Good day, ladies and gentlemen. Thank you for standing by. And welcome to Telefonica's January to June 2014 Results Conference Call. At this If you should require any assistance As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr.
Pablo Egunoz, Head of Investor Relations. Please go ahead, sir.
Good afternoon, and welcome to Telefonica's conference call to discuss January June 2014 results. I'm Pablo Girona, Head escalation. And before proceeding, let me mention that this document contains financial information that has been prepared under international financial reporting standards. His financial information is available. This presentation may contain announcements that constitute forward looking statements and uncertainties of better performance and involve risks and uncertainties.
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 in our website. We encourage you to review our publicly available disclosure documents filled with the relevant securities marketable. You don't have a copy of the and sites to contact the following receivables. Before nine 48287.
Now, let me turn the call over to our Chief Financial And Corporate Development Officer, Professor Willough, who will be leading
Thank you, Paolo. Good afternoon, and welcome to Telefonica's first half twenty fourteen results conference call. Today with me is Jose Maria Alvarez Paliete, Chief Operating Officer. So during the Q And A session, you will have the opportunity to address to ask any questions you may have. Telefonica has released today a strong set of results.
Based on the execution of the management priorities The quarter evidenced a pickup in commercial activity with remarkable momentum in net adds, especially pay TV mobile contracts, smartphones, and fiber. We are working on expanding customer value by reducing churn and improving ARPU. 2nd, top line grew year on year for the fee consecutive quarter, boosted by Telefonica Espana America, growing at double digit and mobile data ongoing expansion. 3rd, OIBDA was stable year on year. Financing increased efforts in commercial expenses with cost savings from efficiency.
As such, OIBDA margin posted a limited decline year on year in organic terms, both in the semester and in the quarter. 4th, pending for network differentiation continued to accelerate. If financial flexibility was sustained, benefiting from a strong free cash flow of 1,000,000,000 to June, while net debt stood at 1,000,000,000 after the sale of Ireland closed in July. 6, EPS posted an outstanding sequential improvement, per share in Q2. And finally, let me remark that these results are fully aligned with our expectations and therefore, our guidance and dividend policy are confirmed.
Let me now start with a summary of key financials on Slide 3. Reported first half evolution was impacted by negative FX under deconsolidation of Telefonica Czech Republic. Although in Q2 both impacts slow down slightly. The first factor FX acted 10.9 percentage points in the semester and 10 percentage points in the second quarter to revenue and OIBDA variation. But at the same time, we've used the payments in euros of CapEx, interest, taxes and minorities.
Therefore, the FX impact on OIBDA is virtually neutralized at free cash flow level. In organic terms, 2nd quarter revenues posted a consistent performance versus the 1st quarter, growing 1.3% year on year, to reach 1,000,000,000 in the first half, while OIBDA top, 1,000,000,000 and remain flat. OIBDA margins stood at 32.3 percent, 50 basis points lower than in the 1st 6 months of 2013. Lastly, net debt stood at 1,000,000,000 at the end of June 6,000,000,000 lower than last year figure. On slide 4, I would like to stress that commercial activity ramped up showing very strong volumes.
This way, total net adds exceeded $2,600,000, growing 40% quarter on quarter, and posting a better trend in most categories, but especially in high value services such as mobile contract, the and fiber. We continues to focus on value and growth levers. As I just said, increasing customer loyalty on the back of differential propositions. This strategy translated into a sequential improvement of churn levels across the board. Slide 5 shows the remarkable growth of future key drivers.
Highlighting pay TV momentum, up 32% year on year. Connected fiber accesses double year on year, LTE coverage in Europe reached almost 50% of the population. Smartphone traction continues and penetration expanded 8 percentage points year on year to 32%. As such, strong investments in customer expansion enabled to improve customer satisfaction and differentiation, setting the stage for further sustainable growth. Best in class portfolio diversification by geographies and services, underpin organic revenue growth.
As shown in slide number 6. In first half of twenty fourteen, Telefonica Pan America and Telefonica Brazil remained a key growth area. More than offsetting lower sales by some of our European businesses. Let me also highlight mobile data revenues, which accelerated revenue growth in Q2, to 9.2% year on year and increased their weight of our mobile service revenues to 40%, which is 3 percentage points, up year on year. Year on year, sorry.
Revenue flow coupled with good progress on cost efficiencies allowed the cumulative OIBDA to remain flat year on year. Organically. Margin declined 50 basis points year on year in the 1st 6 months 60 basis points in the 2nd quarter, reflecting higher customer investments linked to capture future growth. In Slide 7, free cash flow generation was robust the 6 months to June reaching 1,000,000,000 or exceeding 1,000,000,000 before spectrum pay I would like to highlight the sum for 14.7 percent year on year growth in free cash flow, levered on improvements in most categories of free cash flow metrics, despite adverse FX effects, CapEx increase and assets sold. Let me remind you that the first half of the year is traditionally impacted by seasonal effects.
Therefore, free cash flow should record a better performance in the second half We continue to invest strongly to improve foster growth as shown on slide 8. On network, we keep on accelerating user broadband deployments. In order to meet steady traffic increases. 4G is increasingly available for customers in key markets with recent new launching On fiber, we have doubled the size of the network, having passed more than 10,000,000 premises. We are exploiting technology to provide the best data experience, combined with multiple initiatives which are leveraged on our scale.
