Ladies and gentlemen, thank you for standing by, and welcome to Telefónica's January to March 2016 results conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question- and- answer session. If you'd like to ask a question, please press star one on your telephone keypad. If you should require any assistance during this call, please press star zero. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Pablo Eguirón, Head of Investor Relations. Please go ahead, sir.
Good afternoon, and welcome to Telefónica's conference call to discuss January to March 2016 results. I'm Pablo Eguirón, 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 unaudited. This conference call webcast may contain forward-looking statements and information relating to Telefónica Group or otherwise, and these statements may include financial forecasts and estimates based on assumptions or statements regarding plans, objectives, and expectations that make reference to d`ifferent matters such as the customer base and its evolution, growth of the different business lines and of the global business market share, possible acquisitions, 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 filed with the relevant securities market regulators. If you don't have a copy of the relevant press release and the slides, please contact Telefónica's investor relations team in Madrid by dialing the following telephone number, 34914828700. Now, let me turn the call over to our Chairman and CEO, José María Álvarez-Pallete.
Thank you very much, Pablo. Good afternoon to all of you. I'm pleased to show on slide three this quarter means a very good start. Our sustainable growth profile has once again accelerated with organic revenue growth at 3.4% and 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 a strong OIBDA and operating cash flow growth on synergies, and Spain is accelerating its top-line growth on a strong performance in value customers.
This proves that our market position strategy is paying off. On the other hand, Telefónica U.K. has posted a continued strong profitability while continuing to lead the market in contract churn. We start the year with a robust liquidity position after achieving historically low rates on financing. Let me highlight, we have EUR 20 billion liquidity, including the Eurobond issued in April, which covers all our maturities through to December 2017, and that's not taking into consideration any cash flow generation. Our midterm net debt to OIBDA target remains at below 2.35x , and we reiterate our 2016 guidance and dividend. To review Telefónica key financials, please turn to slide four. 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 Latin currencies, though this impact was partially mitigated by the positive contributions from GVT and DTS. It's 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. As in previous quarters, FX impact is mitigated at free cash flow level. Lastly, earnings per share stood at EUR 0.14 versus EUR 0.37 last year, which was positively impacted by EUR 1.2 billion deferred O2 U.K. 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 EUR 0.40 per share in cash, corresponding to the second tranche of the 2015 dividend. Our proposals for the cash dividend, subject to the receipt of O2 U.K. proceeds or voluntary scrip dividend of EUR 0.35 per share to be paid in the second half of 2016, and the 1.5% of treasury stock to be canceled, are both included in the agenda of the annual shareholders' meeting, which will be held on the 12th May on second call. Again, 2016 dividend is confirmed at EUR 0.75 per share. On slide six, 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 can be seen on the bottom left of the slide, with impressive growth across the board. This shift towards higher value offerings has resulted in tangible growth in customers' value, with average revenue per access up 4.2% and in customer loyalty, with churn down 0.6 percentage point quarter-on-quarter. On slide seven, we explain the drivers behind our 5.5 year-on-year organic OIBDA growth. Let me highlight that OIBDA grew for the seventh consecutive quarter, and more importantly, all of our regions are already growing, making this growth sustainable and diversified. Revenues also proved their sustainable track record, expanding for the 12th consecutive quarter. New revenue streams are leading the way to becoming an all-life telco, with a strong performance in connectivity. Organic growth is ramping up versus fourth quarter, mainly on Hispasat 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 3.6% year-on-year on the aforementioned 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 eight shows the continued evolution of main data monetization metrics. Smartphone traction continues, and average users per 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 a strong upside in Hispanoamérica, where prepaid smartphone penetration is at just 29%, and ARPU uplift once a customer starts using 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 uplift. 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 nine, are driving impressive revenue growth 19% up year-on-year, accelerating nearly 4 percentage points versus the previous quarter. This boost is built on our key digital pillars: video, security, and machine-to-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 million premises passed with fiber up more than 25% year-on-year on Fiber to the Home, and LTE coverage of 50% up 16 percentage points. Our current progression towards an all IP network is solid, with Voice over IP accesses at 5.2 million and VoLTE available in three countries after deployment 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, Ángel will give you more details about our performance in the quarter.
