Good afternoon, and welcome to Telefonica's conference call to discuss January January June 2015 results. I'm Pablo Guido, Head of Investor Relations. Before proceeding, let me mention that financial information contained in this document related to the first half 'fifteen has been prepared under an international financial reporting standards as adopted by the European Union. This financial information is unaudited. This presentation may contain assements that constitute forward looking statements, which are not guarantees of future performance and involve risks and uncertainties.
And that third, and 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 publicly available disclosure documents filled with the relevant securities market regulators. If you don't have a copy of the relevant press ladies and slides. Please contact Telefonica's Investor Relations team in Madrid by dialing the following telephone number 14828700.
Now let me turn the call over to our Chief Financial And Corporate Development Mr. Angel Villa, who will be leading this conference call.
Thank you, Pablo. Good afternoon, and welcome to Telefonica Second Quarter 20 15 Results Conference Call. Today with me is Jose Maria Alvarez Paliete, Chief Operating Officer. So during the and A session, you will have the opportunity to address us with any questions you may have. Telefonica has released today a robust set of results, accelerating in the second quarter and the new cycle of profitable growth initiated at the start of the year.
Posted for the 2nd consecutive quarter in reported main metrics ranging from 7% in OIBDA to 70% in net income, along with a remarkable EPS of in the quarter, and 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 percent, 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 1,000,000,000 on seasonal and nonrecurring 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 and outlook recently made by ratings agencies. Our free cash flow generation was sound and surpassed 1,000,000,000 in the 1st 6 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 3, let me summarize our key financials, where we also outline several factors that which impacted Q2 results. Firstly, we are adjusting our FX in Venezuela to the SIMADI exchange rate. Which was fixed at 190 7 Benethuelan Bolivaris to the dollar in the last auction. This has had a limited impact in OIBDA of minus 1,000,000 and a net income of minus 1,000,000.
With Venezuela now contributing only 0.6 percent of revenues, 0.4 percent OIBDA and a net cash position reduced to around 1,000,000. Other impacts on the P and 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 nonrecurring factors, such as the demerger of Telco, the acquisitions of GBT and DTS, plus the dividend and spectrum payments. On Slide 4, we explained the year end the year end guidance upgrade. Given the earlier consolidation of GBT plus incorporation of DTS, and our good performance in 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 percentage points to revenues. OIBDA margin pressure is updated to around 1 point 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 UK sale.
Dividend at per share and a treasury share cancellation of 1.5% that has been executed already. On the next slide, we and OIBDA year on year growth versus Q1. The consolidation of GBT and DTS from May 1, clearly had a positive impact in the quarter, contributing jointly 10 and 7 percentage points, respectively, to revenue and OIBDA year on year reported changes. The previously mentioned move to SIMali in Venezuela has reversed Q1 positive FX movement and drag in Q2 close to 3 percentage points in year on year variation. In addition to that, we are seeing a consistent improvement in organic trends in Q2.
On Slide 6, 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 5 times. Churn was also down across services. GBT and DTS have contributed significantly to our high value portfolio with 10,000,000 customers. In the bottom of the slide, we highlight that Q2 revenues have seen sequential improvement across the board in our economic terms, except in Germany. Mobile data and Telefonica is Panamerica 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 7 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 we continue benefiting from clear upside opportunities going forward, as shown by the limited smartphone penetration in Espana America.
On the other hand, we are implementing measures to monetize data beyond the allowance as 30% of customers are exceeding data gaps. And more than 40% of those by extra data products. This leaves us plenty of room to upsell thanks to the launch of new data services that are already adding 1 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 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 plus 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 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 growth of 27% in Q2. As such, in this quarter, we are proud to present a video business enhanced by the consolation of 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 Plus, 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 $12,500,000 in Spain.
While in Brazil, premises passed with fiber to the cabinet, total 1,000,000, including GBT. In LTE, coverage in Europe stands at 67%. And 35% in LatAm, with LTE now available in all countries except El Salvador Nicaragua. We continue advancing towards becoming an all IP company with initiatives such as voice over LTE in Germany or central switch closure in Spain. As of June, fixed voice over IPX totaled 4,300,000.
