Good day, ladies and gentlemen. Thank you for standing by, and welcome to Telefónica January to June 2014 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. If you'd like to ask a question, please press star one on your telephone keypad. If you should require any assistance during this call, please press star zero. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Pablo Eguirón, Head of Investor Relations. Please go ahead, sir.
Good afternoon, and welcome to Telefónica's conference call to discuss January to June 2014 results. I'm Pablo Eguirón, Head of Investor Relations. Before proceeding, let me mention that this document contains financial information that has been prepared under International Financial Reporting Standards. This financial information is unaudited. This presentation may contain announcements that constitute forward-looking statements, which are not warranties of future performance and involve risks and uncertainties. Certain results may differ materially from those in the forward-looking statement as a result of various factors. We invite you to read the complete disclaimer included in the first page of the presentation, which you will find on our website. We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulator. If you don't have a copy of the relevant press release on hand, contact Telefónica Investor Relations at +34 91 482 8700.
Let me turn the call over to our Chief Financial and Corporate Development Officer, Ángel Vilá, who will be leading this conference.
Thank you, Pablo. Good afternoon, and welcome to Telefónica's first half 2014 results conference call. Today with me is José María Álvarez-Pallete, Chief Operating Officer. During the Q&A session, you will have the opportunity to address to us any questions you may have. Telefónica has released today a strong set of results based on the execution of the management priorities established for the year. First, the quarter evidenced a pickup in commercial activity with remarkable momentum in net adds, especially Pay TV, mobile contract, smartphones, and fiber. We are working on expanding customer value by reducing churn and improving ARPU. Second, top line grew year-on-year for the fifth consecutive quarter, boosted by Telefónica Hispanoamérica growing at double digit and mobile data ongoing expansion. Third, OIBDA was stable year-on-year, balancing increased efforts in commercial expenses with cost savings from efficiencies.
As such, OIBDA margin posted a limited decline year on year in organic terms, both in the semester and in the quarter. Fourth, spending for network differentiation continued to accelerate. Fifth, financial flexibility was sustained, benefiting from a strong free cash flow of EUR 1.7 billion in the six months to June, while net debt stood at EUR 43 billion after the sale of Ireland closed in July. Sixth, EPS posted an outstanding sequential improvement, EUR 2.26 per share in Q2. Finally, let me remark that these results are fully aligned with our expectations, therefore, our guidance and dividend policy are confirmed. Let me now start with a summary of key financials on slide three. Reported first half evolution was impacted by negative FX and the deconsolidation of Telefónica Czech Republic, although in Q2, both impacts slowed down slightly.
The first factor, FX, deducted 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, reduced the payments in EUR of CapEx, interest, taxes, and minorities. Therefore, the FX impact on OIBDA is virtually neutralized at free cash flow level. In organic terms, second quarter revenues posted a consistent performance versus the first quarter, growing 1.3% year on year to reach EUR 25 billion in the first half, while OIBDA topped EUR 8.1 billion and remained flat. OIBDA margins stood at 32.3%, 50 basis points lower than in the first six months of 2013. Lastly, net debt stood at EUR 43.8 billion at the end of June, six billion lower than last year figure. On slide four, I would like to stress that commercial activity ramped up, showing very strong volumes.
This way, total net adds exceeded 2.6 million, growing 40% quarter on quarter and posting a better trend in most categories, but especially in high-value services such as mobile contract, Pay TV, and fiber. We continued to focus on value and growth levers, as I just said, increasing customer loyalty on the back of customer differential propositions. This strategy translated into a sequential improvement of churn levels across the board. Slide five shows the remarkable growth of future key drivers, highlighting Pay TV momentum up 32% year on year. Connected fiber accesses double year on year, and LTE coverage in Europe reached almost 50% of the population. Smartphone traction continues, and penetration expanded eight 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 underpinned organic revenue growth, as shown in slide number six. In first half of 2014, Telefónica Hispanoamérica and Telefónica Brasil remained as 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 over mobile service revenues to 40%, which is three percentage points up year on year. Revenue flow, coupled with good progress on cost efficiencies, allowed the community for OIBDA to remain flat year on year organically. Margin declined 50 basis points year on year in the first six months and 60 basis points in the second quarter, reflecting higher customer investments linked to capture future growth.