Thank you, José María. 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 repositioning. However, commercial momentum progressively recovered as net adds and churn improved throughout the quarter and normalized in March. Fusión delivered a strong quarterly ARPU growth to EUR 78, +14% year-on-year, underpinned by a better customer mix, tariff adjustment, and the end of the TV premium promotion on December 31st. 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 devoted to building a leading proposal, placing us in a very solid market position.
The fiber network now reaches 15 million premises passed, LTE coverage 83% of population, and the quad-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 segments performance, consumer revenues are growing, underpinned by solid Fusión revenue, +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%, 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 1st. Finally, operating cash flow trend improved also significantly, being virtually stable year-on-year in organic terms, up 7% sequentially from a decline of 7.5% in the previous quarter. To review Telefónica Deutschland, please turn to Slide 14. We are keeping our momentum in a dynamic environment with a focus on retention over acquisition, with continued traction from partners. In this context, partner share of contract gross adds has been broadly stable, around 45%. LTE 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 and music streaming. Total revenues declined 2.3% year-on-year, affected by lower handset sales.
Fixed revenues maintain trends sequentially with record VDSL net additions. Further progress on integration is shown in Slide 15 with the repositioning of the O2 brand, customer base 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 million of OpEx and revenue synergies in Q1, which are reflected in the 6.2% OIBDA growth year-on-year and the 1.8 percentage point margin improvement. CapEx was down 1.2% versus Q1 2015, as costs of integration efforts are back-end loaded, and as a result, operating cash flow grew 16% to EUR 173 million. 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 São Paulo and the improvement of the legacy copper network. 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 seven percentage point sequential improvement in year-on-year OpEx evolution despite inflation pressure due to, first, a more selective commercial approach; second, credit and collecting actions to improve the budget trend; and finally, the early synergies the company has started to capture, which amounted to EUR 48 million in OIBDA. As a result, OIBDA growth accelerated to 8.2% and operating cash flow to 32.1% year-on-year. Turning to Slide 18, let me summarize Hispanoamérica's commercial performance. Commercial momentum was maintained in Q1 with the adoption of high-value services. As such, contract accesses grew by 7%, with net adds 8x higher than in the 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 four years while continuing to improve speeds on fixed broadband. Peru, once again, presented outstanding figures in fixed broadband and TV on the back of its differential assets and quality. Colombia posted strong net adds and low churn. Finally, in Mexico, contract net adds grew 4x 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 experienced 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 U.K. Commercial traction continued, leverage on a best-in-class customer experience and on successful propositions, which resulted in sustained contract churn at market leading level of below 1%. Quarterly contract net additions reached 115,000, driven by LTE and a penetration of 38%. All this formed the foundation for the seventh 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% and 16% year-on-year respectively, and 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 EUR 50.2 billion, 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 corporate actions. 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 Eurobond issued in April, reached EUR 19.9 billion, covering the full amount of 2016 and 2017 maturities without considering cash generation, additional financing, nor credit lines extensions.
This cushion has been strengthened through EUR 9 billion long-term financing since November 2015, EUR 5 billion year-to-date, accessing different pockets of liquidity and benefiting from lowest historical benchmark rates. Please turn to Slide 23 for an update on Telxius, our infrastructure company, one of the leaders in the sector in Europe and the Americas. Telxius was created with a selection of Telefónica's well-diversified assets and includes approximately 16,000 towers in Spain, Germany, and some countries in LatAm, plus more than 65,000 kilometers of fiber-optic submarine cable, of which around 31,000 kilometers are owned. Telxius' attractive proposition includes a high level of revenue visibility 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%.
In terms of financials, initial 2015 pro forma figures indicate that revenues would reach around EUR 680 million and OIBDA around EUR 300 million. I hand back to José María for the concluding remarks.