In terms of operational excellence, The global device center design and integrated router that is delivering Wi Fi at full fiber speed and we are introducing self organizing network automation. IT help business transformation and full stack 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, 4 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 a typical factors during April 1st halfofMay. The first and most notable was a decline in gross additions due to the strike held by third party installation technicians. Second was second was Fusion 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.
Fusion continued delivering very positive results with ARPU growing to in the quarter, plus 4.4% year on year or 3.1 percent quarter on quarter. Underpinned by the better customer mix and the tariff adjustment. Lastly, we further expanded our Ultra broadband network reaching 12,500,000 premises passed in June, and we launched a new TV offer in July, integrating the assets of Digital Plus, significantly strengthening our positioning to promote content upselling going forward. Moving on to Slide 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 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 minus 1.3% year on year in the quarter. -2.7 percent, excluding a 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 the conscious strategy to drive value through the development of the customer base, plus strong traction in the business and product segments and better consumer churn quarter on quarter.
This was translated into contract net adds of 201,000 and mobile based growth of 2 percent year on year organically to 42,600,000. 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 percent of new auto grew all in customers taking tariffs above 1 gigabyte 34 percent of customers optitin data automatic future 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 2 thirds of mobile service revenue sequential deceleration on lower trading in high value. On slide number 14, we present a strong sequential improvement in OIBDA growth organic and ex nonrecurring items to 12.5 percent year on year, which was driven by 3 main factors: First, early synergy execution, which represents more than 40% of our annual improvement.
2nd, commercial activity centered on retaining high value customers and 3rd, 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, 7700 rooftop sites to Deutsche Telekom, continued consolidation of shops or 750 employees already signing the Liberal Program. Turning to slide number 15 to review the performance of Telefonica Brazil. Let me first remind you that the acquisition of GBT was closed in May to fully complement our high quality strategy and to reinforce our growth profile in the Brazilian market.
On 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, first positive signs of the transformation into a fiber and video company are already visible. We reached 3,600,000 fiber connections, out of a footprint of more than 60,000,000 premises passed, which represented 57% of the Ultra broadband market. In pay TV, we captured 93 percent of the new customers of the market in the first half of twenty fifteen.
To review the financial performance in Brazil, turn to slide 16. Organic year on year revenue growth ramped up to 5.2 percent, thanks to the sustained solid growth of the mobile business, up 6.9%. The sound progress of the fixed business, excluding GBT plus the contribution of GBT. 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, 2 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 BRL9.6 billion as a base case to our best case scenario of up to BRL16.2 billion with upwards revisions on all items. On Slide 17, we review our performance in Pano America where growth rates in both revenue and OIBDA remained solid in Q2. Access's growth and higher usage resulted in top line organic growth of more than 10% year on year, or 7.7% when excluding Benezuela, 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. And it seems that there is still plenty of room to grow ahead of us, because smartphone users are still one out of every 3 in the region. In addition, OIBDA grew by more than 9% year on year in organic terms or almost 11% when Banas excluded. Boosting profitability expansion for the 6th consecutive quarter. As shown on Slide 18, we continue to post strong commercial activity that enable gradual market share gains that are translating into revenue growth acceleration thus Revenue growth accelerated to 7.8% year on year, despite a 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 6 percentage points year on year. In the rest 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 explained that acceleration of financial growth rates in the quarter Please turn to Slide 20 for a review of UK, reported as discontinued operation. The robust financial performance was underpinned by sustained commercial momentum over the last two and a half years leading to maintain market outperformance.
Continuous mobile based growth was driven by the contract base 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 auto 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.
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 nonrecurring factors such as telco demerger, GBT And Digital Plus Acquisitions, change to Simadin, 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 and A deals closed in Q2. We expect to improve our leverage ratio towards our target of less than 2.35 times be a positive free cash flow generation in the second half of twenty fifteen, growing up all on an organic basis and also benefiting from the acquisition of Ipla's Engility and closing auto 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 Uriba rate reduction. We have intentionally decreased fixed rate debt in euros and lower refinancing costs leading to 53 basis point savings. But higher debt in Latin American currencies has partially offset those benefits. In all, debt has been 15 basis points reduction in the financial cost to 5.23 percent.
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 3 rating agencies covering Telefonica 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 2 UK.
In spite of a temporary increase in leverage Thank you very much for your attention.