In slide number seven, free cash flow generation was robust in the six months to June, reaching EUR 1.7 billion or exceeding EUR 1.8 billion before spectrum payments. I would like to highlight the sound for 14.7% 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 quality and capacity and foster growth, as shown on Slide eight. On network, we keep on accelerating ultra-broadband deployments in order to meet steady traffic increases. 4G is increasingly available for customers in key markets.
With recent new launch in On fiber, we have doubled the size of the network, having passed more than 10 million 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 such as standardization, modernization, reutilization, and automatization. To give you some examples, we launched more business support projects across Telefónica Hispanoamérica, and we are strengthening our digital capabilities for marketing and self-care. Finally, efforts on simplification and consolidation continue, with more than 6% of physical servers reduced, over 160 applications decommissioned, three additional data centers closed, and sustained progression on virtualization. Turning to slide number nine, 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. Machine-to-machine is growing by more than 50% on solid access trend and key deals signed in the first half. Cloud revenue was up 20%, and information security surpassed 40% increase, with relevant agreements reached this quarter, such as the one with Etisalat. Regarding the consumer segment, video stood 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 year on year. Finally, in financial services, I would like to highlight the launch of Yaap Shopping in Spain, allowing customers and stores to be connected through discount offers and loyalty programs.
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, leveraged 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 1.2 million TV customers and 0.9 million fiber accesses in June, paving the way to build a leading platform for content delivery at home. Have also repositioned 7 million Fusión customers in the quarter, which implies resetting the 12-month commitment with the service. While in the mobile business, improved portability trends led contract mobile net adds to turn positive for the first time since Q2 2011.
Fusión 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% 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 7.4 million premises after increasing by 1.3 million the premises covered in just one quarter. Spain'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 revenues have already reached the bottom. This improvement has been driven by lower repricing impact and progressive stabilization of the customer base.
The improved commercial performance that we are already noticing should lead 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 the U.K. 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. O2 Refresh continues to be a successful proposition, together with the proactive upgrade of high-value customers to LTE, resulting in a contract segment increase of mid-single digit.
Top line returned to growth in the second quarter despite the negative contribution of Refresh following its anniversary in April 2014, 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 non-recurrent effects. 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 handsets 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 in the acquisition of E-Plus 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 captured 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 second quarter net adds of fixed services accelerating. On top of that, fiber uptake stands out after connecting 37,000 households on an accelerated fiber deployment that already reached 2.9 million premises passed. This operational performance resulted in an improved revenue and OIBDA trend as slide number 15 shows. Service revenue growth accelerated year-on-year despite the increased negative regulatory effect this quarter. As such, service revenue would be growing above 6% 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 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 Telefónica Hispanoamérica, we kept posting a strong revenue and OIBDA growth. As such, excluding regulation, second 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% 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 excluding Venezuela. 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 one year ago. In Argentina, revenue and OIBDA were both growing above 20% versus Q2 2013, 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 rates. Nevertheless, let me highlight the strong year-on-year increase in OIBDA margin on better commercial comps and despite strong trading in most valuable segments.
To continue with the Latin American review on page 18, in Peru, revenue and 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 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 sale revenue kept increasing at a strong rate of above 30% year-on-year. Especially noteworthy is the leading non-SMS growth in the region on a right monetization strategy. Let me now move to the financial side on slide 19.
Net debt has been reduced to the absolute level of EUR 43 billion. The balance between free cash flow and dividends have allowed divestment proceeds for EUR 3.1 billion to fully flow into lower debt. Despite stable OIBDA in organic terms, lower reported OIBDA due to LatAm currencies depreciation and divestments has pushed up the leverage ratio in the year. To offset this effect, we are putting together measures to reduce leverage, among others, the voluntary scrip dividend in November, the recent mandatory exchange of voluntary shares or the expected mandatory convertible linked 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 EUR 1.25 billion through an eight-year bond yielding 2.24%.