Thank you, Ángel. To recap, we had a solid start of the year. First, our growth is accelerating, leverage on a strong execution in fiber, Pay TV, and LTE, which are delivering a differentiated network experience. As such, OIBDA is growing across the board. Second, Spain achieves both revenue and OIBDA growth while operating free cash flow is stabilizing. Third, synergies capture and efficiencies led to a strong OIBDA growth and margin stabilization. Fourth, operating cash flow is sequentially improving growth with targeted CapEx. Finally, we confirm our outlook and dividend for 2016. Thank you very much for your attention, Now we are ready to take your questions.
Ladies and gentlemen, if you'd like to ask a question at this time, please press star one on your telephone keypad. To cancel your question, please press star two. Once again, that's star one to register a question, and star two to cancel. We would kindly ask you to ask a maximum of two questions per participant, and if possible, we recommend you not to use your cell or hands-free phone. We will pause for just a moment to allow everyone to signal. Our first question comes from Mathieu Robilliard from Barclays. Please go ahead. Your line is open.
Good afternoon. Thank you very much. I had a question with regards to the potential U.K. 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? 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 they had a very strong performance, I was wondering if you could elaborate a little bit about how you think you can continue to differentiate in the fixed business considering that both Vodafone and Orange are expanding a fiber network and will also have access to content, I mean, notably soccer. Thank you very much.
Well, taking your first question. Allow me to say that Telefónica is convinced that the remedies that have been offered for Hutchison, we think address all Commission concerns. Therefore, nevertheless, we cannot exclude a level of political interference that can affect the decision of the Commission. We have several reasons to think that the merger merits a clearance decision. This transaction we think will have a positive impact on effective competition in the U.K. market, in particular with regard to price competition, network quality, and consumers' choice. We think that the failed merger is not comparable and that this transaction is much more similar to the Austrian or the Irish 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 were raised in those previous cases, which, by the way, were cleared. I think that they are very similar to the German or the Irish case. We also think that the remedies that have been offered by Hutchison are 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 of more than 40% of the combined network in hands of the new entrant. All those remedies are substantially larger than the ones that were given by Telefónica in Germany, which, by the way, the Commission recently described as quasi structural in nature and conceptually close to an MVNO.
We think that the remedies that were proposed by Hutch were more than enough to address those concerns. The decision of the Commission should be coming in May, and we think that this transaction was designed to really benefit the U.K. consumers. Having said all of that, we think that the strictly legal analysis would justify a clear decision, but a negative decision cannot be disregarded, probably due to political reasons, especially in the context of Brexit, which is basically contaminating all debates, and also the strong opposition shown by the national regulatory authorities. Our U.K. asset is 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. Therefore, we are ready to face a decision in whatever direction. We have put in place all the initiatives to strengthen our financial flexibility, in order to cover those, I hand over the question to Ángel.
Hi, Mathieu. This is Ángel. You had a very specific question, which was, would we be bound by the contract when Hutchison would be appealing if the decision was negative? The answer is that we would only be bound until the moment that contractually there is what is sometimes called 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 that deal to fall apart, first, you have to take into account the strong free cash flow generation that the company is going to produce. Second, that while consolidating, in that case of the deal not going ahead, the U.K. activities, our debt service and our dividend coverage would be improved. Third, we have already announced financial measures for that eventuality, including the voluntary partial scrip dividend in the November tranche of EUR 0.35.
Fourth, we are executing portfolio management measures regardless of the outcome of the U.K. For instance, releasing capital through transversal businesses like the potential Telxius IPO. We continue to review our geographic portfolio of assets. We are looking at potential divestment of non-core assets, we're also evaluating minority stakes like Mediaset Premium, which has been dragged along by Mediaset. Finally, we would have several alternatives regarding the U.K. asset once the EU decision would become clear and final.
Taking your second question on Spain and in order to differentiate our 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 at the level of European competitors. We have the most extensive ultra broadband network in Europe and 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, video on demand, last seven days recording.