Thank
you. And if possible, we recommend you do not use your cell or hands free phone. There will be a short silence whilst we are being while questions are being registered. Our first question comes from Nick Brown from Goldman Sachs. Please go ahead.
Thanks. A couple of questions, please. Firstly, have you had conversations with DEC regarding the O2 UK sell yet? If the competition commissioner decides not to approve anymore, my work installation deals. What's plan B, please?
Will you have an issue refinancing debt next year and presumably that might impact the dividend? And secondly, are you still expecting another domestic football rights auction later this year? Will it be for 2 or more 2 or 3 more seasons in reasonable then that you might have to spend another 1,000,000,000 to 1,000,000,000 on content costs?
Thank you. If you don't mind to repeat the second part of the question?
Yes, sure. Just on the domestic football rights auction, will it be for 2 or 3 more seasons? Are you expecting another auction later this year still or will that get pushed to next year?
Hi, Nick. This is Angel on the YouTube, auto UK, 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.
You European Union phase 2 is the most likely. There are several present for this type of transaction. There has been already conversation on draft documents of the Form CEO. We expect the formal filing to be made in in September, there are several presence of this type of transaction in Germany, Austria, Ireland and other markets Hatchison is highly experienced on this type of dealings and we remain highly confident that the deal will be approved in this, in this instance and with phase 2 in Brussels.
Taking your question on the football rights in Spain for the domestic right the 2015, 2016 season has been awarded. As you know, we have been the winners of that and therefore, there is not going to be another auction during 20 in the next round would probably be, during 2016, for the 3 next seasons. And it would be an option process. So there is no other auction expected for this year and Telefonica has, the rights for the domestic rights for the football season 2015, 2016.
You, Nick. Next question please.
We will take our next question from Matthew Robilliard from Barclays.
Yes, good afternoon. Thank you for taking the questions. First, with regards to your Digital Plus acquisition, so you've launched a new TV package, but I was wondering how we should think about your strategy in terms of integrating these 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.
So that's the first question. Second question has to do with the tax assets you highlight your presentation that you activated some tax assets and looking at your 20 F, there still is more than 1,000,000,000 of tax losses that I understand are not recognized at least in Spain. So what are you saying? Are you saying that you are activating those and potentially there could be more some color on that, would be, very helpful. Thank you.
The first one on the on the DTS and the integration of the offering. Let me stress the fact that we have able to do in less than 60 days a fully integrated like video on demand and multi platform screening, integrating not just the content, but also the assets of the two companies. A result of that, we have been registering in the Competence Commission here in Spain. The wholesale offer certification 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. So the message here is that Yes, we have been integrating both offerings.
Yes, we have a significant content improvement across platforms. And yes, we think we have significant upside from an ARPU standpoint, and we are going to be incentivating that ARPU to move the customers to move upwards on that value chain. Finally, let me just assure the fact that we are pending the we have just pending the approval of the retail offering on the football right All the others have already been commercialized. And the commercial results that we are seeing, the commercial trends that we are seeing during the month of July as a result of those of that integrated offer is significantly improved. So so integrated the offering integrated into the platforms and already commercializing the product.
Regarding tax, and the full 9,000,000,000 have been have been activated. So what we have recognized is slightly above 1,000,000,000 tax credit, accounted in Spain. This comes from losses incurred in previous years that have clarified after tax audit, court resolutions and after finishing tax authorities reviews. So the full $9,600,000,000 that you were talking about have been, activated.
Okay. So 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 single market framework currently under discussion in Brussels, if you can share your views on the current status and the progress? And secondly, on cross border synergies, with the networks being upgraded to all IP, that is increasing in trust 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 telecon single market initiative being currently run at the level of the European Commission. We there are several fronts they are a front on roaming. But as you know, the end of roaming has been delayed to postpone, for, for a few more quarters. And, on that We think we have better news this quarter than before.