We have launched private placement bonds for EUR 7 million with three years of average maturity and 67 basis points as average spread to repay more expensive debt with similar maturity. We have also been granted bank loans at similar spread. We keep a liquidity cushion of EUR 22.2 billion. Even after the Plus acquisition and every debt repayment for EUR 2.2 billion, we will still keep outstanding liquidity levels while controlling financial costs. Effective interest costs stay similar to the previous quarter in the middle of the target range, despite the increase on average cost of debt driven by the reduction of debt held mainly in euros and Czech koruna with lower cost on average, and second, by keeping hedging strategy in LatAm 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 churn levels. Second, commercial action and investments led to positive organic growth for the last five quarters with improved trends quarter-on-quarter in Brazil, U.K., and Germany. Outstanding commercial trading in Spain anticipates revenue recovery in next quarters.
Stable OIBDA performance year-on-year, organic and healthy margin of 32.3% in the first half. Sorry. Third, stable OIBDA 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. Finally, in the first half of the year, we posted a strong cash generation while our financial flexibility sustained. Thank you very much for your attention, and now we are ready to take your questions.
Thank you. Ladies and gentlemen, if you'd like to ask a question at this time, please press star one on your telephone keypad. To cancel your question, please press star two. Once again, that's star one to register a question and star two to cancel. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. We would kindly ask you to ask a maximum of two questions per participant. If possible, we recommend you not to use your cell or hands-free phone. There will be a short silence whilst questions are being registered. Thank you. Ladies and gentlemen, as a reminder, to ask a question, please press star one. Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. Thank you. Ladies and gentlemen, we apologize.
We are experiencing a momentary interruption in today's conference call. Please stand by, the conference will recommence shortly. Thank you. Ladies and gentlemen, we will now take our first question from Georgios Ierodiaconou of Citi. Please go ahead.
Hello. 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. Particularly, whether there is a threshold at which the programming costs effectively turn to flat fee, any additions that you make thereafter are much higher margin. Perhaps if you could comment whether, if successful with acquiring Digital+, if that could have an impact on your per unit programming cost. My second question 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 market. Thank you.
Thanks for your question on the programming cost, namely on the content cost. The way we account for that is out of the total cost of the contract divided by the number of years, therefore, we accrue each year the proportional part of that, therefore, independent of the number of customers that we have each year. As a result, as you correctly mentioned, the more customers we have, the more profitable this content is going to flow to the profit and loss account. Basically, the message is that we are accounting by the full amount of the contract divided by the number of years, the revenues are flowing as we get more customers. In terms of Digital+, the transaction is subject to the approval of the relevant authorities. For sure.
It will give us more scale because we have more customers, therefore, the profitability on an upper customer basis is going to be significantly improved, namely in Spain. Most of all, I think that Digital+ would provide us with significant know-how and expertise dealing with content negotiations and in terms of dealing with production capabilities that we are lagging at the group level as we speak. Basically, we think that in terms of the scale, and that's why we are accelerating growth in TV. The more we accelerate the scale of the group, the more profitable the TV business will be at the level of the group. We do think that Digital+ would significantly accelerate our expertise at that point.
Regarding Mexico, our priority continues to be to accelerate the turnaround of the business, focusing on quality growth and capturing the mobile broadband opportunity. We don't see it as a converged market yet. As you have seen, the first half is already showing a clear acceleration in revenue and OIBDA growth. 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 a 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. When that may happen, we would communicate to the market accordingly.
Thank you.
Thank you, Georgios. Next question, please.
Thank you. Ladies and gentlemen, as a reminder, to ask a question, please press star one, and to cancel, please press star two. We will now take our next question from Giovanni Montalti of UBS. Please go ahead. Your line is open.
Hello, good afternoon. Thank you for taking the question. Just an update on Brazil, on the back of the recent events on Portugal Telecom, can you provide us an update on the way you look at consolidation? Thank you.