One example is the global management of roaming traffic already in place in our major markets. IT is helping businesses transformation according to common principles and optimization. To give you some examples, we launched more business support projects across the and Finally, efforts on simplification and consolidation continue. With more than 6% of physical servers reduced, Over 160 applications decommissioned, re additional data centers closed and sustained progress progression on virtualization. Turning to slide number 9, Let me go through the main progresses achieved in the digital arena.
In the B2B area, solid year on year growth rates are shown in different services. Machinto machine is growing by more than 50% on solid access strength and key deals signed in the first half. Cloud revenue was up 20%. And information security surpassed 40% increase with relevant agreements Sumer segment, CDS2 as one of the key drivers, with revenues accelerating above 15% year on year, as we continue to focus on reinforcing our position through exclusive content acquisition. The global device management is driving the smartphone adoption with special focus on LTE as the total volume of LTE devices increased eightfold on year.
Finally, in financial services, I would like to highlight the launch of the app shopping in Spain, allowing customers and stores be connected through discount Let me now update you on the progress of our business in Spain, which is showing signs of recovery driven by an intense commercial performance. Our new quadruple play offer leverage on our superior TV and fiber is a game changer in the Spanish marketplace, as shown by outstanding Q2 net adds. Pushed by higher gross adds and especially by churn reduction across services. Strong traction of the new convergent offer allowed us to reach 1,200,000 TV customers and 900,000 fiber accesses in June. Aiming the way to build the leading platform for content delivery at home.
We have also repositioned 700,000 Fusion customers in the quarter which implies resetting the 12 month commitment with the service. While in the mobile business, improved portability trends, net contract mobile net adds to turn positive for the first time since Q2 2011. Cushion is not only helping to gain commercial momentum and extend the lifetime of our customers by dramatically reducing churn. But it is also enhancing the value of the base by accelerating the take up of high value services as reflected by the fact that close to 80 percent of new customers adopting for high packages in Q2. This commercial performance is leveraged on a strong network differentiation, and we keep investing to enlarge this gap.
We have already passed 7,400,000 premises after increasing by 1,300,000 the premises cover in just one quarter. Ping's financial performance is shown on slide 11. The evolution of revenues in Spain is showing clear progress in recent quarters, which allows us to think that revenue have already reached the bottom. This improvement has been driven by lower repricing impact and progressive stabilization of the customer base. So the improved commercial performance that we are already noticing should treat revenues to gradually improve year on year trends and to grow again in the coming quarters.
In terms of profitability, OIBDA margin decline in the quarter reflected the strong commercial effort devoted to anticipate revenue recovery by capturing the value we see in a market that is finally showing a clear macro turnaround. Please turn to Slide 12 for a review of our operation in UK. From a trading standpoint, Commercial momentum picked up in the second quarter. And as part of this, our contract churn improved to a record 1%, extending the market leading loyalty. O2Refresh continues to be a successful proposition together with a proactive upgrade of high value customers to LTE resulting in a contract segment increase of mid single digit.
Top line returned to growth 2nd quarter despite the negative contribution of Refresh following its anniversary in April 14, and the disposal of fixed business assets. The sequential improvement of revenue trends is the result of non SMS data revenue acceleration to almost 20% year on year. Lastly, improving business dynamics translated into stable OIBDA and margin in Q2 when excluding nonrecurrent effect. In Germany, commercial dynamics reflect the strong traction of new propositions with both gross adds and contract churn improving their trend. As a result, contract net adds more than double the average of last four quarters.
Additionally, we continue to focus on LTE deployment, reaching a coverage of 52% at the end of June. LTE consolidated as the main driver of mobile data monetization in a very competitive market. With 86% of hand set sold in Q2 versus 40% a year earlier. In this context, mobile service revenue showed a better year on year trend in the second quarter, down only by 2.5% when excluding MTRs on lower ARPU dilution. Q2 OIBDA margin was 2.7 percentage points lower year on year, following the increased commercial investment to enhance trading momentum.
Finally, I would like to remind that we have overcome an important milestone the acquisition of IPLAS with the EC conditional approval on July 2nd. In Brazil, turning to Slide 14, our leadership position in network quality and brand perception led to a strong performance in the most valuable segments of the mobile business. As such, for four quarters in a row, we capture more than 60% of the contract net additions, while smartphone penetration almost doubled year on year to 32%. As a result, we have expanded our contract market share by 3.4 percentage points year on year to 41.3%. In the fixed business, the execution of our turnaround strategy continues on track, with 2nd quarter net adds of fixed services accelerating.
On top of that, fiber uptick stands out after connecting 37,000 households on an accelerated fiber deployment that already reached 2.9000000 premises passed. This operational performance resulted in an improved revenue and OIBDA trend as Slide 15 shows. Service revenue growth accelerated year on year despite the increased negative regulatory effect this quarter. As such, service revenue percent when regulation is excluded. Also excluding regulatory impacts, mobile service revenue ramped up to 11% in Q2 year on year on strong mobile data growth, which grew once again 40% year on year.
Fixed revenues is slightly accelerated on lower working days due to the football World Cup. At the same time, OIBDA reverted the trend of last quarters growing 4% year on year in Q2 on revenue improvement and on a strict cost discipline, offsetting higher commercial costs incurred to keep improving our market position. Turning to slide number 16, in Telefonica, we kept posting a strong revenue and OIBDA growth. As such, excluding regulation, 2nd quarter revenues grew by 13% year on year or 12% when excluding Venezuela. With a solid performance across the board.