We think the commission has understood that the needs to be a progressive, a progressive fading off of those roaming charges. And I think that now, we are facing a different scenario than a quarter ago. Another issues like net neutrality and, and, all the issues. In terms of the neutrality, we think that the definition of the 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 that framework allow allow us to go ahead with network optimization and network management without interfering without provoking a loss of quality on the customer on the customer side. And I think that that, 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. So basically, we agree with the initiative. We think it makes sense to have one single 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 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 little platforms that are giving voice over IP on an unregulated manner using elements of the network. And therefore, I think we think that the regulation needs to contemplate those kinds of situations in order to avoid just charging concentration on the traditional manner. So we are deep believers on end 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 site globally speaking, to become distributors of technology. And therefore, we need to be relevant when the new iPhone is being launched or with the new elements of the network of Ericsson or Huawei or this car being launched. And therefore, it depends your size and your scale.
If you are among the top 10 players, you have that scale and therefore you can take advantage of the leadership to be to have a kind of 1st mover advantage in technology, which is essential. And therefore, I think that cross border synergies needs to be judged, independence of the size have telephonic fields 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. So for we don't feel that need. So to make a very long answer short, the believers in market consolidation, cross border synergies is still to be proven depending on your
Thank you very much. Appreciate it.
Next question comes from Giovanni Montalte from UBS.
Hello, good afternoon. Thank you for taking the question. Two quick follow-up on digital plus, some of your competitors have been pretty loud in complaining especially about the football, right? Do you see room for negotiation or is there a risk of some litigations let's say on the on the right for this season? And about the market consolidation, if you can share with us any update about the way you look at Brazil be the timing.
I don't know if 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 full rights in Spain, you know that in order to get the digital plus transaction and proof, we were we were imposed significant remedies in terms of, 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 percent of the premium contents that we will be buying. So 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 will we are still, we are still suffering the bulk of the content acquisition that we are buying. And I think that on that side, the situation is already asymmetrical, and we don't share view for our competitors in Spain on that side.
Having said that, both the 2 largest competitors in Spain or and Vodafone have decided that they're going to have access to our wholesale offer of namely of the football rights. And therefore, there is 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 incentivating all of us to expand pay TV penetration in Spain. So, we do not share their view. We have given access to them to our premium content.
We registered in a record period of time, our wholesale offer in the competition commission fee in Spain, and they are already accessing those contents Therefore, we do not share their views.
So if I may follow-up in terms of asymmetry, again, back to Spain, there is a, I mean, the current draft implies regulation still on TAF as, let's say, an operator with the significant market power, nothing apparently on cable. How do you see this? Probably nothing for the next, let's say, regulatory period. How do you see this topic going forward? Europe wise, and in Spain, do you do you see, let's say, obligation on, 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, that because of what's going on because of the convergence that is happening in some of the campus, I think that the definition of relevant market the address. And that applied to the smartphone market. And in my opinion, that also applied to the cable market. Having said that, within that, in Spain, the situation already been defined. The rules of the game are now key here in Spain after the digital plus approval process and the revenues 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 addition that is incentivating all of us to invest heavily and to expand heavily on next generation network. And that explain why Spain in the middle of the crisis of the macroeconomic rises between 2011 2015 has passed from being the 6th country in Europe in terms of absolute number of fiber connected to the house, to the home, to be the leader. And it's not just Telefonica, all other players have also done their job, like just all others. So my view is that, next generation network requires new regulation at the European level. And in the case of Spain, that also, again, have already been defined and we are already playing with those rules.
[SPEAKER UNIDENTIFIED
COMPANY REPRESENTATIVE:]
Thank you. Regarding sorry, regarding Brazilian consolidation, 3 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 GBT combination. 2nd, that we continue to believe that the potential synergies of further in market consolidation could be very substantial.
And the firm 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 Dyer Khanow from Citi.
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 the content expenses with acquisition of La Liga rights on one hand and on the other hand, the synergies you have from the DTS acquisition shown, going forward, if we should expect a significant growth in content cost or whether the 2 effects could net off. And 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.
And my second question is on that, if you could just give us an update of any special 1 off items being spectrum payments or some other factors that are working capital moves that may impact the deleveraging in the second half.
Thanks for your question. Taking the 1 on OpEx, but namely I would say more globally margins Spain. In the first half of the year, as you know, we have been significantly focused on revenue recovery. And as we explained on 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.
And therefore, all the revenue recovery during this quarter is explained. So all the OIBDA performance during this quarter is explained by revenue recovery and tight cost control having the remainder of the OpEx flattish. In turn, it is true that we have had lower commercial activity to the strike and this has helped OIBDA performance. But let me also highlight that the strike has had also some effects on 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 on the of the strike on our customers, but also during the month of the price increase, in terms of the elimination of the retention clauses.
