Good afternoon, and welcome to Telefónica's conference call to discuss January to June 2015 results. I'm Pablo E. Lladó, Head of Investor Relations. Before proceeding, let me mention that financial information contained in this document related to the first half 2015 has been prepared under International Financial Reporting Standards as adopted by the European Union. This financial information is unaudited. This presentation may contain announcements that constitute forward-looking statements which are not guarantees of future performance and involve risks and uncertainties, and that certain results may differ materially from those in the forward-looking statements as a result of various factors. We invite you to read the complete disclaimer included in the first page of the presentation, which you will find on our website. 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 slides, please contact Telefónica's investor relations team in Madrid by dialing the following telephone number, 34 91 482 8700. Now, let me turn the call over to our Chief Financial and Corporate Development Officer, Mr. Ángel Vilá, who will be leading this conference call.
Thank you, Pablo. Good afternoon, and welcome to Telefónica's second quarter 2015 results conference call. Today with me is José María Álvarez-Pallete, Chief Operating Officer. During the Q&A session, you will have the opportunity to address us with any questions you may have. Telefónica has released today a robust set of results, accelerating in the second quarter the new cycle of profitable growth initiated at the start of the year. We are particularly pleased with the year-on-year growth posted for the second consecutive quarter in reported main metrics, ranging from 7% in OIBDA to 70% in net income, along with a remarkable EPS of EUR 0.37 in the quarter and EUR 0.75 up to June. We continue to strengthen our quarterly organic trends.
Top line accelerated by 110 basis points to 4.4% in Q2 year-on-year, OIBDA by 90 basis points to 3.3%, and operating cash flow virtually flat with just 0.4% decline. CapEx is being consistently devoted to high-speed networks, namely fiber to the home and to the cabinet and LTE, to further increase our differentiation and to complete our spectrum map with the aim of fostering our competitive position. Net financial debt increased in the quarter to EUR 51 billion on seasonal and non-recurrent factors that will normalize along the year. We remain committed to our annual target of leverage ratio below 2.35 times, adjusted for O2 UK sale. In this context, I would like to highlight the upgrades in outlook recently made by ratings agencies. Our free cash flow generation was sound and surpassed EUR 1.4 billion in the first six months pre-spectrum.
The execution of our portfolio strategy continued delivering synergies, as the ones in Germany are already flowing, and there is upside potential in the Brazilian synergies. All of this has allowed us to upgrade our year-end guidance. Moving to Slide three, let me summarize our key financials, where we also outline several factors which impacted Q2 results. Firstly, we are adjusting our effects in Venezuela to the SIMADI exchange rate, which was fixed at 197 Venezuelan bolívars to the dollar in the last auction. This has had a limited impact in OIBDA of minus EUR 90 million and in net income of minus EUR 364 million, with Venezuela now contributing only 0.6% of revenues, 0.4% OIBDA, and a net cash position reduced to around EUR 100 million. Other impacts on the P&L include the positive effect of the divestment in TI and a large activation of tax credits.
On the debt side, the quarterly increase is mainly explained by non-recurrent factors such as the demerger of Telco, the acquisitions of GVT and DTS, plus the dividend and spectrum payments. On Slide four, we explain the year-end guidance upgrade, given the earlier consolidation of GVT, plus the incorporation of DTS and our good performance in the first six months of the year. Up to June, we have exceeded our outlook as revenues are up 9.4% versus the guidance of over 7%, and margin is 0.9 percentage points lower. CapEx to sales ratio stands at 14.8% as CapEx has a more seasonal evolution. Our new guidance implies growth acceleration to above 9.5%, with the new perimeter adding 1.8 percentage points to revenues. OIBDA margin pressure is updated to around 1.2 percentage points as perimeter changes increase short-term erosion by 0.3 percentage points, but will bring future synergies.
The rest of the metrics guided remain without changes. CapEx to sales at around 17%, leverage lower than 2.35 times post U.K. sale, dividend at EUR 0.75 per share, and a treasury share cancellation of 1.5% that has been executed already. On the next slide, we can see how Q2 changes in the perimeter and organic performance have accelerated reported revenue and OIBDA year-on-year growth versus Q1. The consolidation of GVT and DTS from May 1st clearly had a positive impact in the quarter, contributing jointly 10 and seven percentage points, respectively, to revenue and OIBDA year-on-year reported changes. The previously mentioned move to SIMADI in Venezuela has reversed Q1 positive FX movement and dragged in Q2 close to three percentage points in year-on-year variation. In addition to that, we are seeing a consistent improvement in organic trends in Q2.
On Slide six, I would like to highlight the acceleration in accesses organic growth this quarter on higher quality customer base, with fiber, pay TV, and smartphones growing solidly and LTE up five times. Churn was also down across services. GVT and DTS have contributed significantly to our high-value portfolio, with 10 million customers. In the bottom of the slide, we highlight that Q2 revenues have seen sequential improvement across the board in organic terms, except in Germany. Mobile data and Telefónica Hispanoamérica have made a significant contribution to year-on-year growth in the period April to June, and revenue mix is positively evolving towards fixed and mobile data and services over connectivity. Slide seven shows some insights on how mobile data monetization is fostering growth. We are seeing encouraging data dynamics on LTE, with data usage 60% above 3G customers on average.
As such, LTE traffic already represents 13% of total mobile data traffic, while LTE penetration is still at 8%. Furthermore, the smartphone penetration expanded by 11 percentage points year-on-year and will continue benefiting from clear upside opportunities going forward, as shown by the limited smartphone penetration in Hispanoamérica. On the other hand, we are implementing measures to monetize data beyond the allowance, as 30% of customers are exceeding data caps, and more than 40% of those buy extra data products. This leaves us plenty of room to upsell, thanks to the launch of new data services that are already adding one percentage point to organic revenue growth in Q2. As a result, non-SMS mobile data revenue picked up its growth to 27% organic year-on-year in the second quarter and now represent 82% of mobile data.