This evolution is underpinned by the growing uptake of non SMS mobile data posting an increase of 41.5 percent year on year in Q2, along with a higher penetration of fixed broadband and new services above 18% this quarter. At the same time, let me remark that this revenue performance is steadily flowing into OIBDA, offsetting higher commercial and network expenses. All countries in the region with exception of Uruguay are growing OIBDA year on year, which keeps accelerating and growing double digit, even after on a per country overview, let's move to slide number 17. In Colombia, solid revenue and OIBDA year on year growth remained in Q2, underpinned by structural changes implemented by the regulator 1 year ago. In Argentina, revenue and OIBDA were both growing above 20%.
Versus Q2 'thirteen, with year on year erosion in profitability, reflecting currency depreciation and inflation driven costs In Chile, revenue and OIBDA performance have been highly impacted by the new regulatory framework for mobile and fixed termination rate. Nevertheless, let me highlight the strong year on year increase in OIBDA margin on better commercial comps and despite its strong trading in most valuable sectors. To continue with the Latin American review, page 18, In Peru, revenue in OIBDA reached double digit growth ex regulation and the low smartphone penetration provides a huge opportunity onwards to an already strong mobile data growth. Mexico posted once again this quarter an accelerated trend of on mobile service revenue increasing by almost 8% year on year, while profitability improved despite strong trading momentum. Let me also highlight the new regulatory framework will be effective from mid August, providing additional growth opportunities in a more dynamic and competitive telecom sector.
In Venezuela And Central America, revenue was severely impacted by lower handset sales, but mobile sales revenue kept increasing at the strong rate of about 30% year on year. Especially noteworthy is the leading non SMS growth in the region on our right sell side on Slide 19. Net debt has been reduced to the absolute level of 1,000,000. The balance between free cash flow and dividends have allowed divestment proceeds for 1,000,000,000 to fully flow into lower debt. Despite stable OIBDA in organic terms, lower reported OIBDA due to LatAm currencies depreciate and divestments has pushed up the leverage ratio in the year.
To offset this effect, we are putting together measures to reduce leverage, among other the voluntary script dividend in November, the recent mandatory exchangeable on TI shares or the expected mandatory convertible link to the Plus acquisition slide 20 shows the ongoing diversification in our funding process. While keeping a high liquidity cushion. In the last quarter, we raised billion through an 8 year bond yielding 2.24 percent. We have launched private placement bonds for 1,000,000 with 3 years of average maturity and 67 basis points as average spread to repay more expensive debt with similar maturity. And we have also been granted bank loans at similar spreads.
We keep a liquidity cash of 1,000,000,000. Even after the plus acquisition and heavy debt repayment for 1,000,000,000, we will still keep outstanding liquidity levels when while controlling financial costs. Quarter in the middle of the target range, despite the increase on average cost of debt, driven by the reduction of that helped mainly in euros and sekoruna with lower cost than average. And second, by keeping hedging strategy Latin currencies with higher costs. To conclude, Let me highlight that we have made further progress in our transformation strategy first, we are accelerating commercial momentum with increased customer appetite for value and quality translating into lower turn levels.
2nd, commercial action and investments led to positive organic growth for the last five quarters, with improved trends quarter on quarter in Brazil UK and Germany, while outstanding commercial trading in Spain anticipates revenue recovery in next quarters. 3rd, sibonoida performance year on year, organic and healthy margin of 32.3% in the first half. 3rd developed a performance year on year organic and healthy margin of 32.3% in the first half. The year on year erosion resulted from higher net adds in Q2 and focused investments to expand 4g coverage and fiber. And finally, in the first half of the year, we posted a strong cash generation, while our financial flexibility sustained.
Thank you very much for
Once again, that session. Please ensure that We would kindly ask you to ask And if possible, we recommend you not to use your cell or hands free phone. There would be a short silence while questions are being registered. Thank you. Ladies and gentlemen, as a reminder to ask a question, please press star 1.
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Ladies and gentlemen, we apologize we are experiencing a momentary interruption in today's conference call. Please stand by and the conference recommence shortly.
Thank
you. Ladies and gentlemen, we will now take our first question from Georgios Erosaku of Please go ahead.
I've got two questions, please. The first one is around pay TV margins. I would like to get an idea of how programming costs work. And whether you get any per unit savings as you grow the base, particular, whether there is a threshold at which the programming costs effectively turn to flat fee. Any additions that you make thereafter a much higher margin?
And perhaps if you could comment whether if successful with acquiring Digital Plus if that could have an impact on your per unit programming costs? And then my second shown is on Mexico and obviously the news we had yesterday. I just wanted to understand whether, you see a path to convergence and to some type of fixed line arrangements there, or whether this transaction that you are pursuing is purely focusing on consolidating the mobile it? Thank you.
Well, thanks for your question on the on the programming cost, namely on the, on the content cost, the way we account for is out of the total cost of the contract divided by the number of years. Therefore, we include each year, the proportion are part of that. And therefore, independent of the number of cash that we have each year. And as a result, as you were correctly mentioned, the more customers we have, the more profitable this content is going to flow to the profit and loss account. But basically the message is that we are account by the full amount of the contract divided by the number of years.