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 growth and also best-in-class churn and customer loyalty around the Spanish situation. You should expect from us to build on those, on our technological capabilities of the platform, of the network, and therefore, features like symmetric speed upstream, downstream, and upgrading our offer is the strategy going forward in order to upsell our customers and therefore to keep growing momentum on ARPU and customer base in Spain. We feel in a strong situation.
We acknowledge that there is strong competition, infrastructure-based competition, which we think is the sounder 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, Mathieu. 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 development of trends in Spain. Clearly, you had a slow start to the quarter due to price changes, and you said commercial activity picked up. Just want to get a 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. 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 it's positive? Do you refer to the slide as a start of a new cycle, which suggests to me you think of it as sustainable.
Can you just 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? Thank you.
Well, thanks for your question. In terms of the trends that we foresee, we think that those trends 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 offer upgrade in terms of putting more value for a little bit more of price in the last 12 months. In spite of that, churn is relatively stable. 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. Also, in terms of competition, we see a competition in Spain being much more focused on value than on price.
Therefore, we think that the trends that have been built all along the last four to five years in Spain are sustainable and should be going into this direction. In terms of OIBDA impact, namely on content impact, and in terms of the efficiency plan that we have put 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 voluntary retirement plan in Spain, because that was the exit time for employees was starting on the 1st of April.
The first quarter of 2016 includes an extra cost of content and has no impact or positive impact from efficiency coming from this voluntary retirement plan. As a result, we do think that OIBDA trends are also going into the right direction. Next stage is operating free cash flow growth, and we are targeting to get there. Overall, more positive trends in the Spanish market. The overall environment in terms of competition is much more focused on value in upselling customers than in price overall. 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, José María.
Thank you, Mandeep. Next question, please.
Our next question comes from Luis Prota from Morgan Stanley. Please go ahead.
Yes, hello. Two questions, please. First is on Fusión and the broadband market. Your net growth in broadband clients is just below 1%, and you have now 70% of the broadband base, which is already in Fusión. 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-Fusión clients to Fusión clients, whether you could give us the ARPU of the non-Fusión clients now, and what are the dynamics in the migration of non-Fusión to Fusión? What I mean is whether you expect reaching 100% of your broadband base in Fusión, or this is not realistic for whatever the reason, and maybe it's just 80 or 90, and how fast that could happen. Your thoughts on this would be very helpful.
The second question, and 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 lowering interest costs in the next few years. You have above EUR 7 billion upcoming maturities annually. 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? Thank you.
Thanks, Luis. A pretty complete first question. Let me try to address it. First, we still see growth in terms of penetration of Fusión 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 from the competition to a bundled service from Telefónica. We do not give up in terms of organic growth, in terms of number of accesses. In fact, remember that Fusión right now customer base is 4.2 million, has been growing 9% year-over-year. With 1.4 million of additional mobile lines, which has been growing on top of that 9% year-over-year as well. It is true that this first quarter has been negatively impacted by the tariff repositioning and by the TV promo benefit that ended in December at the end of last year.
Also remember that there is no retention clauses anymore. 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 points of growth year-over-year, 91% of those were bringing new accesses, which is again 9% growth year-over-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. We see growth on the Fusión part of the residential revenues coming from both the organic additional new customer base and also from upselling our customers.
In terms of calculating the ARPU of the non-Fusión customers, I think that we have disclosed the number of non-Fusión customers, you have also the figure of non-Fusión revenues. We can help you through the IR department to calculate those numbers. I think that those numbers have been disclosed. I hand it back to Ángel 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, our cost right now is around 3.6%, in LATAM, around 8.7%. An assumption you can make is from that 3.6%, a reduction of 1.5% to around 2% cost. You can apply this to EUR 6 billion refinancing average that we have every year of this type of debt. This can lead you to some substantial savings on interest cost.
Okay, thank you.
Thank you, Luis. Next question, please.