On slide 8, we can see that OIBDA year-on-year organic growth ramped up versus the first quarter by 0.9 percentage points to +3.3%, with Germany and Spain being the largest contributors to this improvement. Furthermore, we expect to see further benefits from the execution of synergies in Germany in the second half of this year. I would also like to highlight that group margin in Q2 has remained stable overall, with a limited erosion of 0.3 percentage points year-on-year organic. Turning to slide 9, we take you through the progress made in digital services, which have delivered solid organic year-on-year revenue growth of 27% in Q2. As such, in this quarter, we are proud to present a video business enhanced by the consolidation of GVT and DTS, boosting scale and bringing new exclusive content, brilliant know-how, and the best technologies.
Thus, in Spain, we have launched a new TV offer, Movistar+, built in record time with the most complete TV product on the market, national coverage, a groundbreaking platform, and the most extensive catalog. In other digital services, we remain focused on wrapping digital solutions into our core offers. There were noteworthy advances in Q2 in various areas, such as security, cloud, and machine-to-machine. The main accomplishments delivered by global resources are shown on slide 10. On the network side, we continue to accelerate ultra-broadband deployments. Premises passed with fiber to the home increased to 12.5 million in Spain, while in Brazil, premises passed with fiber to the cabinet total 16.1 million, including GVT. In LTE, coverage in Europe stands at 67% and 35% in LATAM, with LTE now available in all countries except El Salvador and Nicaragua.
We continue advancing towards becoming an all-IP company with initiatives such as Voice over LTE in Germany or central switches closure in Spain. As of June, fixed Voice over IP accesses total 4.3 million. In terms of operational excellence, the Global Device Development Centre designed an integrated router that is delivering Wi-Fi at full fiber speed, and we are introducing self-organizing network automation. IT helped business transformation and full-stack projects are progressing in line with expectations. Lastly, our efforts in simplification continued with a year-on-year reduction of physical servers of more than 10% organic, more than 350 applications decommissioned, four data centers closed, and virtualization increased by 10 percentage points. Please turn now to Slide 11 for a review of our business in Spain. Commercial activity in the quarter slowed down, influenced by atypical factors during April and the first half of May.
The first and most notable was a decline in gross additions due to the strike held by third-party installation technicians. Second was Fusión tariff repositioning and the removal of loyalty clauses, which saw a momentary pickup in fixed services churn. Importantly, net adds in June were back on track once the aforementioned effects had ended and the upgrade of speeds up to 300 megabytes started at the beginning of the month. Fusión continued delivering very positive results, with ARPU growing to EUR 72 in the quarter, +4.4% year-on-year or +3.1% quarter-on-quarter, underpinned by the better customer mix and the tariff adjustment. Lastly, we further expanded our ultra-broadband networks, reaching 12.5 million premises passed in June, and we launched a new TV offer in July integrating the assets of Digital+, significantly strengthening our positioning to promote content upselling going forward. Moving on to slide number 12.
Once again, revenue posted a sequential improvement in the quarter with year-on-year decline at -1.1%, improving by 2.7 percentage points versus previous quarter. Let me stress that revenues in May and June had already stabilized year-on-year, something we had not seen since the month of December of 2009. The OIBDA trend notably improved to -1.3% year-on-year in the quarter, or -2.7%, excluding a EUR 19 million real estate gain, benefiting mainly from the revenue flow-through and the better OpEx performance as commercial trading was lower and content costs were stable quarter-on-quarter. As a result, margins remained stable at 44.4% in Q2. In Germany, turning to slide 13, we see that Q2 results reflect Telefónica Deutschland's conscious strategy to drive value through the development of the customer base, plus strong traction in the business and partner segments and better consumer churn quarter-on-quarter.
This was translated into contract net adds of 201,000 and mobile base growth of +2% year-on-year organically to 42.6 million. Additionally, we continue to focus on LTE deployment, reaching a coverage of 70% at the end of June. LTE was the main growth driver, with 35% of new O2 Blue All-in customers taking tariffs above 1 gigabyte, and 34% of customers opted in data automatic feature extending monthly volumes with data snacks. In this context, mobile service revenue grew +0.2% year-on-year versus +1.5% in the first quarter, with two-thirds of mobile service revenue sequential deceleration on lower trading in high value. On slide number 14, we present the strong sequential improvement in OIBDA growth organic and ex non-recurring items to +12.5% year-on-year, which was driven by three main factors. First, early synergy execution, which represents more than 40% of our annual improvement. Second, commercial activity centered on retaining high-value customers.
Third, significant change in trend in margin from handset sales. As a result, Q2 OIBDA margin improved by 2.4 percentage points year-on-year and reached 23.8% in organic terms. Finally, I would like to highlight our steady progress on integration activities with recent milestones, including the agreement to transfer 7,700 rooftop sites to Deutsche Telekom, continued consolidation of shops or 750 employees already signing the deliver program. Turning to slide number 15 to review the performance of Telefónica Brasil. Let me first remind you that the acquisition of GVT was closed in May to fully complement our high-quality strategy and to reinforce our growth profile in the Brazilian market. On the mobile market, our leadership has once again been strengthened with 41.7% of contract market share.
This, coupled with ARPU growth driven by increased data consumption, allows Vivo to capture 97% of the market mobile service revenue growth in the last 12 months. In addition, in the fixed business, the first positive signs of the transformation into a fiber and video company are already visible. We reached 3.6 million fiber connections out of a footprint of more than 16 million premises passed, which represented 57% of the ultra-broadband market. In pay TV, we captured 93% of the new customers of the market in the first half of 2015. To review the financial performance in Brazil, turn to slide 16. Organic year-on-year revenue growth ramped up to 5.2%, thanks to the sustained solid growth of the mobile business, up 6.9%, the sound progress of the fixed business excluding GVT, plus the contribution of GVT.
This top-line performance is flowing into positive organic year-on-year OIBDA growth, despite the impact of macro and the strong commercial activity. Finally, two months after the combination of both companies and following the hard work made by our Brazilian team, we have identified significant upside potential on integration synergies. As such, an intense review of all the assumptions confirms the base case scenario while pointing out to an upside opportunity. Operational synergies are raised from the 9.6 billion BRL as a base case to a best case scenario of up to 16.2 billion BRL with upwards revisions on all items. On slide 17, we review our performance in Hispanoamérica, where growth rates in both revenue and OIBDA remained solid in Q2. Accesses growth and higher usage resulted in top-line organic growth of more than 10% year-on-year or 7.7% when excluding Venezuela, stable versus the previous quarter.