And then the revenues are flowing as we get more cash. In terms of Digital Plus, the transaction is subject to the approval of the relevant authorities for sure. It will give us more scale because we have more customers on the phone, the profitability or the profitability on an upper customer basis is going to be significantly include name in Spain. But most of all, I think that digital pass would provide us with a significant know how an expertise is dealing with the content negotiation. And in terms of with production capabilities that we are lagging at the group level as we speak.
So basically, within that, in terms of the scale. And that's why we are accelerating lovingly. The more we accelerate the scale of the group, the more profitable that the business would be for the level of the group. And we do think that the Total Plus would significantly accelerate or execute that
Regarding Mexico, our priority continues to lead to accelerate the turnaround of the business focusing on quality growth and capturing yet. As you have seen, the first half is already showing a clear acceleration in revenue and OIBDA growth and furthermore, The new regulatory framework will improve the competitive landscape, creating the conditions for us to capture better market position. Regarding what was disclosed yesterday, you know, that we are firm believers in the benefits of market consolidation And we have demonstrated this belief in several opportunities in the last quarters. In the specific case of Mexico, we already have collaboration agreements in place and we are open to explore deepening them. Conversations are on and off.
And what I can say at this moment is that we can be pragmatic when assessing a potential merger or integration. Clearly there are several strategic alternatives open to us, but no agreement has been reached so far. On any front. So when that may happen, we would communicate to the market accordingly.
Thank you, Georgios. Next question, please.
1 and to cancel, please press star 2. We will now take our next question from Giovanni Montality of UBS.
Good afternoon. Thank you for taking the question. And just an update on Persil, I mean, on the back of the recent events on Portugal Telecom, can you provide us an update on the way you look at consolidation?
Yes, in Brazil, we continue to have a very strong position as was explaining during the presentation. We continue leading in the mobile market with, very strong position in, in net adds, more than 60% for a 4th quarter in a row. And also looking at the results of our competitors, one can see the Brazil is an attractive market, but one that will require substantial investments going forward and that could potentially benefit from from consolidation. Having that these, these type of transactions require that the timing and the conditions be right for all parties involved. And we will see how the situation evolves in the coming future.
Sorry, if I may follow-up. Last time we who we had the conference call with you. You were talking of some stars getting more in line. I mean, incrementally, how do you see the situation today, if I may ask?
I don't know. Maybe we can see that some stars may be looting their shine, but the force of gravity remains strong, putting, cosmic bodies together potential in the future.
Thank you, Giovanni. Next question, please.
Thank you. We will now take our next question from Akhil Dhatan of JP Morgan. Please go ahead.
Yes. Hi. Good afternoon. Two questions, please. Firstly, on the Spanish fiber landscape.
We've seen from Jazztel in recent days that they have indicated in their tensions to expand their fiber rollout from 1,000,000 to 1000000 to 1000000. Just wondered if you could comment on whether or not there are any discussions ongoing or whether at least you'd have an interest in partnering with them for that rollout or whether we should assume that there is a standalone rollout And with that, maybe if you can update us on your own coverage plans for the next few years in case there are any changes or thoughts around that? And then secondly, just on your margin in Spain for the second half of the year, you've talked about how you feel revenues have bottomed in the second quarter. Could you maybe help us understand relative to the 45% margin in Q2, how you think about the cost evolution through the back end of the year and what that might mean for margins?
Thanks for your questions. Our own, our own plans, and then they would come in a little bit on the market. As as was described by, by ASCO during the, the conference call we have reached 7,400,000 premises in June 2014, which is double the amount that we have a year ago. We, we have the target to reach 10,000,000 households before year end and also plan to significantly increase by 1000000 to 1000000 by 2016. Therefore, we are not on a wait and see mode.
I mean, we are accelerating because we think that to the fiber and you see the figures of Fusion, we have a midterm competitive advantage based on infrastructure investments and CapEx. And therefore, I mean, we have the agreement that we have we just started, which is for 1,500,000 each the total of 3,000,000 premises in 18 months ending in the second half of this year and no other plan is already is today on top of the table. We are doing our homework and we the orders are accelerating by the 7,400,000 households that we have in June is target that some of our competitors have for the next few years. Therefore, we think that we have a mid term competitive advantage and we are We are exploiting that to our Fusion offer. And in terms of the margin in Spain, the margin in Spain has been in this second quarter by several factors.
I mean, namely the commercial effort that we think we need to do in order to capture the value that we see in the market in Spain. Out of the 4 percentage point of decline, roughly a 5.1 percentage point coming from lower revenues compared with a year ago. 2.6 percentage points are coming from, from commercial costs, handset content. As well. And 3.7 percentage point in positive are coming from interconnection and efficiency That means that there is a mix of effects and positives and negative.
The ones that are specifically for this quarter are a little bit more of content and not that we're talking about roughly in the neighborhood of 1,000,000 more handsets that we have been using tactically to improve the churn. And you will see, to have seen that we have bought it very significantly into churn figures. And then as I was telling you, the content accounting. As a result, for the reminder of the year, we think that the value of the customers that we have been able to capture namely on the contact side on the mobile side, on the mobile business means that our plans to turn back into into revenue growth has been accelerated. And therefore, but I can also anticipate to use that in the month of July, we are seeing much better revenue trends that at the end of June, which means that we think that the margin effort that we have done in the second quarter is going to be paying off significantly sooner in terms of getting back station and soon revenue growth.