So all in all, and finally, regarding the content let me also highlight that now that we have digital plus on board, and taking into consideration the fact that they have this no inflation on the football rights in Spain because we have been paying just slightly above. It's a 2% above the price of the previous year. And the Delta Plus have the right of those of those of the previous year on a consolidated terms, the impact is going to be negligible. And we will more rights as last year. We didn't have the 2nd division rights.
So all in all, we keep focus, as we told you on revenue recovery, we it is true that the strike has been helping us marginally on the positive side, but it is also true that we have some one offs in terms of some compensations, revenue compensations of revenue reimbursements to customers and because of service interruptions, and we have been having tactically more subsidies.
Ask a follow-up, what could be the synergy benefit on the content side from putting the 2 assets together? I guess there will be some scale benefits when you talk about national 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 have, on the right to distribute the, to have those rights internationally. So therefore, in terms of scale outside Spain, Spain, we don't have that benefit yet. But in terms of the content in Spain, remember that we have been basically before the acquisition of the year plus Mogo Star TV was already leader in Spain. And therefore, now the cost of the content of Nania, the football rights is divided into much more customers. Therefore, in terms of marginal and positive effects of the growth factor that we'll have is more positive than before.
Add to that, the fact that the wholesale offer, we are sharing part of the fixed part with other places, which are also going to be incentivated because they have minimum amounts of customers before reaching the marginal to distribute the content throughout Spain. So 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. And there are other synergies, like, for example, the technological one and the on the plat not just on the video on demand, but also on the close platform multi screen offering that we have developed So 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 the 1,000,000,000 free cash flow prespectrum in the first half. This is going to be 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 twenty fifteen.
Regarding shareholder remuneration. We will have, the tranche of dividend of $0.35 in November. Remember that we have structured that as a voluntary script dividend. If the tick 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.
So this all this go in the direction of a much better evolution in the second half. Why am I saying that free cash flow, perspective in the second half will be much stronger than in the first half. Well, we have just upgraded the guidance on our guidance. And these 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 half, we moved to positive cash generation in the second half.
Order of magnitude, close to 1,000,000,000 each. Financial payments, you should expect us to be in the bottom, right, at the bottom of the 5% to 6% range. With respect to cash tax and given the positive developments, developments of this year, we are changing our guidance from 23% to 21%. So all in all, a reasonable estimate of net debt for year end would be something below 1,000,000,000.
Thank you, Julius. Next question please.
Next question comes from James Mackenzie from Fidenti.
Hi, thanks very much. Football rights and freight again. Could you give us an idea of how the wholesale negotiation 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. And then second question once again on Spain is you've put through some pretty hefty price rises on us poor residential clients.
And yet the growth in revenues or the declining level, the growth in revenues that you're seeing in June seems relatively 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?
Okay. Thanks for your question, James. I mean, on the football, right? I think it's public information that 2 of our largest competitor have already sided 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 even the, not on the two packages, I would say one package is all the matches, except in the best match of the weekend.
And the other package is, the weekend match, both of them have been have been, acquired, but there were 2 largest competitors
Okay.
Or this, or, but that means that, as we have 6 premium packages and they need to choose 50 percent of those, therefore, 3 packages out of 6. Our differentiation is gonna from the other content, namely the formula 1, the motorcycling, the movies, the the new launches, the new, the movies, premieres, and the and series, depending on who's in what. So we can, we are going to be able to differentiate on offer depending on who is accessing what. Understood. And 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, we 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, our offering and to change our offer, namely, in the It is not just Fusion. It is on the mobile side. It's in the 1P. So since January, we have been doing a significant effort to upgrade our effort, namely 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. And then, I think it was 10th May. We upgraded our offer with much more megabytes and much richer content and more capacity on the mobile side. And, coincidentally, we have 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 have more is richer in terms of content. So at the end of the second quarter, the price increase of the aggregate of the offer that we have launched in Spain has been totally, assimilated by the market. And by that, I mean that the customer, the residential customer, looks like accepting the value proposition, more value for a little bit more of, of price, more content pride to be more of price. And therefore, the highest execution risk that we have this year in Telefonica Espana was precisely upgrading the offer in an orderly manner and seeing the reaction of our customer base has been, I would say, very positive because we are back.