The main driver for this performance is the smartphone explosion, which is driving data traffic up 60% year-on-year. It seems that there is still plenty of room to grow ahead of us because smartphone users are still one out of every three in the region. In addition, OIBDA grew by more than 9% year-on-year in organic terms or almost 11% when Venezuela is excluded, boosting profitability expansion for the sixth consecutive quarter. In Mexico, as shown on slide 18, we continue to post strong commercial activity that enables gradual market share gains that are translating into revenue growth acceleration. Thus, revenue growth accelerated to 7.8% year-on-year, despite the negative impact of regulation that was dragging 2.7 percentage points.
The combination of growing economies of scale, the benefits of the new regulatory framework, and the consistent implementation of efficiency improving measures continued to deliver strong OIBDA growth, up by almost 44% year-on-year and profitability expansion of almost six percentage points year-on-year. In the rest of the region, turning to slide 19, we continued to post solid growth, gradually gaining revenue market share based on best-in-class assets. Let me also highlight the notable OIBDA margin expansion with very positive trends in Colombia, Argentina, and Chile. In Peru, we maintain a strong commercial traction in value segments, but regulation and intense competition explain the deceleration of financial growth rates in the quarter. Please turn to slide 20 for a review of U.K., reported as discontinued operation. The robust financial performance was underpinned by sustained commercial momentum over the last two and a half years, leading to maintained market outperformance.
Continuous mobile-based growth was driven by the contract-based increase and record high customer loyalty. This is explained by outstanding LTE adoption, with 864,000 net adds in the quarter, and LTE penetration up 16 percentage points year-on-year to 26%. Top-line growth accelerated to 6.8% year-on-year in Q2, excluding O2 Refresh, driven by service revenue with ARPU inflection through demand for higher value tariffs. OIBDA margin expanded 2.9 percentage points year-on-year and reached 26.5% in the quarter on tight cost control and higher handset margins. Let me now move to the financial slides on slide 21. As anticipated, our leverage ratio in the second quarter was negatively impacted by certain cash consumption matters that will be offset as the year progresses.
In particular, net debt has grown due to the seasonality of the dividend payment, combined with non-recurrent factors such as Telco demerger, GVT and Digital+ acquisitions, change to SIMADI in Venezuela and the German spectrum payment. The net OIBDA ratio adjusted for O2 UK sales stands at 2.38 times and would stand at 2.35 times in the absence of the M&A deals closed in Q2. We expect to improve our leverage ratio towards our target of less than 2.35 times via positive free cash flow generation in the second half of 2015, growing up OIBDA on an organic basis and also benefiting from the acquisition of E-Plus and GVT, and closing O2 UK divestment in 2016. Moving to slide 22. First thing I would like to highlight is that our effective interest cost has continued to benefit from the EURIBOR rate reduction.
We have intentionally decreased fixed rate debt in EUR and lowered refinancing costs, leading to 53 basis point savings, but higher debt in Latin American currencies has partially offset those benefits. In all, there has been 15 basis points reduction in the financial cost to 5.23%. We showed a robust liquidity position covering maturities until the end of 2016. In line with the strong financing activity completed year-to-date, in the second half of the year, we will continue accessing capital markets and reinforcing our liquidity position. Finally, let me mention that the three rating agencies covering Telefónica have stabilized or placed a positive outlook on our rating year-to-date. To conclude, let me highlight that we have presented today a solid set of operational and financial results, delivering sustainable, profitable growth.
We are accelerating organic growth in sales and OIBDA and enjoying a strong commercial momentum on LTE, fiber and Pay TV. We are capturing early integration benefits in Germany, and going forward, we will be unlocking an increasing amount of synergies on recently closed acquisitions. We are continuously focused on best customer experience through technological leadership, and we are investing to enlarge this leadership. Our balance sheet remains strong considering the sale of O2 UK, in spite of a temporary increase in leverage this quarter. Finally, we are upgrading our guidance for the year. Thank you very much for your attention. We are now ready to take your questions.
Thank you. 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 do not use your cell or hands-free phone. There will be a short silence while questions are being registered. Our first question comes from Nick Brown from Goldman Sachs. Please go ahead.
Thanks. Couple of questions, please. Firstly, have you had conversations with the EC regarding the O2 UK sale yet? If the competition commissioner decides not to approve any more mobile consolidation deals, what's plan B, please? Will you have an issue refinancing debt next year? Presumably, that might impact the dividend. Secondly, are you still expecting another domestic football rights auction later this year? Will it be for two or three more seasons? Is it reasonable then, that you might have to spend another EUR 1 billion-EUR 2 billion on content costs? Thank you.
Nick, if you don't mind to repeat the second part of the question.
Yeah, sure. Just on the domestic football rights auction, will it be for two or three more seasons? Are you expecting another auction later this year still, or will that get pushed to next year?
Hi, Nick. This is Ángel on the O2 U.K. sale. We are progressing on the work from signing to closing. We are highly confident that the deal will be successful. Our estimate continues to be that it will be reviewed at the European level. European Union Phase II is the most likely. There are several precedents for this type of transaction. There has been already conversation on draft documents of the Form CO. We expect the formal filing to be made in September. There are several precedents of this type of transaction in Germany, Austria, Ireland, and other markets. Hutchison is highly experienced on these type of dealings, and we remain highly confident that the deal will be approved in this instance and with Phase II in Brussels.
Taking your question on the football rights in Spain for the domestic rights. The 2015-2016 season has been awarded, as you know, and we have been the winners of that. Therefore, there is not going to be another auction during 2015. The next round would probably be during 2016, for the three next seasons, and it would be an auction process. There is no other auction expected for this year, and Telefónica has the rights for the domestic rights for the football season 2015-2016.
Great. Thank you.
Thank you, Nick. Next question, please.
We will take our next question from Mathieu Robilliard from Barclays.
Yes, good afternoon. Thank you for taking the questions. First, with regards to your Digital+ acquisition. You've launched a new TV package, but I was wondering how we should think about your strategy, in terms of integrating this content into your main offering. Would that be a way to continue to push ARPU up next year or at the end of this year, as you give more for more? That's the first question. A second question has to do with the tax assets you highlight in your presentation that you activated some tax assets. Looking at your 20F, there still is more than EUR 9 billion of tax losses that I understand are not recognized, at least in Spain. Are you saying that you are activating those and potentially there could be more? Some color on that would be very helpful. Thank you.
