been even issuing at negative rates. On mid term bonds, we are issuing at the lowest rates. On the ECB bond purchasing program of corporate bonds. Telefonica is one of the entities that is going to benefit the most.
So yes, we're going to be continuously using the this possibility.
Is it worth revisiting the credit rating to a higher? I mean, why be so sort of rigid about the 2.35 times net debt EBITDA funding is so cheap. It's clearly causing a lot of stress. Why not sort of have 2.3x leverage?
Well, I don't know if I would call it rigidity. What we have a commitment is to have a rating of equivalent to triple net stable And this is what triggers this ratio. It's a midterm objective that we commit to. And, we're working towards that But our liquidity is very high. The cost of debt is at historic minimums OIBDA is growing.
All OIBDA generation machine is fighting on all cylinders. The 5 geographies are all of them simultaneously going in OIBDA and these allows us to look at a debt service in a way that does not concern us. But we have a commitment to our rating and we're going to be working in that direction.
Okay.
I'm taking your question on potential Ultra broadband in Latin America. Well, you excluded Brazil from your question because you know that we are doing exactly that in Brazil, but we are going to be applying in the overall of Espana America the same criteria in terms of we are going to be mixing fiber to the cabinet with fiber to the home. In fact, 55% for our customer base in Espana America have already speeds that are above 4 megabits per second, which is significantly more than what we have a year ago. And significantly, significantly more than we have 2 years ago because we have been significantly investing in shortening the loops in most of our territories. In Chile, for example, I mean, 46% of our customers in Chile, of the fixed broadband customers already have speed at ARP between 10.50 megabits per second.
Remind that in Peru, we have the cable operation. And therefore, we are combining cable with ultra broadband. And we are also trying to do the same strategy in Colombia and in Argentina. So the answer is yes, we will go there in terms of significantly improving our fixed flow ban offer in Latin America. And we are already doing that, but you should expect from us to be more pragmatic in terms of solution, mixing fiber to the home, fiber to the cabinet.
And in some places, a pure IT approach because of of the topography of the region. But we are already building on that and take a look at the performance of the former wireline business in Latin America, you will see that there are increasing revenues that we have revenue growth precisely because of our fiber offer or our broadband offer is being significantly improved as we speak. And that's where we are devoting a part of our CapEx intensity during the last 4 years. So the answer is yes, but will be pragmatic with the technological solution.
Thank you very much. Thank you very much.
Thank you,
Jonathan. Thank you very much for your participation. And we certainly do hope that we have provided some useful insights for you. Should you still have further questions, we kindly ask you to contact our Investor Relations department. Thank you very much again and good afternoon to all of you.
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