Yes, in Brazil, we continue to have a very strong position. As I was explaining during the presentation, we continue leading in the mobile market with a very strong position in net adds, more than 60% for the fourth quarter in a row. Also, looking at the results of our competitors, one can see that Brazil is an attractive market, but one that will require substantial investments going forward and that could potentially benefit from consolidation. Having said this, these type of transactions require that the timing and the conditions be right for all parties involved. We will see how the situation evolves in coming future.
Sorry, if I may follow up. Last time we had a conference call with you were talking of some stars getting more in line. Incrementally, how do you see the situation today, if I may ask? Thank you.
I don't know. Maybe we can say that some stars may be losing their shine. The force of gravity remains strong, pulling cosmic bodies together, potentially in the future.
Thanks very much.
Thank you, Giovanni. Next question, please.
Thank you. We will now take our next question from Akhil Dattani of JP Morgan. Please go ahead.
Yeah. 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 intentions to expand their fiber rollout from 3 million to 6 million-7 million. 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 as is a standalone rollout. 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. 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 a lot.
Thanks for your questions. First, in fiber in Spain, let me first address our own plans, and then I would comment a little bit on the market. As was described by Ángel during the conference call, we have reached 7.4 million premises in June 2014, which is double the amount that we had a year ago. We have the target to reach 10 million households before year end and also plan to significantly increase to 18 million by 2016. Therefore, we are not on a wait-and-see mode. We are accelerating because we think that with the fiber, and you see the figures of Fusión, we have a mid-term competitive advantage based on infrastructure investments and CapEx.
Therefore, we have the agreement that we have with Jazztel, which is for 1.5 million each, therefore a total of 3 million premises in 18 months ending in the second half of this year. No other plan is today on top of the table. We are doing our homework. The orders are accelerating. By the 7.4 million households that we have in June is the target that some of our competitors have for the next 3 years. We think that we have a mid-term competitive advantage. We are exploiting that through our Fusión offer. In terms of the margin in Spain. The margin in Spain has been affected in this second quarter by several factors. 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 5.1 percentage point are coming from lower revenues compared with a year ago, 2.6 percentage point are coming from commercial costs, handset content as well, 3.7 percentage point in positive are coming from interconnection and efficiency. That means that there is a mix of effects, some positive and some negative. The ones that are specifically for this quarter are a little bit more of content and not that much. We are talking about roughly in the neighborhood of EUR 50 million. More handsets that we have been using tactically to improve the churn. You would have seen that we have posted very significantly improved churn figures. Then, as I was telling you, the content counting.
As a result, for the remainder of the year, we think that the value of the customer that we have been able to capture, namely on the contract side, on the mobile side, on the mobile business, means that our plans to turn back into Spain into revenue growth has been accelerated. Therefore, what I can also anticipate to you is that in the month of July, we are seeing much better revenue trends than 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 revenue stabilization. Soon, revenue growth. We are not guiding, as you know, margins. In our view, we will update you in every quarter.
We think that this level of margin is sustainable. We are aiming even higher.
Thank you, José. Next question, please.
Thank you. Our next question today comes from Paul Marsch of Berenberg. Please go ahead.
Thank you very much. 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, 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. My question is on the revenue line for Spain. I have a second question on Fusión ARPU. You talked of revenues growing again in coming quarters. How long do you think that we have to wait for that? Do you think that is possible to actually get back to growth in 2014? Year-over-year growth, I am talking about. In 2015, sorry. 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? Secondly, on Fusión. In the press release, you say that Fusión is attracting both new and existing customers to higher value offers, that 79% of gross additions to Movistar TV took packages of EUR 60 or more.
You also say that Fusión's customers who repositioned into the new Fusión offers had higher ARPU than before the repositioning. My question is, why did ARPU fall in the second quarter compared to the first quarter? What were the moving parts that actually led to ARPU coming in at EUR 68.8 when it was EUR 70.2 in the prior quarter?