Our next question comes from Iván 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 old Digital+ pay TV subscribers migrating to your platform. I don't know if you could share with us how many pay TV subscribers are still Digital+ subscribers, what's their ARPU, and what kind of ARPU we should expect from them when they migrate to Fusión pay TV offer. The second one may be on football. Has your approach to the football rights changed at all since December, or 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 the Movistar Fusión bundle or customer just exiting or quitting the Telefónica group perimeter. Most of this process has already been made. In spite of that, if you go to the reported figure of Telefónica, overall pay TV customer has been growing year-over-year, which means that we have been adding more customers than the one that have been leaving us. As a result, what I can share with you in terms of overall number of customers, this overlap has been mostly covered. There is still a significantly minor part of the customers that haven't decided yet.
We read out of that some of them will preserve both platforms because it might be the second residence. Basically, in our estimates, most of this 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. I think that this migration, once both databases have been combined, has been proactively managed in terms of outbound call center calls. I think that we can read out of that this negative synergy coming from the DTS integration has almost been covered. In order to give you an idea, out of the total number that we have initially, we have something in the neighborhood of 15% of the customers still 15%-20% of the customers still pending of a decision.
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. In terms of the content, you know that we signed with Mediapro an agreement for the next three years. This extra content cost will start to flow starting from mid-August with the new Liga championship for the 2016-2017. All the other content that we have, Formula One or MotoGP, we have also those right signed for the next two years. 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 Liga content from BeIN as well, and that we have one of the packages, which is El Partidazo, and therefore, I think that all along this year, you will have a full picture what could be this impact going forward for the next three years, both in terms of extra cost, but also in terms of extra wholesale revenues for Telefónica going forward. All in all, what I can share with you is that this extra content cost, we think is less than the savings that we are going to be able to generate for the efficiency plan that we have put in place. Therefore, I think that the equation is sustainable at least for the next two years.
Okay. Thanks, José María. I thought you had to renegotiate your agreement with Mediapro because the regulator had for those eight matches per week.
No. First piece of information.
Okay. Thank you so much.
Thank you. 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, José María, on your new appointment. I am just trying to understand the commercial activity in Spain with the Fusión ads running significantly below run rate. You have said that that was restored in March. 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 the EUR 65 package for 15. How should we read this? Does this mean dropping promotions means commercial momentum falls and churn ticks up? In which case, how confident does this leave you feeling with the midterm monetization of content costs, given it was somewhat predicated on promotional spinoff?
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? Thanks.
Thank you very much for your first part 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. 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 those. Therefore, you should expect from us to combine both things. Tactical promotions are the ones that we have been putting in place just for new acquisition, for new customers, starting last month, and that we have been extending. Also in terms of upselling the offer, in terms of putting more value for the existing customers or more optionality for the existing customer.
Also remember that, again, there is no more retention clauses, and that we keep deploying fiber to new zones in Spain. I think that going forward, there 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 trying to monetize the new network that we are deploying, should help us to keep the revenue growth momentum in Spain. Therefore, to cover the extra cost coming from content cost. In terms of my previous comment, in terms of the content cost being more than covered by the efficiency, I was talking about OpEx.
I have also highlight that we are approaching a point in which operating cash flow in Spain, OIBDA minus CapEx, is going to start to grow. We are going to be putting in place other cash efficiencies. 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. We are not giving up in none of the fronts, at the OpEx 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% payments out to the suspension plan employees, correct?
Correct. At this level, correct.
Thank you. Okay. Thanks very much.
Thank you, David. Next question, please.
Our next question comes from Giovanni Montalti from UBS. Please go ahead.
Hello. Sorry. Can you hear me?
Yes, we can.
Hi. Sorry. Going back to the U.K., just trying to understand how we should think about these assets. Assuming that the deal with Hutchison doesn't go through, what would be your plan A, staying in the U.K. and, let's say, eventually seeking some strategic options that could give you a convergent asset base? Or plan A is still leaving the U.K. market? Thank you.