We are not guiding, as you know, on margins, but in our view, we will update you in every quarter. We think that this level of margin is sustainable and we are aiming even higher.
Thank you, Haki. Next question, please.
Thank you. Our next question today comes from Paul Maersk of Berenberg. Please go ahead.
And before I ask my question, I wonder if I could just ask you about the comment you made at the end there about the level of margin being sustainable you mean the Q2 level of margin in Spain, do you think is at least sustainable through the rest of the year? Is that what you meant?
Yes. The answer is yes.
Yes. Thank you. Sorry. So my question is, is then on the revenue line? For Spain.
And then I have a second question on Fusion ARPU. So on Spanish revenues, you talked of revenues growing again coming quarters. How long do you think that we have to wait for that? Do you think that's possible to actually get back to growth in 2014 year over year growth I'm talking about. In 2015, sorry, And when you talk about that, are you talking about the aggregate for Spain, the total revenue for Spain, or are you just talking about the wireline business?
And then secondly, on fusion, in the press release, you say that fusion is a acting both new and existing customers to higher value offers. That 79% of gross additions to Movistar TV took packages of over €60, instead of €60 or more. And you also say that Fusion's customers who repositioned into the new Fusion offers had higher ARPU than before the repositioning. So my question is why did ARPU fall in the second quarter compared to the first quarter. What was the moving parts that actually led to ARPU coming in at 68.8 when it was 70.2% in the prior quarter.
Okay. 1st, on the, on the revenues, soon to guide or when we are going to be back to work. But, certainly we think that, 25 team is the gearing with which we should condition that to happen. And we are accelerating that. And that's why we're investing significantly on the commercial side.
The factors that are behind that assumption are the following in terms of Fusion, and I will go on to your question about ARPU. We see that 77% of the customers that coming to Fusion or moving to different packages are upselling. And therefore, we are stuck to see an stabilization of the ARPU position as we speak. And on the other side, just in terms of the capital and the absolute amount of cash customers, just by our medical calculation, the effort that we have done on the mobile side means that stopping the bleeding of the mobile, of the contract mobile customer to help us also to go into positive momentum too soon to say when, but sooner than what we were anticipating in the first quarter of this year, thanks to the commercial effort and the investment that we are doing in this quarter because we do see value in the market and we do see the Spanish economy moving more and consumption being more attractive for, for, for our customers. And that's why we are investing on the market.
In terms of the Fusion, in the second quarter, the reason behind the no sequential improvement despite the fact that we see positive incremental ARPU from repositions, as you were mentioning, is that in order to calculate the ARPU, the revenue correspond the billing period. That means that, for example, in June, we are taking this from May 18 to June 17. On top of that, the customers considered for calculating the ARPU to share are those stable, which means that all that have not changed their tariffs. And therefore, growth has for repositioning after May 18th, have not been taken into account. So and therefore it takes a little bit of time for the Fusion ARPU to reflect the change of the mix.
We think that going forward, because of the number of customers that we have on fiber and on TV. And out of that, let me allow me to remind you that in terms of the new gross 79% of the gross adds are coming on from the above packages, 70% of Fusion customers have already fiber and 30% to see on customers already have TV. Therefore, the blended is improving and is moving outward. So we have become, we are becoming more optimistic about the pool of Fusion. But again, allow us to update you on a quarterly basis because this is very sensitive in terms of the arimatic calculation and it's soon to say when that would turn to a significant revenue growth.
But just to, again, to, let's press the previous point on the revenues in July, Spain, the latest reading that we have for that, which is out of the middle of July allow us to think that we are heading into that direction.
Thank you.
Of Credit Suisse.
On Spain, obviously, some good progress. When infusion was first launched, we had a pretty good round of it for a few, a few months men, ultimately, JazzTel, and and Ronald reacted with cheap, smaller bundles, which which slowed down there from renting degree of fusion. Do you worry about the same thing, or do you think this time, because you've added TV, because you've added fiber you're doing things that can't really be be replicated. You know, you've launched these plans back in April, so you that's where you've seen enough time to know if competition is going to react or not. You know, how do you see the the likely competitive reaction?
And secondly, in Mexico, can you give us an idea about how the the growth trends could improve in the second half as this regulatory change comes through? Do you think that we can move towards double digit growth in that business
Okay. Allow me to give a little bit of color on the comparison between the first launch of Tuzion and this renewal of the offer. First, now we are 2 years after the initial to use and have after the initial launching of Fusion. And we have now learning curve in terms of the customers that were, expiring of their retention costs of the cushion. Out of that, we have been able to preserve most of them and even to move them up.
And therefore, the turn of Fusion that we are showing in the different chapter is already a good indicator of the trends that we might be anticipating and as a result, repositions and gross adds to help us to keep the momentum on Fusion. Most of that, we have a new pillar on the Fusion offer, which is the TV offer and then the fiber deployment. And therefore, we think that we can keep feeding, if we see an attraction in more areas geographical areas of Spain with these 100 mega offer and with the different, the 4 different content packages or bundles that we have been Therefore, if you put everything into the equation, and after the learning curve that we have and consider the levels of churn that we have in the different products, namely the most valuable products, which are namely fiber, TV, and, and mobile contracts. We tend to think that they push you on momentum, put the accelerator I believe or not, but, it would be significantly sustained. We are repositioning customers.