Thanks for your question. Taking the first one on DTS and the integration of the offering. Let me stress the fact that we have been able to do in less than 60 days, a fully integrated offer cross-platform with value-added services like video on demand and multi-platform screening, integrating not just the content, but also the assets of the two companies. As a result of that, we have been registering in the Competition Commission here in Spain, the wholesale offer 30 days in advance of the retail offer, and we are already commercializing the retail offer in Spain, excluding the football rights, which we are still pending to be approved the retail price. The message here is that, yes, we have been integrating both offerings. Yes, we have now a crystal clear offering with different segmentation and significant ARPU or significant content improvement across platforms.
Yes, we think we have a significant upside from an ARPU standpoint, and we are going to be incentivizing that ARPU to move the customers upwards on that value chain. Finally, let me just stress the fact that we have just pending the approval of the retail offering on the football rights. All the others have already been commercialized. The commercial results that we are seeing, the commercial trends that we are seeing during the month of July as a result of that integrated offer, is significantly improved. Integrated the offering, integrating the platforms, and already commercializing the product.
Regarding tax, the full 9 billion have been activated. What we have recognized is slightly above EUR 1.1 billion tax credit accounted in Spain. This comes from losses incurred in previous years that have been clarified after tax audit, court resolutions, and after finishing tax authorities' reviews. The full nine point something billion that you were talking about have been activated.
Okay. Is there additional tax assets that are not activated and that could still be activated beyond what you just did?
Non-material ones.
Thank you very much.
Thank you, Matthew. Next question, please.
Our next question comes from Luigi Minerva from HSBC.
Yes, good afternoon. I have two questions on the European big picture. The first is on the Digital Single Market framework currently under discussion in Brussels, if you can share your views on the current status and the progress. Secondly, on cross-border synergies, with the networks being upgraded to all-IP, there is increasing interest by both companies and investors on the topic. If you can share your views on this, please. Thank you.
Thanks for your questions. On the first one, on the Telecoms Single Market initiative being currently run at the level of the European Commission. There are several fronts. There are a front on roaming, as you know, the end of roaming has been delayed or postponed for a few more quarters. On that, we think we have better news this quarter than before. We think the commission has understood that it needs to be a progressive fading off of those roaming charges. I think that now we are facing a different scenario than a quarter ago. On other issues like net neutrality and other issues, in terms of net neutrality, we think that the definition of net neutrality has been significantly advanced. We think that we have a framework that is workable, both in a technical and on commercial terms.
We think that framework allow us to go ahead with network optimization and network management without interfering and without provoking a loss of quality on the customer side. We think that with this test, we have advanced. We are in favor of a consolidated regulation at the European level. We think it makes total sense, and I think that the framework that is being run is logical and makes sense. Of course, we are arguing on some of those elements, namely on interoperability of operating systems, which we think needs to be addressed, and also a new definition for relevant markets, because we think that a market like the smartphone market needs to be defined and is not currently contemplated in the regulation. Basically, we agree with the initiative. We think it makes sense to have one single set of rules all across the European footprint.
We think that those rules or the discussion are advancing into the right direction, but we still think that there are some issues that needs to be addressed and have not been addressed. In terms of the cross-border synergies, we are big believers, and we have been practicing that of in-market consolidation. We think it makes total sense. We think that there are just too many operators per country, both MNOs and MVNOs. We think that we are facing competition from over-the-top platforms that are giving Voice over IP on an unregulated manner using elements of the network. Therefore, we think that the regulation needs to contemplate those kinds of situations in order to avoid just judging concentration on the traditional manner. We are big believers on in-market consolidation. We think that cross-border consolidation depends on what's the scale that you have. Let me give you an example.
We are on a fight, globally speaking, to become distributors of technology, and therefore, we need to be relevant when the new iPhone is being launched or when the new elements of the network of Ericsson or Huawei or Cisco are being launched. Therefore, it depends on your size and your scale. If you are among the top 10 players, you have that scale, and therefore you can take advantage of that leadership to have a first-mover advantage in technology, which is essential. Therefore, I think that cross-border synergies needs to be judged in independence of the size that you have. Telefónica feels that we have the right size. We feel that we have the right position in order to take advantage of that leadership position to distribute technology and to be efficient on that side. Therefore, we don't feel that need.
To make a very long answer short, big believers in in-market consolidation, cross-border synergies is still to be proven depending on your size.
Okay. Thank you very much. Appreciate it.
Thank you, Luigi. Next question, please.
Next question comes from Giovanni Montalti from UBS.
Hello. Good afternoon. Thank you for taking the question. Two quick follow-up on Digital+. Some of your competitors have been pretty loud in complaining, especially about the football rights. Do you see room for negotiation, or is there a risk of some litigations, let's say, on the rights for this season? About in-market consolidation, if you can share with us any update about the way you look at Brazil, what could be the timing? I know things are very complicated there, but if there is anything you can share with us. Thank you.
Okay. Taking your first question on the situation of the football rights in Spain. You know that in order to get the Digital+ transaction approved, we were imposed significant remedies in terms of eliminating some retention process, in terms of giving access at no margin to premium content, in terms of having available for our competitors at least 50% of the premium contents that we will be buying. We have a list of things that have been imposed on us in order to get the transaction approved in a very asymmetrical way, I need to say, because we are still suffering the bulk of the content acquisition that we are buying. I think that on that side, the situation is already asymmetrical, and we don't share the view for our competitors in Spain on that side.
Having said that, the two largest competitors in Spain, Orange and Vodafone, have decided that they are going to have access to our wholesale offer of namely of the football rights. Therefore, they have access to that content, and they are sharing less than 50% of the total cost of that asset. We think that this structure is much more rational because it makes the whole amount of the football rights more sustainable on a long-term view for the football clubs, but also is incentivizing all of us to expand pay TV penetration in Spain. We do not share their view. We have given access to them to our premium content. We have registered in a record period of time our wholesale offer in the competition commission here in Spain, and they are already accessing those contents. Therefore, we do not share their view.