Hi, Giovanni. First, I should reiterate what José María said at the beginning of the call. This is still pending a decision. In any case, the U.K. asset is a very attractive asset. As I was saying when I was doing the presentation at the beginning, mobile service revenue is 2.6% up, margin is up two percentage points, above 26.3%. Cash flow generation is very strong, can be even improved through working capital measures. It's a very attractive asset. In addition to this, the whole discussion on remedies that has taken place with the Hutchison process has made everyone's priorities and intentions quite clear. This provides good visibility on what could be feasible alternatives. Again, the asset is very attractive. We have plenty of alternatives. Some of them could allow us to combine the U.K. cash generation with a partial divestment.
Some other alternatives would imply loss of control. We can have either capital markets or M&A solutions. 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. Absolutely, I don't want to push you in, let's say, discussing things you cannot say because the deal is still on. Again, assuming a scenario in which it doesn't go through, would an option of staying in the U.K. and looking for building up a convergent asset base be an option that you would consider? 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. Staying and developing a different business model, more comparable to a certain extent to what you are doing in Spain or in Brazil. Is this an option you are considering? Does it 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 U.K. Because of the performance that we have been having in the U.K. and because 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.
Thanks so much. Thank you.
Thank you.
Thank you, Giovanni. Next question, please.
Our next question comes from Justin Funnell from Credit Suisse. Please go ahead.
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. 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? It's 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 a new trend that we're going to see actually over the next few years that CapEx starts to come down a bit?
Just finally, in Brazil, can you give a view on your outlook for the business over the next two to three quarters? There's obviously, on the one hand, economic pressures and a bit of pricing pressure. On the other hand, your strategic advantage in the market, your ability 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? Thank you.
For your questions. In terms of the year-on-year comparison of our upselling strategy in Spain, remember that we are putting significantly more value for a little bit more of ARPU, therefore the average price per unit of value is decreasing as we speak in Spain. Having said that, we have been able to do that intentionally, with no retention clauses, with very low levels of churn, therefore it looks like customer loyalty is there because they appreciate the new product that we are putting on top of the plate. We have more than 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. I'm talking about symmetry of speed at some point, which will be included in our offer, more than 300 Mbps . We can even upgrade that speed without significantly peaking CapEx. We have one of the best 4G mobile network, which covers already 83% of the population. We think we have the best nationwide TV content offer in the market. I think that you should expect from us to keep upselling 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 or more content.
I think that we will be strategically improving or proposing upgrades of the offer for the customers going forward. 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. I think that you should expect from us further upgrades on our value proposition. Therefore, I think that this is a trend globally. In terms of CapEx, it is true that it's going to be depending on the new regulation coming in Spain. Competition zones have already been declared. 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 the level of those prices.
It is also true that the bulk of the deployment has already been done. Probably still a few more quarters to go on CapEx. Yes, at some point, CapEx intensity should start to go down. Therefore, that's why including the current, the existing levels of CapEx intensity, we are very close to reach OIBDA minus CapEx growth in Spain. Getting back to David question before, including the retirement cost that are being carried out for the last years from the previous retirement plans. The retirement cost impact in terms of cash flow in 2016 is going to be lower than in 2015, despite the new plan. We do think that next pending issue in Spain is cash flow generation. I think that we can keep going. In terms of summarizing the answer, we think that we can still outperform our competitors.
We think that the economic situation in Spain is also helping. The customers are focused more on value than on price, a significant amount of them. We think that we can handle that with a contained cost impact, and therefore with a sounder OIBDA. In terms of the Brazilian outlook, we are more positive than the market in terms of the situation of Brazil. We think that the macroeconomic trends, once the political is cleared, would recover probably sooner than what most people in the market are expecting, and that's why we keep being very confident on the Brazilian market.
During the bulk of the crisis, remember that the year-on-year comparison is going to start to ease, namely in terms of currencies, because the next quarters, the Brazilian currency, namely in the second half of this year, comparison should be more in our favor because the bulk of the impact on the real occurred in the second half of the previous year. Operational trends in the middle of the crisis have been outstanding at the level of Vivo. I'm talking about both Vivo, the former GVT and the former Vivo, including the wireline business. The underlying trends are pretty sound.