They resigned a commitment clause of 12 more months. And therefore, all indicators that we have right now look to go into the direction that the trends of Fusion are pretty sustainable. In terms of Mexico, I mean, now, now that the reform has been approved by, by, the congress and the Senate. We think that a new commercial momentum starts next to. Susan to say again, what are going to be the legal derivatives of any of the players in of, of the procedural, but we do see better momentum.
Just allow me to remind you that the 5 major points of the reform are asymmetry of interconnection. And if you can asymmetry even higher than the one that was approved Colombian that our net and off net tariff need to converge exclusively in retail outlets or owns is done and the obligation of sharing infrastructure as well as unbunding of the local loop. All those chapters each of them, each of each of them separately have significant impacts. And therefore, we think that if we keep building the momentum, the commercial momentum that we have on top of that and we are able to exploit the new regulatory framework, we should be able will will contain or even increase the the trends that we have right now. Terms of, the quality of, of the network we need to keep investing.
That's why, the the level of CapEx in Mexico it's, it's relevant because we cannot afford not to take advantage of the opportunity. But, we will starting to make a long story short, we should start seeing some effects out of the next quarter, the third quarter.
Okay. Thank you.
Thank you, Justin. Next question, please.
Thank you. Our next question comes from Louis Brotter of Morgan Stanley. Please go ahead.
Yes, thank you. Two questions. One on Spain, one on Brazil. On Spain, it would be helpful if you could give us some indication on the impact from, 1st, the pension contributions or pension payments that you are going to resume, I think, from the third quarter, a rough order of magnitude and also whether you have already analyzed and you can share with us the implications of the tax rate reduction 28% and then to 25% where that is going to be priced to some tax savings in the next few years. And then the question on Brazil related to GPT, which is an asset that you were interested in the past.
And then you seem not to be interested anymore, but it's now coming on the table in some market talks whether you might be interested in this asset again.
Okay. The impact, hi Luiz, thanks for the question. And the impact on the pension funds is roughly been around €15,000,000 per quarter. And therefore, it's relevant, but, it's manageable in terms of the other effort that we are doing in terms of in sourcing and so on. So it's, it's pretty limited We are developing, as we speak, older source of savings in the cost structure of same and remind also that, the, the commercial effort that we are doing, we will notify that depending on the market condition.
The level of margin OIBDA margin in Spain is going to be depending on how activities in the market and how much value we think we can capture. On the on the GBT questionnaire,
Well, before GBT regarding, the impacts of exchanges in Spain, what I can say is that for this year, we stick to our guidance of tax rate of around 25 percent. And for the coming years, we will give the appropriate guidance, but that should be trending towards a lower figure. Regarding TBT, in Brazil, as you know, in the fixed business, we continue on track in our turnaround strategy with very clear growth in fixed broadband, fiber and pay TV. It's not Brazil, a convergent market today, but may evolve in that direction in the future. So we are monitoring all all possible scenarios, and we're going to get ready to act potentially in a spacious way if needed.
Thank you, Grace. Next question, please.
Thank you. Ladies and We will now take our next question from Fabienne Flores of JB Capital Markets. Please go ahead.
Hi, thank you for answering my questions. With regard to the fiber deployment in Spain, you already mentioned that, by 2016, you want to reach 18,000,000 households. That's, the totality of the Spanish households basically. So you want a 100% coverage. This would imply somehow that you would probably to consider what the regulator's standpoint would be on you having such a significant lead on, everyone else.
Do you have any visibility on how the fiber to the market, fiber to the home review is coming along at the regulator when should have some kind of ruling on that and how that would affect your plans and rollout. That's my first question. 2nd, with regards to 4G in Spain, the digital dividend in Spain is coming online January 1st this coming year. Do you plan to have an extensive rollout given your limitations and the 1800 Megahertz Free Farm, frequency. So when you receive the 800 Megahertz, the plan to uplift CapEx to do a strong rollout to, recover some, advantage in 4G.
Thanks.
Okay. Thanks for the question. On the first question, we were talking about 18,000,000. We were talking about 18,000,000 is not household, which is the the metric that our competitors are all also using. For it's a different metric that we were talking about.
In terms of the regulation on the on the potential regulation of fixed broadband access or infrastructure, the commission the commission is doing a public consultation, which is expected to happen early fourth quarter of this year. What position there is follows. We think that the traditional broadband and the wholesale broadband should have a different approach. The next generation network deployed will be deployed under competitive conditions. The first should not be regulated.
They don't want to hinder investment sustainable competition. Cable operators are undoubtedly also under this chapter next generation, and therefore they are market leaders because they have cable networks that been updated to DOCSIS 3.0. There are no entry barriers to the market that the bottlenecks have have installed. An alternative operator has access to the essential facilities civil infrastructure and to in building fiber infrastructure. Therefore, have been significant economies of scale and stocks.
And therefore, and on top of that, there is a, there is a consolidation point in the market as result of all that, we don't think and we are working and we are deploying under the assumption that no major changes are going to be introduced on the that framework. Was that, was that not to be the case, then we will reconsider our deployment plan. And in terms of the LTE 1800 network will be an overlay network, based on, the most efficient multi mode base station technology and therefore offering and 4G overall, the spectrum asset that we have. As soon as we will have access to the 800 Megahertz then we will deploy also a wide LTE 800 network, in order to provide a better door experience. But in terms of the technology and the assumptions, we are really working on the model that we will be able to take usage and to take advantage of of the different banks.