Sorry, if I may follow up. In terms of asymmetry, again, back to Spain. The current draft implies a regulation still on PSTN as, let's say, an operator with significant market power. Nothing apparently on cable. How do you see this? Probably nothing will let them for the next, let's say, regulatory period. How do you see this topic going forward Europe-wise and in Spain? Do you see, let's say, obligation on cable operators coming? Are you pushing for this? Thank you.
Well, again, as I was saying in the previous question about the definition of relevant markets, I think that because of what's going on, because of the convergence that is happening in some of the countries, I think that the definition of relevant market needs to be addressed. That applied to the smartphone market, and in my opinion, that also applied to the cable market. Having said that, we think that in Spain, the situation has already been defined. The rules of the game are now clear in Spain after the Digital+ approval process and the remedies applied on that side. I think that right now what we have here in this market in Spain is infrastructure-based competition, significant infrastructure-based competition that is incentivizing all of us to invest heavily and to expand heavily on next-generation network.
That explains why Spain, in the middle of the crisis, of the macroeconomic crisis between 2011 and 2015, has passed from being the sixth country in Europe in terms of absolute number of fiber connected to the home, to be the leader. It's not just Telefónica. All other players have also done their job, like Jazztel or others. My view is that next-generation networks requires new regulation at the European level. In the case of Spain, the rules of the game have already been defined, and we are already playing with those rules.
Thank you.
Regarding Brazilian consolidation, three messages. First one is that we have the best assets and the best management in the country. We just upgraded the synergies of the Vivo GVT combination. Second, that we continue to believe that the potential synergies of further in-market consolidation could be very substantial. The third message is that we are at the sweet spot to benefit from various potential consolidation scenarios, probably to be triggered by other parties.
Thank you, Giovanni. Next question, please.
Our next question comes from Georgios Ierodiakonou from Citi.
Yes, hi. I've got two questions, please. The first one is around OpEx in Spain. I was wondering if you could give us an idea of the delta in content expenses with acquisition of LaLiga rights on one hand and, on the other hand, the synergies you will have from the DTS acquisition going forward, if we should expect a significant growth in content cost or whether the two effects could net off. Secondly, again, on OpEx, if you could give us an idea of the benefits you had on your cost base in the second quarter because of the strike. My second question is on the debt. If you could just give us an update of any special one-off items being spectrum payments or some other factors that are working capital moves that may impact the deleveraging in the second half. Thank you.
Thanks for your question. Taking the one on OpEx, but mainly, I would say more globally margins in Spain. In the first half of the year, as you know, we have been significantly focused on revenue recovery. As we explained during our last conference call, the sooner we get back to growth in revenues, the sooner OIBDA will stabilize as well. Revenue recovery, therefore, has been crucial in OIBDA performance, namely in this quarter, since OpEx has been flattish during the quarter. Therefore, all the OIBDA performance during this quarter is explained by revenue recovery and tight cost control, having the reminder of the OpEx flattish. In turn, it is true that we have had lower commercial activity due to the strike, and this has helped OIBDA performance.
Let me also highlight that the strike has had also some negative effects on OpEx since we have been compensating some customers for service interruptions, and we have applied tactically a little bit more of subsidies to offset the impact of the strike on our customers, but also during the month of the price increase in terms of the elimination of the retention process. All in all, and finally, regarding the contents, let me also highlight that now that we have Digital+ on board. Taking into consideration the fact that they have this almost no inflation on the football rights in Spain because we have been paying just slightly above, it's 2% above the price of the previous year. Digital+ have the right of those of the previous year.
On a consolidated terms, the impact is going to be negligible, and we will have more rights. Last year, we didn't have the second division rights. All in all, we keep focused, as we told you, on revenue recovery. It is true that the strike has been helping us marginally on the positive side, but it is also true that we have had some one-offs in terms of some compensations, revenue compensations, for revenue reimbursements to customers because of service interruptions, and we have been having tactically more subsidies.
I could follow up. What could be the synergy benefit on the content side from putting the two assets together? I guess there will be some scale benefits when you talk about international content from that. Will we see the benefits already from Q3, or would it be something for next year?
There will be benefits whenever we will have the right to have those rights internationally. Therefore, in terms of scale outside Spain, we don't have that benefit yet. In terms of their content in Spain, remember that we have been basically, before the acquisition of Digital+, Movistar TV was already leader in Spain. Therefore, now the cost of the content, mainly of the football rights, is divided into much more customers. Therefore, in terms of marginal positive effects of the growth factor that we'll have is more positive than before. Add to that, the fact that through the wholesale offer, we are sharing part of the fixed part with other players, which are also going to be incentivized because they have minimum amounts of customers before reaching the marginal part of the agreement. We are all going to be incentivized to massively distribute the content throughout Spain.
I think that one of the major synergies that you will be seeing on the content side is the dilution effect on the fixed part of the content among a much larger customer base. There are other synergies, like for example, the technological one on the platforms, not just on the video on demand, but also on the closed platform multi-screen offering that we have developed. We expect that for the next quarter, we'll have more numbers to share with you on that front as we are doing in terms of the synergies in Brazil or in Germany.
Regarding the question on why net debt will go down in the second half of the year. I'm going to be using slide number 21 as a base or a structure of my answer. First, we had a EUR 1.4 billion free cash flow pre-spectrum in the first half. This is going to be much stronger in the second half of this year. Spectrum, that was a significant cash outlay in the first half. We are not expecting any significant additional spectrum in the second half of 2015. Regarding shareholder remuneration, we will have the tranche of dividend of EUR 0.35 in November. Remember that we have structured that as a voluntary scrip dividend. If the take-up was similar to the one that we had last year, it would not imply a significant cash outlay.
With respect to net financial investments, we are not expecting to close any further acquisition in the second half of the year. All this go in the direction of a much better evolution in the second half. Why am I saying that free cash flow pre-spectrum in the second half will be much stronger than in the first half? We have just upgraded the guidance on our guidance, and this, if you do the math, you will see that it results in operating cash flow growth. The consumption of working capital that we had in the first half will move to positive cash generation in the second half. Order of magnitude close to 1 billion-ish. Financial payments. You should expect us to be in the bottom, right at the bottom of the 5%-6% range.