So to historically low levels of churn at the end of June. And 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, movements that we have done, that the value movement, the upgrading of the offer that we have done, has not just 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, namely a company, and it's not necessarily deflectionary in the long run, but probably the opposite if you do the right position. In terms of other segments, in terms of B2B, 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, what we just issued today has been growing 1% in GDP in the last quarter.
And corporates were already feeling that for a long while. So in the P2P segments, we were doing okay. It was the SMEs in which the segment in which we were struggling. And on that, during the during this quarter, we have launched the Fusion Impressas, the Fusion corporates for namely for SMEs, that is having also a very significant positive traction. So all in all, where do you approach that by the residential market or by the others, the trends in Spain are going in the upside direction.
And then on, I think that was all.
Thank you, James. Next question, please.
Next question comes from Luis Brotter from Morgan Stanley.
Yes, hello. Sorry, second, a follow-up on the Football Rights, topic. I'm not sure if I understood well, earlier regarding the wholesale from Vodafone and Orange. I don't know Jose Maria, whether you said that that was to account for 50% or below 50% of the total cost. So I would like to clarify roughly what percentage of the million that you are paying could be compensated through the wholesale agreement?
And secondly, how convinced you are that this can be monetized and not impact EBITDA negatively in 2015 or 2016. So you have already made comments on this. But what I don't understand well is whether existing digital plus clients who will be migrating to Telefonica's offer, will be providing some ARQ dilution to Telefonica and then you are expecting say that through a 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 million that is being covered by the wholesale offer. It depends on 2 factors. First, what are the 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 warranty, but this type fixed amount, and if they overpass that amount, they start paying variable during the season. So it's going to be depending on what is the price offering that they would do in terms of how fast they are going to be covering the the allowances of customers that they have attached to the price that they're paying for the channel. And therefore, we will see along the year, but the initial movement in fixed in the fixed component is significant. This is highly commercial this information, and that's why we don't disclose, we don't disclose that. But it depends on those 2 things.
We think that both of them, I mean, both of them have going to buy the 2 football packages. And therefore, now it's going to be depending on how fast they are in deploying or on distributing those packages among the customer base. And how fast they consume the allowance of customers that is attached to the fixed component of that offering. Any answering your question of can it be monetized? A very good question.
And effectively, it was depending on how many customers were overlapping, having both services in the former digital plus customer base and the Telefonica customer base, we didn't have access to that information until the transaction was finally approved. Now we know. And, and as you know, this is essential for designing the offering. And, all in all, we think that, the situation is, is controlled. And therefore, we think that, and that's why we were pretty rational on what was the amount of money we were offering for the domestic rights.
And let me remind you that inflation on the domestic football rights has only been and we have included the 2nd division. So all in all, I think that the equation makes sense. I think that we could 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 Telefonica.
Thank you. If I can just follow-up, how is this accurate? 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 third quarter, we should already have a few months of this or how is this accurate?
Thank you. Well, we are going to be assigning the cost of the football, starting with the season. And therefore, you will see the effect in terms of cost immediately. But again, let me remind you, and let me stress the fact that you judge the effect on the consolidated terms because remember that the Ethal Plus already had those rights last year. And therefore, in the absolute, in the consolidated numbers of Telefonica pro form a on a pro form a basis, there is very, very light dilution.
Just the 2% that we have been paying more now it's a question on how fast we are going to be able to distribute to, to increase popularity of those rights, of those right among our customer base. And on that regard, even before having the offer approved, if you judge upon the numbers of course that we are having to our call centers asking for the football channels, we are pretty positive on the future of, of revenues on that side. So when I was saying on the quarters on the third quarter, you will already have impact of the content and you will see the consolidated effect on Telefonica's number. And you will also have the commercial results of the offering. And that's why I think that during the third quarter results, you will have a much better picture of how the equation makes sense.
Thank you, Chris. Next question please.
Next question comes from Paul Marsh of Berenberg. Yes.
Thank you for taking the question. So I have two questions about pricing in Spain. Firstly, on the 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. I mean, 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. So that's my first question.