Thank you, Fabienne. Next question, please.
We will take our question from David Wright of Bank of America. Please go ahead.
Yeah, hello guys. Just one question really. Obviously, in Spain, convergence is your core strategy. You've even mentioned, convergence within the frame work of your Brazilian outlook. It does seem like the UK stands out a little.
You obviously sold fixed line operations there And it's a market that could be moving towards convergent products with BT's mobile phone launch at some point this year. Could you tell us a little bit more about, your sort of plans for the UK and why perhaps you've looked to invest less, on the fixed line infrastructure side.
Thanks for the question. First, we think that, in the UK today, convergence is not a factor. 1st of all, the interest of the customers has been significantly limited so far. The different there are different market structures, between the wireless and the wireline commercial distribution networks. I mean, in terms of retail, direct and direct and therefore the convergence on the commercial side in terms of distribution.
So far, they are significantly limited. There are already, some, convergence offer on the market. For example, Beijing is already offering that, and it has for the being limited market demand. But it is true that, BT has announced that, and has started a significant effort on the content site and has also announced that it has intention to move, to, mobile data network, operator kind of profile into the wireless side of the market. It is also true that we did try that previously.
And it has proven not to be And that's why for the time being, we think that conversion is not the name of the game. Get or stay or still on the UK, Mark. As to my team, I think we are we monitor permanently, but, if you allow me, I think that the UK dynamics today are much more based on the quality and on LTE deployment. If you go through the numbers of net or gross adds in the recent months, you will see that happening, namely in this quarter. And according to the figures that have already been published, everything everywhere is kind of the leader in contract taking advantage of the 4G coverage we are immediately after.
On prepaid is pulled up on the leader, we are immediately after. And we have best in class churn, which means that the loyalty of our customer finally higher than the ones of our competitors based on 2 factors. First, we have a pretty solid network, and we keep investing for 4g. But most of all, we have been able to provide to our customers, to, experiences like priority moments or refresh that allow us to think that we have 1 of the best distribution networks as well and one of the best value So as we speak as of today, as of this quarter, we think this is the name of the game in the UK, but we will monitor
Thank you.
Thank you, David. Next question please.
Thank you. We will now take a question from Jean Francois Paurin of Credit Agricole. Please go ahead.
Thank you. Good afternoon. Very good question. Just want to have your thoughts where we are in terms of the process of funding and financing and the acquisition of E Plus, have you already started? I understand that 20 30% was meant to be financed through a convertible.
Is that still the plan? Thank you.
The answer is yes. We are planning to issue a mandatory convertible on Telefonica shares to complete the financing for repasquisition. The hybrids were already issued, and the net portion, is in a modated in our balance sheet. This issuance is still not in the market, but since we would expecting to get unconditional approval in the coming weeks and Telefonica Deutschland to fulfill the rights issue. Then would be the time to see if market conditions are right for suggestions.
Next question please.
Thank you. We will now move to Jerry Delis of Jefferies. Please go ahead.
Yes, good afternoon. Thank you for taking my questions. First question on Spain, please. I just wondered whether I could delve into a little bit more detail in terms of what might drive a faster pace of cost reduction within the domestic business going forward. I wonder whether there are any new potential initiatives that you have in mind related perhaps to the personnel cost base?
And alternatively, whether you are intending on perhaps easing up on the level of commercial investment in the second half of the year and whether you feel comfortable that your strong commercial traction would be capable of being maintained if you were to do that? And then the second question, please, just on Brazil. Obviously, the cost base been stabilizing progressively over recent quarters, but in particular, against selling expenses seem to have been particularly flat last quarter. And I just wondered really how sustainable you think that is going forward? Thank you.
Your question. In Spain, first, we think that we can keep going with measures and namely, the the ones in which we are focused as we speak is simplification, namely of, of, IT and, and, and network processes in sourcing of activities and focusing on a much more efficient distribution channel. And let me elaborate a little bit on, on those in terms of simplification. Angel has mentioned the effort that we are doing in terms of shutting down applications. Every single time that we converge or that we standardize 1 of the applications, the IT application that not providing us with a significant competitive advantage.
We significantly save money in terms of a storage capacity processing capacity. And as a result, you will see that the ITFO that we are doing all along the group and namely in Spain in terms of radically transforming our systems would allow us to radically simplify the way we process the information and therefore should flow immediately into other commercial cost reduction in terms of number of forced work call centers, number of claims, family of In terms of the distribution model, we are aiming reducing by roughly 20 percentage points of sale that we have. Roughly a 21100 to 1600 and fostering the online channel. Right now, we have a an online activity of 7% at the end of twenty we have online activity of 7%. And we are doubling that to more than we are more than doubling that more than 20% only in the neighborhood of percent at the end of this year.
And on top of that, we have also been working significantly in terms of the in sourcing activities. So it's basically not about assuming that we are going to be changing our commercial approach, then we also highlight that in this second quarter and in this summer campaign, so far. And again, too soon to, too soon to compute, but so far, the market is showing more rationality. And therefore, I think that the commercial effort that we are showing is also installing some kind of discipline on the market been as the leader. So we are not assuming that in the second half of the year, we will be saving significantly in terms of our financial report backlog and another And in terms of Brazil, what I can tell you is that we are doing most of the things that we would saying we are also applying in Brazil.