With respect to cash tax and given the positive developments of this year, we are changing our guidance from 23%-21%. All in all, a reasonable estimate of net debt for year-end would be something below EUR 49 billion.
Perfect. Very clear. Thanks.
Thank you, Georgios. Next question, please.
Next question comes from James Mckenzie from Fidentiis.
Hi. Thanks very much. Football rights and trade again. Could you give us an idea of how the wholesale negotiations are going with the other operators? You've mentioned sharing the costs, but then I think in your presentation, you talk about exclusive football rights for Spain. Second question, once again on Spain, is you put through some pretty hefty price rises on us poor residential clients. Yet the growth in revenues or the decline in revenue, the growth in revenues that you're seeing in June seems relatively sparse. I wonder, is there something going on with the corporate client base that we should be looking at or aware of that's detracting from this, and will this change in the second half of the year?
Thanks for your question, James. On the football right, I think it's public information that two of our largest competitors have already decided to have access to our premium wholesale offer on the football rights, and therefore, we are not going to have the domestic league, the national championship in exclusivity, not on the two packages, I would say. One package is all the matches except the best match of the weekend, and the other package is the weekend match. Both of them have been acquired by our two largest competitors.
Okay.
That means that as we have six premium packages, and they need to choose 50% of those, therefore three packages out of six, our differentiation is going to come from the other content, namely the Formula 1, the motorcycling, the movies, the new launches, the movie premieres, and the series, depending on who's accessing what.
Okay.
We're going to be able to differentiate our offer depending on who's accessing what.
Understood.
In terms of the price upgrade in Spain, because as you know, it has not been just a price increase, it has been an offering upgrade. You know that first, all along the year, because this is not just in May, all along the year in Spain, we have been taking several actions to increase our offering and to change our offer. Namely, it is not just Fusión. It is on the mobile side, it's in the 1P. Since January, we have been doing a significant effort to upgrade our offer. Namely, on Fusión, we communicated first the 5-year increase. We eliminated, during that process, the retention process, and therefore, during the month of April, we were exposed to a higher churn because of that effect.
I think it was the 10th of May, we upgraded our offer with much more megabytes and much richer content and more capacity on the mobile side. Coincidentally, we had the strike in the middle of all of that. What we can share with you is that during June already, we had a significant return to normal patterns of churn in all segments of customers, and therefore, before launching the new TV offer during the month of June, we were back to historically low levels of churn before launching the new offer that have more versatility and is richer in terms of content. At the end of the second quarter, the price increase or the upgrade of the offer that we have launched in Spain has been totally assimilated by the market.
By that, I mean that the customer, the residential customer, namely the Fusión customer, looks like accepting the value proposition, more value for a little bit more of price, more content for a little bit more of price. Therefore, the highest execution risk that we have this year in Telefónica España, was precisely upgrading the offer in an orderly manner and seeing the reaction of our customer base has been, I would say, very positive.
We are back to historically low levels of churn at the end of June. Now during the month of July, that we have been able to launch the new content offer with the exception of football that is still pending to approval, we are seeing, I would say, very high levels of commercial activity, which allow us to think that the price movement that we have done, that the value movement, the upgrading of the offer that we have done has not only been very well accepted by the market, but has been boosting the appetite of our customer for our products. As a result of all of that, I think that we need to start thinking about a sector, and mainly a company that is not necessarily deflationary in the long run, but probably the opposite if you do the right proposition.
In terms of other segments, in terms of B2B was already doing very well in Spain. It has been one of the segments that has been reacting faster to macroeconomic turnaround. You know that Spain, we just issued today, has been growing 1% in GDP in the last quarter, and corporate were already feeling that for a long while. In the B2B segments, we were doing okay. It was the SMEs in which the segment in which we were struggling. On that, during this quarter, we have launched the Fusión Empresas, the Fusión Corporates, namely for SMEs, that is having also a very significant positive traction. All in all, whether you approach that by the residential market or by the others, the trends in Spain are going in the upside direction. I think that was all.
That was all, yes. Thank you very much.
Thank you.
Thank you, James. Next question, please.
Next question comes from Luis Prota from Morgan Stanley.
Yes, hello. Sorry, second follow-up on the football rights topic. I am not sure if I understood well earlier, regarding the wholesale from Vodafone and Orange. I don't know, José María, whether you said that that was going to account for 50% or below 50% of the total cost. I would like to clarify roughly what percentage of the EUR 600 million that you are paying could be compensated through the wholesale agreements. Secondly, how convinced you are that this can be monetized and not impact EBITDA negatively in 2015 or 2016? You have already made comments on this, but what I- Don't understand well is whether existing Digital+ clients who will be migrating to Telefónica's offer will be providing some ARPU dilution to Telefónica, and then you are expecting to compensate that through higher take-up of fiber, or how all the different moving pieces work. Thank you.
Thanks, Luis. We do not disclose what is the amount of the EUR 600 million that is being covered by the wholesale offer. It depends on two factors. First, what are the packages that our competitors are buying? We already know that. It also depends, you know that those packages have a minimum number of customers attached to those, which means that they have a minimum amount of connection guaranteed by this fixed amount, and if they overpass that amount, they start paying variable during the season. It's going to be dependent on what is the price offering that they will do in terms of how fast they are going to be covering the allowances of customers that they have attached to the price that they are paying for the channel. Therefore, we will see along the year, but the initial movement in the fixed component is significant.
This is highly commercially sensitive information, and that's why we don't disclose that. But it depends on those two things. We think that both of them are going to buy the two football packages. Therefore, now it's going to be depending on how fast they are in deploying or on distributing those packages among the customer base, how fast they consume the allowance of customers that is attached to the fixed component of that offering. In answering your question of can it be monetized? It's a very good question. Effectively, it was depending on how many customers were overlapping, having both services in the former Digital+ customer base and the Telefónica customer base. We didn't have access to that information until the transaction was finally approved. Now we know. As you know, this is essential for designing the offering.
All in all, we think that the situation is controlled. Therefore, we think that, and that's why we were pretty rational on what was the amount of money that we were offering for the domestic rights. Let me remind you that inflation on the domestic football rights has only been of 2%, and we have included the second division. All in all, I think that the equation makes sense. I think that we are going to be able to show all along the next quarters that it makes sense. It is a very attractive value proposition for our customers, and I think it's going to be a profitable business for Telefónica.