And then the second question is just a more general question about the pricing environment, which I think you alluded to earlier on. I mean, it seems like the reaction of the customer base was pretty limited to the price increases that have happened so far. So do you see this as the beginning of a period of regular annual price increases? Or is this still likely to be some thing 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 in margin and namely on the operational effect. Again, the same message that we shared during the first quarter, the only way to really stabilize or improve for EDA was to eliminate the erosion of the revenue decline. And that's why we have been so focused on revenue in Spain in the last, 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.
And we keep doing efficiency efforts, namely on stores and other fronts. So we feel that now the priority is revenue increase as the same time. And if you just judge upon the example of the football rights, we intend to be rational. And therefore, we have been having just a limited inflation on the football rise 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. So 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 have a higher take of premium content from customers and therefore, the customers moving up on the value chain.
And that's true, having the 2nd part of the year. On 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 we have an impact in margin, negative impact on margin. But I think that we overall, we are with we have significant expectation about upselling. And now I'm addressing that really just 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 you do the right proposition between, price upgrades and value, the customer response.
The customer wants more data. The customer wants more value other services the customer wants to enjoy richer content, more speed, more capacity, and that can be monetized. So 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. And we think that we have now 1 quarter that even considering extraordinary negative effect as the strike, we have been able to demonstrate that that can be executed without sacrificing much margin and without sacrificing, churn. So 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 champions on exceptional quality.
And therefore, as I was saying before, with this industry should target to stop being a deflationary industry.
Thank you Paul. Next question, please.
Next question comes from Fabienne Lares of JB Capital Markets.
Hi, good afternoon. Thank you for taking my questions. I'm sorry to be so redundant to keep coming back to the football right but, it's this is not so much about domestic, but the European. I've seen some items on news that say that you're negotiating with media pro to access the Champions League and the way the Europa League broadcasts. Is that finalize is still undergoing?
Do you have the attention to keep increasing your football content? And 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's my first question. 2nd, with regard to the situation with the UK disposal.
I know you highlight that you're very confident on the conclusion. Are you concerned that the timing of the deal could be somehow delayed as we could've seen in, deals such as the JazzTel Orange transaction, which took almost an a year to get the phase 2 approval? And how would that change, if anything, your objectives and or your remuneration policy 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 what would be the implications, well, Mediapro has disclusive rights.
So they would they can share that with other with other pledges, but 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 Estrella, but also in our ePlus transaction, or when we sold those to Ireland that processes tend to take around 12 months. Bear in mind that we signed the O2 UK transaction by the end of the first quarter. So even allowing it for a little bit of slippage, we're still thinking of closing in the second quarter. Of 2016.
Our next question comes from Jonathan Dan 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 Fusion 300. Could you just, I mean, it seems as though you mentioned that churn wasn't the problem. But can you just confirm that post the initial 1 month opt in opt out periods, there hasn't been a sort of backlash where people get the 2nd or third bill and start worrying about the price increase? Or and could you also just quantify roughly how many people have did it have chosen to upgrade to the 300 meg offer?
Well, in terms of your question, I mean, right as we speak, there is no retention clauses on our customer base. I mean, as a result, the churn figures that we are issuing already reflects the customer decision if they want to stay or leave, as depending on the service, but 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 Plus acquisition. So now, our customer base is free to go whatever they want. And that's actually what?
Why we think that, the churn levels that we have at the end of June are so relevant because 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. And that proves that the value proposition is fair. And that proves that the ARPU uplift that we have been having in Fusion that only reflects the EUR 71.8 that we have that we are sharing in terms of ARPU or Fusion or it reflects a month and a half roughly of the price upgrade because it was done on the 2nd billing cycle of May, which was on 20th May. Therefore, you should expect that during the third quarter, that ARPU uplift of Fusion should continue even if it was just nothing else being changed. In terms of the customer base.
So to summarize, there is no more retention clauses, no more opting or opt out. They have been eliminated And in spite of that, we are back to historically low levels of churn in Telefonica. And a result, but I can share with you that have been no big shock. And therefore, we have not been experiencing any kind of backlash of customer being surprised after receiving their bill because now they are totally free to decide. And in terms of the number of customers that have been moving to the 300 megabyte, we are we do not disclose on that in many details, but again, because again, it's very highly sensitive commercial information but let me just summarize you that we see more and more customers on the Fusion days moving towards 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 and Investor Relations team. Okay.