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, also coming from a regulatory drop of MTR and FTR that have an impact and, of course, the macroeconomic situation. Even scoring all of that, synergies of the GVT transaction are flowing, that's why we are outperforming our peers in Brazil, both in terms of revenues because of cross synergies and because of the fact that we have the best customer base in Brazil. Because of the integration efforts that we are doing in terms of taking the best out of both worlds, the former GVT world and Vivo. We are pretty confident on the future of our Brazilian unit.
I think that our team, headed by Amos, is doing an outstanding job, it's precisely in times of recession when you check the quality of both your asset and your management team. On that part, I think that we are clearly beating our peers.
Thank you.
Thank you.
Thank you, Justin. Next question, please.
Our next question comes from Georgios Ierodiaconou from Citi. Please go ahead. Your line is open.
Good afternoon. My first question is on Mexico. Looking at your numbers, clearly a very good performance, especially compared to some of your competitors. However, I was just wondering how sustainable what we've seen in the first quarter is for the rest of the year. I notice you mentioned there's been some agreements regarding previous disputes with other operators that benefited the results. I'm guessing also there's been some incoming benefit. Perhaps if you can talk us through those effects and what to expect for the rest of the year, given the price pressure there. My second question is more around the options for deleveraging you have beyond disposal. 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 it's still to a certain extent debt. If you can talk us through how much of the shortfall, if the U.K. 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 true 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 is less in our favor than a year ago because it has been also dropping. It is as well true that we have been positively impacted by an agreement reached with other players over disputes on the interconnection fees of our previous periods. Having said all of that's why commercial momentum in terms of revenue growth has declined. We see several trends going on the Mexican market.
Some of the most aggressive promotions that were there during the Christmas campaign in the first three weeks of January are starting to be removed, therefore, even though there is still a high level of price aggressiveness, it still is a little bit lower than at the beginning of the year, though still very high. It is also true that we have our own differential features. I think that those are positive one in terms of we have for the first time having some continuous positive momentum in contract. We have been multiplying by 4x the net adds in contract year-on-year. Contract accesses have been growing 25% year-on-year, that should provide us, in spite of this commercial aggressiveness, with a little bit of more momentum going forward.
Smartphones have almost reached 11 million on our customer base in Mexico, this is 47% year-over-year. A smartphone customer has significantly more data consumption than a feature phone customer. Smartphone already represents 44%, but just 44% of our customer base in Mexico. Our LTE accesses have reached 2.2 million, 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. Commercial aggressiveness is there. It's still a little bit lower than 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.
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-over-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 U.K. OIBDA free cash flow. This OIBDA free cash flow from the U.K. helps to have a debt service to the tune of EUR 5 million-ish or a bit higher in terms of EUR. You have to think also in free cash flow generation. We have OIBDA and operating cash flow growing organically, the 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 fourth quarter. The second half is going to provide for better comparisons. All our units, all are simultaneously growing in OIBDA with a sequential acceleration.
We're going to proceed with transactions like the potential Telxius IPO. With respect to financial measures, the voluntary scrip dividend for the tranche of EUR 0.35 in November, if it had the same take-up as it did last year, would provide a cash preservation to the tune of EUR 1.5 billion-ish. Finally, specifically to your question, in addition to the partial voluntary scrip, if needed, we could consider other measures like hybrids. We have now EUR 5.5 billion of standing capacity, could be equivalent to that, an additional EUR 5 to EUR 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 Khiroya from Deutsche Bank. Please go ahead.
Thank you for that. Two questions, both of which are related to Spanish football. On the slides, you highlight that 52% of pay TV customers take an add-on. Last quarter, that was 53%. 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 two or three quarters? Secondly, with the new agreements you have with Mediapro, can you tell us how those content costs will be split over the three years? Will they be split evenly, or is there a formula of how you split them over the three years?