Thank you. If I can just follow up, how is this accrued? You said you are going to show this in the future quarters. This is for the season 2015-2016. Is that starting in September or in August or so in the third quarter, we should already have a few months of this or how is this accrued? Thank you.
We are going to be assigning the cost of the football, starting with the season, therefore you will see the effect in terms of cost immediately. Again, let me remind you and let me stress the fact that you should judge the effect on the consolidated terms because remember that Digital+ already had those rights last year. Therefore, in the consolidated numbers of Telefónica on a pro forma basis, there is very light dilution, just the 2% that we have been paying more. Now it's a question of how fast we are going to be able to distribute to increase capillarity of those rights among our customer base.
On that regard, even before having the offer approved, if you judge upon the numbers of calls that we are having to our call centers asking for the football channels, we are pretty positive on the future of revenues on that side. When I was saying on the next quarters, on the third quarter, you will really have impact of the content, and you will see the consolidated effect on Telefónica's numbers, and you will also have the commercial results of the offering. That's why I think that during the third quarter results, you will have a much better picture of how the equation makes sense.
Okay. Thank you.
Thank you, Luis. Next question, please.
Next question comes from Paul Marsch of Berenberg.
Yeah. Thank you for taking the question. I have two questions about pricing in Spain. Firstly, on the trade-off between pricing increases on margin and how we should think about the operating leverage from price increases as we go through the rest of the year. Is the aim to see price increases flowing through to margin and benefiting margin, or should we expect the benefits of the price increase to be spent on content costs, on handset subsidies, and other commercial expenses? That's my first question. The second question is just a more general question about the pricing environment, which I think you alluded to earlier on. It seems like the reaction of the customer base was pretty limited to the price increases that have happened so far.
Do you see this as the beginning of a period of regular annual price increases, or is this still likely to be something of a one-off that maybe still remains exposed to price reactions from competitors, for example?
In terms of your question about the trade-off between price increases and margin, namely on the operational effect, again, the same message that we shared during the first quarter. The only way to really stabilize or to improve EBITDA was to eliminate the erosion of the revenue decline. That's why we have been so focused on revenue in Spain in the last quarters, and we'll keep going into that direction. We have been able to do that without significantly affect our OIBDA margin, and we have best in class OIBDA margin if you benchmark ourselves against our peers in Europe. We keep doing efficiency efforts, namely on stores and other fronts. We feel that now the priority is revenue increase. At the same time, if you just judge upon the example of the football rights, we intend to be rational.
Therefore, we have been having just a limited inflation on the football rights of 2%, because we thought that was the right thing to do between the trade-off of having the contents and not diluting our margins. Overall, what I can tell you is that, we feel that we can combine both things, that in the next quarters, we should have the ambition of retaking or preserving historical low levels of churn to have a higher take of premium content from customers and therefore the customers moving up on the value chain. That should help in the second part of the year. At the same time, we are going to have an impact from the regulatory obligation to commercialize premium at wholesale level, at mostly zero margin, and that will have an impact in margin, a negative impact on margin.
I think that we, overall, we have significant expectation about upselling. Now I'm addressing directly the second part of your question in terms of the future. Our main reason of what has happened in Spain in the last two quarters, namely since January this year, is that when you do the right proposition between price upgrades and value, the customer responds. The customer wants more data. The customer wants more value-added services. The customer wants to enjoy richer content, more speed, more capacity, and that can be monetized. I think that our goal is to keep monetizing data. Our goal is to be able to do that at the same time combining historically low levels of churn.
We think that we have had now one quarter that even considering extraordinary negative effects like the strike, we have been able to demonstrate that that can be executed without sacrificing much margin and without sacrificing churn. To make a very long answer short, we are going to be trying to combine both things, price upgrades or product upgrades, with historically low levels of churn based on exceptional quality. Therefore, as I was saying before, we think this industry should target to stop being a deflationary industry.
Thank you very much.
Thank you, Paul. Next question, please.
Next question comes from Fabian Lares of JB Capital Markets.
Hi. Good afternoon. Thank you for taking my questions. I am sorry it is a bit redundant to keep coming back to the football rights, but this is not so much about domestic, but the European. I have seen some items on news that say that you are negotiating with Mediapro to access the Champions League and the Europa League broadcasts. Is that finalized or still undergoing? Do you have the intention to keep increasing your football content? If this were the case, would you be forced to open that or since that channel is not an exclusivity, it can be basically owned by anyone who actually puts the money up? I guess that is my first question.
Second, with regards to the situation with the U.K. disposal, I know you highlight that you are very confident on the conclusion, but are you concerned that the timing of the deal could be somehow delayed, as we could have seen in deals such as the Jazztel Orange transaction, which took almost an entire year to get Phase II approval? How would that change, if anything, your objectives and/or your remuneration policies, if at all? Thank you.
Thanks for your question. On the first part, unfortunately, I'm not going to be able to be very transparent because we are in the middle of a process, and therefore I cannot be very specific. Are we interested in the content? The answer is yes. What would be the implications? Well, Mediapro has the exclusive rights, so they can share that with other players. Sorry, I cannot be more specific on that because we are precisely in the middle of those conversations.
On the second question, you're right. We have seen previous processes, not only Orange Jazztel, but also in our E-Plus transaction or when we sold O2 Ireland, that these processes tend to take around 12 months. Bear in mind that we signed the O2 UK transaction by the end of the first quarter. Even allowing it for a little bit of slippage, we're still thinking of closing in the second quarter of 2016. Thank you, Fabian. Next question, please.
Our next question comes from Jonathan Dann from Royal Bank of Canada.
Hi there. I've got a question on the opt-in and opt-out with the price rises and the Fusión 300. You mentioned that churn wasn't the problem. Can you just confirm that post the initial one-month opt-in, opt-out periods, there hasn't been a backlash where people get the second or third bill and start worrying about the price increase? Could you also just quantify roughly how many people have chosen to upgrade to the 300 Meg offer?