And those can
I ask a follow-up? Those comments would hold true for July as well as June? Sorry. I mean, we're we're now at the end of July, and I would assume you get weekly dates on churn. So those comments for June are sort of equally valid for July.
As you might imagine, I'm receiving daily updates on churn. Because it's very sensitive and they are totally, totally, updated. So, the same messages that apply for you in June were place for July.
Our last question comes from Jerry Dallas from Jefferies.
Yes, good afternoon. Thank you for taking my questions. The first question relates to Spain and really the cost allocation. So within the first quarter, the DTS business was included within other. And now that Canal Plus content is being bundled within your fusion offers from July.
How will you allocate the associated content costs between the Spanish perimeter and the other category? And then secondly, a question related to Brazil. Obviously, revenues was one of the areas in which you indicate that sort of in the best case, synergies could be ahead of your previously published expectations. I think as Telefonica Brazil reported yesterday, revenue growth was fairly stable between Q1 and Q2. Are you calling out an acceleration in revenue growth in the second half.
And I wonder what sort of view of the macro environment that's predicated upon, please. Thank you.
Well, on the cost allocation part of the digital platform accounting standpoint, we are working on that because we need to allocate PPA, for a depreciation purpose. And also we need to take into consideration and some tax issues. But for an operation, the standpoint, what we are doing, and therefore sooner or later, that's going to be reflected on the, on the corporate side and on the accounting side is that the retail activity of digital plus, the retail responsibility the full amount of customers of digital plus, that responsibility is handled by Telefonica Espana, 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 the, marketing strategy of the offering is gonna be telephonic and digital plus is gonna taking care of the production, the content acquisition, and the content strategy. So I hope that we will be able to be more clear once we have that allocation being done from an accounting one point. But overall, and the level of the group on consolidated figures, again, let me stress that the full of the impact of the full rights is already embedded.
The numbers that we are consolidating on a pro form a basis. And therefore, we are already incorporating that on the 2014 pro form a numbers. And 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. So we do not major surprises coming from that side. And in terms of Brazil, I would give a little bit of color on the operational revenue trends and then I will pass it to Angel for the macro situation.
From a revenue standpoint, let's analyze the different components of the Brazilian it. On the mobile side, on the former Vivo mobile unit, we are clearly outperforming the industry in terms of mobile revenue growth. You have been seeing in the presentation, we have been able to get up 97% of the mobile service revenue growth during the quarter. On the former Bigo fixed line, the former Telespi. For the first times in 2008, we have been growing customer residential customer fixed line revenues in Sao Paulo.
And that proves that the turnaround effort that we have been doing in the last quarter in terms of improving quality shortening the local loops, investing in fiber, upgrading the offer, investing in content and investing on the TV side, is paying off. And then you have the trends coming from the former activity, which is also grabbing double digit. So over and finally, the combined entity. If you, add up the former Vivo fix and, GBT on the TV side, we have been able to grab 93% of the net adds of the market during the quarter. So all in all, an operational standpoint, the kind of traction that we see and the kind of possibility that we see on the combined sales force And that's just residential.
Now imagine our corporate offering outside Sao Paulo where we use not to have a wireline infrastructure. And therefore, we have become immediately powerful and more relevant for the corporate segment and for the SMEs. So, what we see operational 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 in terms of, and this is based on an outstanding commercial team, an outstanding brand, an outstanding distribution channel distribution points and popularity and the strongest network, mobile network in, in Brazil and one of the strongest wireline networks. So operationally speaking, we are very positive on revenue trends and now I'm going to be passing it over to Angel for the macro, diagnose.
Yes, this very positive, performance that Jose Maria was commenting on is against difficult macro backdrop. And this 2015 is a year of adjustments. We CTP 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 and to increase investments and to expand the potential growth rate. We are expecting return to growth in Brazil in the medium term. So as far as Maria was saying, even against these challenging macro backdrop, we're achieving very positive business results.
Sorry. I think this was the last question. So I'll pass over to Angel to close the 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 Investor Relations. Good afternoon. And for those of you leaving for holiday soon, We wish you. We wish you enjoy your summer break, ideally, on some Spanish speech.
Thank you.