We think that the effort that we are doing in order to improve radically improve the quality of our network with a wireline network in Sao Paulo should flow into better cost related savings. And on top of that, we are also being much more selective in terms of the subsidies that we use because we have the network and therefore, we are significantly trying to rationalize the market because as we see, we are grabbing 60% of more than 60% of thick one drug market share in Brazil based on other attributes, which are not purely a subsidies So on both front of the wire and on the wireless side, we are applying most of the methodology that we applied here in Spain. And on top of that, we have some sustainable competitive advantage, which is for the time being, we're speaking network. So I think that, yes, we are to be, optimistic about the future of our Brazilian market.
Thank you very
Our next question is from Nick Brown of Goldman Sachs. Please go ahead.
Thanks. Two questions please, firstly, on Mexico, would you be prepared to dispose of more assets to help fund expansion in other markets like this, or do you think you've got enough balance sheet capacity? And secondly, on Brazil, do you think Cartier is still concerned about the conflict of interest of your telecom Italian stake following the recent exchangeable bond issue?
Okay. Let me take the questions. In the case of Mexico, One way to think about this is that we would be pragmatic when considering merger or integration scenarios. So, probably no divestments, elsewhere would be required with the situation evolve in that market. But again, I have to say that there is nothing.
There is no agreement so far on any funds. And regarding Kadi, well, we have, well, the the rulings that Kedi issued last December are known by the market. We are also have been responding to those. On July 9th, we decided to challenge those rulings in, in court, and we have made some disclosure about in our results and documentation today. But in parallel, we have taken 2 measures to reduce our indirect stake in PI.
The first one was to sell our position in the TI mandatory convertible, the one that was issued in November and that we sold around 1 month ago. And second, following the the start of telco's commercial process. We have placed a bond, which is mandatory exchangeable in fraction of our TI shares. And as a result, we would be reducing our stake, eventually in TI because now we're still shareholders of Telco. We would be reducing take below the levels we had prior to September 14 when we when we did the capital increase telco.
So, these two measures are clearly from the financial point, helping us to preemptively neutralize about half of the potential net increase that would come from Turcotte merger, but also we are signaling to the regulators our lack of influence on on anything regarding Telecom Italia. Thanks.
Thank you, Nick. We have time for one final question, please.
Thank you. Our final question today comes from Keval Kuroya of Deutsche Bank. Please go ahead.
Thank you. I've just got two questions on Germany, please. Firstly, obviously, your net adds performance has improved materially. Versus previous quarters. Can you give us a little bit more color in terms of what segments these incremental customers have been coming from?
And second, the service revenues excluding MTRs is still falling around 3% in Germany. To what degree do you think? Or can you give us some color on how much of the custom basis, things still potentially needs to be priced towards the newer tariffs you've introduced over the past 12 months. Thank you.
Well, on on Germany, first, the performance that, that we have in terms of the positive net add evolution in this second quarter. We have in postpaid to basically 152,000 net adds, which is double the size of the average of the last four quarters. And this is mainly because of 2 factors, significant traction of 2 main targets. 1 is the O2. Blue, which is devoted to consumers.
And as you know, it's a very simple straightforward proposition that differentiated between 50 and 4G, and it's, it is simple, pretty straightforward is the easy to contract and is having significant traction on the consumer side. And namely, we are also having significant traction on the, on the SMEs on with the with the tariff poll or through Unite, which has also capacity, with significant traction. So it is not the major traction that we are seeing is basically on the both consumers and SMEs. And it's based on pre positioning for our commercial proposition that looks to be attractive to the consumer. In terms of the trends that we have been having in Germany, in terms of the operating revenue, we have been basically stabilized in that at the level of minus 4%.
And, we have some lower decline in handset 1st, minus 7% compared with minus 33% in the first quarter, improved performance on managed service revenue based on those studies and then based on the that we have been bringing, we currently and, persistently and in the last quarters, for now, we are just dropping behind 0.5%. So as a result, what I can tell you is that the repositioning that we are doing in the German market is starting to pay off. Let me also highlight another 2 factors, 1st LTE right now in Germany, which is literally booming is just available for the, core brands, namely, knows, participants. And the efforts that, the 3 of us are doing in terms of coverage is paying off half of the time being a competitive advantage in terms of the commercial traction that we are able to have. Out of the customer base of O2 Germany, 72% is, as you know, postpaid, 1% is prepaid, but the experience that we have in terms of the data consumption of ELT consumer's at this stage is that every LTE customers is basically using 3 times more, more higher data usage.
Than a than a 3 g customer. And, basically, it also is showing a significant ARPU assets. So we think we are doing the right strategy in Germany, significantly investing in our network committing to our commercial distribution, simplifying our tariffs. And as a result, we think that the commercial traction should be sustainable in the coming quarters.
Thank you very much for your participation, and we certainly do hope that we have provided some useful insights for you. Should you still have further questions we kindly ask you to contact our Investor Relations department. We wish you a very good summer break. Good afternoon.
Ladies and gentlemen, that concludes our conference call. Thank you for your participation.