Are you able to tell us how much you've booked for Champions League in Q1? Thanks a lot.
Thanks for your question. In terms of the number of customers that have TV add-ons are, as you were mentioning, 52% compared with 53% a year ago. 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 our 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 football rights as an overall impact on the revenues of Telefónica de España than that specifically on the football package. We do not disclose for commercial purposes the different customers that we have on the different premium packages.
Allow me to say that the ARPU expansion that we are having on the overall of Fusiónes year-on-year, out of that ARPU expansion, football rights are a significant driver. In terms of the agreement with Mediapro, they are not exactly linear, but they are mostly. There are some differences. We have not disclosed that in terms of the split. Again, allow me to stress the fact that in the next three years, including the 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.
That's okay. Thank you.
Thank you, Keval. We have time for one final question, please.
Our last question comes from Jonathan Dann from Royal Bank of Canada. Please go ahead.
Hi there. Two questions. One, do you see any benefits from the EC debt purchase? Could you issue debt at very low rates straight to the European Central Bank rather than, say, expensive hybrids? A second one is, I guess, with a clean sheet of paper, it looks like basically two of the main assets have a lot of fiber. In Germany, there's a credible wholesale alternative, but in pretty much all of Hispanoamerica, there's no fiber at all. Is there an ambition at some point to start to add fiber in Latin America, ex-Brazil?
Hi, Jonathan. 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 midterm bonds, we are issuing at the lowest rates. On the ECB bond purchasing program of corporate bonds, Telefónica is one of the entities that is going to benefit the most. Yes, we're going to be continuously using this possibility.
Is it worth revisiting the credit rating to a higher-
I'm taking your question. Sorry.
Why be so rigid about the 2.35x net debt/EBITDA if funding is so cheap? It's clearly causing a lot of stress. Why not 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 BBB stable. This is what triggers this ratio. It's a midterm objective that we commit to. We're working towards that. Our liquidity is very high. The cost of debt is at historic minimums. OIBDA is growing. Our OIBDA generation machine is firing on all cylinders. The five geographies are all of them simultaneously growing in OIBDA. This allows us to look at debt service in a way that does not concern us. We have a commitment to our rating. We're going to be working in that direction.
Okay.
Taking your question on potential ultra broadband in Latin America, well, you know that we are doing exactly that in Brazil. We are going to be applying in the overall of Hispanoamerica the same criteria in terms of we are going to be mixing Fiber to the Cabinet with Fiber to the Home. In fact, 55% of our customer base in Hispanoamerica have already speeds that are above 4Mbps , which is significantly more than what we had a year ago, and significantly more than we had two years ago, because we have been significantly investing in shortening the loops in most of our territories. In Chile, for example, 46% of our customers in Chile, of the fixed broadband customers already have a speed that are between 10 Mbps and 50 Mbps .
Remind that in Peru, we have the cable operation, therefore we are combining cable with ultra broadband, we are also trying to do the same strategy in Colombia and in Argentina. The answer is yes, we will go there in terms of significantly improving our fixed broadband offer in Latin America. We are already doing that, you should expect from us to be more pragmatic in terms of the solution, mixing Fiber to the Home, Fiber to the Cabinet, and in some places, a pure LTE approach because of the topography of the region. We are already building on that, take a look at the performance of the former wireline business in Latin America. You will see that they are increasing revenues.
We have revenue growth precisely because our fiber offer, our broadband offer is being significantly improved as we speak, that's where we are devoting a part of our CapEx intensity during the last four years. The answer is yes, we'll be pragmatic with the technological solution.
Thank you very much.
Thank you very much. Thank you, Jonathan.
At this time, no further questions will be taken.
Thank you very much for your participation. We certainly do hope that we have provided some useful insights for you. Should you still have further questions, we kindly ask you to contact our investor relationship department. Thank you very much again. Good afternoon to all of you.
Telefónica's January to March 2016 results conference call is now over. You may now disconnect.