Well, in terms of your question, right now as we speak, there is no retention clauses on our customer base. As a result, the churn figures that we are issuing already reflects the customer decision if they want to stay or leave us, depending on the service. There is no more retention clauses. This is a result of not just of the price upgrade, but also of the remedies of the Digital+ acquisition. Now, our customer base is free to go wherever they want. That's precisely why we think that the churn levels that we have at the end of June are so relevant. It proves that the customer base, now that it is totally free to decide, is deciding to stay with us after the offer upgrade, after the price upgrade.
That proves that the value proposition is fair, that proves that the ARPU uplift that we have been having in Fusión, that only reflects the EUR 71.8 that we are sharing in terms of ARPU of Fusión, only reflects a month and a half roughly of the price upgrade because it was done on the second billing cycle of May, which was on the 20th of May. Therefore, you should expect that during the third quarter, that ARPU uplift of Fusión should continue, even if it was just nothing else being changed in terms of the customer base. To summarize, there is no more retention clauses, no more opt-in or opt-out. They have been eliminated, in spite of that, we are back to historically low levels of churn in Telefónica.
As a result, what I can share with you is there have been no bill shock, therefore we have not been experiencing any kind of backlash of customers being surprised after receiving their bill, now they're totally free to decide. In terms of the number of customers that have been moving to 300 megabit, we do not disclose on that many details, again, it's highly sensitive commercial information. Let me just summarize you that we see more and more customers on the Fusión base moving upwards the value chain in terms of the speed of access, the capacity on the mobile side, and on the content side as well. For more detailed information, please contact Pablo on the investor relationship team. Okay.
Can I ask a follow-up? Those comments would hold true for July as well as June?
Could you repeat the question?
Sorry. We're now at the end of July, and I would assume you get weekly updates on churn. Those comments for June are equally valid for July.
As you might imagine, I'm receiving daily updates on churn.
Daily.
It's very sensitive, and they're totally updated. The same messages that applied for June applied for July.
Thank you.
Thank you.
Thank you, Jonathan. We have time for the last question, please.
Our last question comes from Jerry Dellis from Jefferies.
Yes, good afternoon. Thank you for taking my questions. The first question relates to Spain and really the cost allocation. See, within the first quarter, the DTS business was included within other. Now that Canal+ content is being bundled within your Fusión offers from July, how will you allocate the associated content costs between the Spanish perimeter and the other category? Secondly, a question related to Brazil. Obviously, revenues was one of the areas in which you indicate that in the best case, synergies could be ahead of your previously published expectations. I think as Telefónica Brasil reported yesterday, revenue growth was fairly stable between Q1 and Q2. Are you calling out an acceleration in revenue growth in the second half? I wonder what view of the macro environment that's predicated upon, please. Thank you.
Well, on the cost allocation part of the Digital+, from accounting standpoint, we are working on that because we need to allocate the PPA for depreciation purpose. Also, we need to take into consideration some tax issues. From an operational standpoint, what we are doing, and therefore sooner or later, that's going to be reflected on the corporate side and on the accounting side, is that the retail activity of Digital+, the retail responsibility, so the full amount of customers of Digital+, that responsibility is handled by Telefónica de España. Which means that they're responsible for coordinating the databases, for deciding on the offer, for deciding on the segments of the offer, the pricings of the offering, the timings of the offering, and the marketing strategy of the offering is going to be Telefónica de España.
Digital+ is going to be taking care of the production, the content acquisition, and the content strategy. I hope that we will be able to be more clear once we have that allocation being done from an accounting standpoint. Overall, at the level of the group on consolidated figures, again, let me stress that the full of the impact of the football rights is already embedded in the numbers that we are consolidating on a pro forma basis, and therefore, we are already incorporating that on the 2014 pro forma numbers. We are also incorporating that on the guidance review that we have been sharing with you at the level of the group in terms of the new OIBDA margin erosion. We do not expect major surprises coming from that side.
In terms of Brazil, I would give a little bit of color on the operational revenue trends, and then I will pass it to Ángel for the macro situation. From a revenue standpoint, let's analyze the different components of the Brazilian unit. On the mobile side, on the former Vivo mobile unit, we are clearly outperforming the industry in terms of mobile revenue growth. As you have been seeing in the presentation, we have been able to grab 97% of the mobile service revenue growth within the quarter. On the former Vivo fixed line, the former Telesp, for the first time since 2008, we have been growing residential customer fixed line revenues in São Paulo.
That proves that the turnaround effort that we have been doing in the last quarter in terms of improving the quality, shortening the local loops, investing in fiber, upgrading the offer, investing in content, and investing on the TV side, is paying off. Then you have the trends coming from the former GVT, which is also growing double digits. Finally, the combined entity. If you add up the former Vivo fixed and GVT on the TV side, we have been able to grab 93% of the net adds of the market during the quarter. All in all, from an operational standpoint, the kind of traction that we see and the kind of possibilities that we see on the combined sales force, and that's just residential.
Now imagine our corporate offering outside São Paulo, where we used not to have a wireline infrastructure, and therefore we have become immediately more powerful and more relevant for the corporate segment and for the SMEs. What we see operationally speaking is a much stronger platform in Brazil. We are the leaders. We are the leaders commercially. We have the best brand. We have the best distribution, and we have the best momentum. This is based on an outstanding commercial team, an outstanding brand, an outstanding distribution channels, distribution points, and capillarity, and the strongest mobile network in Brazil, and one of the strongest wireline networks. Operationally speaking, we are very positive on revenue trends. Now I'm going to be passing it over to Ángel for the macro diagnosis.
Yes, this very positive business performance that José María was commenting on is against a difficult macro backdrop. This 2015 is a year of adjustments. We see GDP contraction, consumption contraction, but a new political project that is committed gradually and with some adjustments along the way to a correction of existing imbalances in fiscal, monetary, and structural fronts with an objective to strengthen confidence and to increase investments and to expand the potential growth rate. We are expecting return to growth in Brazil in the medium term. As José María was saying, even against this challenging macro backdrop, we're achieving very positive business results.
Thank you. Sorry. I think this was the last question, I'll pass over to Ángel to close the conference call. Thank you.
Thank you very much for your participation, and we certainly hope that we answered and provided some useful insights to you. Should you still have further questions, we kindly ask you to contact the investor relations. Good afternoon, and for those of you leaving for holiday soon, we wish you enjoy your summer break, ideally on some Spanish beach. Thank you.
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