Okay. First, on the revenues. Too soon to guide of when we are going to be back to growth, certainly, we think that 2015 is the year in which we should ambition that to happen. We are accelerating that is why we are investing significantly on the commercial side. The factors that are behind that assumption are the following. In terms of Fusión, I will go on to your question about ARPU, we see that 77% of the customers that are coming to Fusión or moving in Fusión to different packages are upselling. Therefore, we are starting to see a stabilization of the ARPU Fusión as we speak.
On the other side, just in terms of the absolute amount of customers, just by a mathematical calculation, the effort that we have done on the mobile side means that stopping the bleeding of the contract mobile customer could help us also to go into positive momentum. Too soon to say when, sooner than what we were anticipating in the first quarter of this year, thanks to the commercial effort and investment that we are doing. In this quarter. We do see value in the market, we do see the Spanish economy moving more consumption being more attractive for our customers. That is why we are investing on the market.
In terms of the Fusión in this second quarter, the reason behind the no sequential improvement, despite the fact that we see positive incremental output from the positions as you were mentioning, is that in order to calculate the output, the revenue corresponds to the billing period. That means that, for example, in Q, we are taking this from May 18th to June 17th. On top of that, the customers considered for calculating the output Fusión are those stable, which means that all that have not changed their tariffs, and therefore gross adds for repositioning after May 18th have not been taken into account. Therefore, it takes a little bit of time for the Fusión output to reflect the change on the mix.
We think that going forward, because of the number of customers that we have on fiber and on TV, out of that, allow me to remind you that in terms of the new gross adds, 79% of the gross adds are coming on from the above EUR 60 packages. 70% of Fusión customers have already fiber, and 30% of Fusión customers already have TV. Therefore, the blended is improving and is moving upward. We are becoming more optimistic of the output of Fusión. Again, allow us to update you on a quarterly basis because this is very sensitive in terms of the arithmetical calculation, and it's too soon to say when that would turn into a significant revenue tool.
Just to, again, to express the previous point on the revenues in July in Spain, the latest reading that we have of that, which is out of the mid of July, allow us to think that we are heading into that direction.
Thank you very much.
Thank you, Paul. Next question, please.
Thank you. We will now move to Justin Funnell of Credit Suisse. Please go ahead.
Thank you. Yeah, again, on Spain and then back to Mexico. On Spain, obviously, some good progress. When Fusión was first launched, we had a pretty good run at it for a few months, and then ultimately Jazztel and Ono reacted with cheap, smaller bundles, which slowed down the momentum to a degree of Fusión. 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 replicated? You launched these plans back in April, so you perhaps already have seen enough time to know if competition is going to react or not. How do you see the likely competitive reaction? Secondly, in Mexico, can you give us an idea about how 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 launching of Fusión and this renewal of the offer. First, now we are two years and a half after the initial launching of Fusión, and we have now learning curve in terms of the customers that were expiring out of their retention clause of the Fusión. Out of that, we have been able to preserve most of them and even to move them up. Therefore, the churn of Fusión that we are showing in the different chapters is already a good indicator of the trends that we might be anticipating. As a result, repositions and gross adds to help us to keep the momentum on Fusión. Most of that, we have a new pillar on the Fusión offer, which is the TV offer, and then the fiber deployment.
Therefore, we think that we can keep feeding the Fusión attraction in more geographical areas of Spain with this 100-mega offer and with the four different content packages or bundles that we have been prepared. Therefore, if you put everything into the equation, and after the learning curve that we have, and considering the levels of churn that we have in the different products, namely the most valuable products, which are namely fiber, TV, and mobile contract, we tend to think that the Fusión momentum would be accelerated a little bit or not, but it would be significantly sustained. We are repositioning customers. They resign 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 Fusión are pretty sustainable.
In terms of Mexico, now that the reform has been approved by the Congress and the Senate, we think that a new commercial momentum starts in Mexico. Too soon to say again, what are going to be the legal derivatives of any of the pledges in terms of the procedural, but we do see better momentum. Just allow me to remind you that the five major points of the reform are asymmetry of interconnection, significant asymmetry, even higher than the one that was approved in Colombia. That on-net and off-net tariffs need to converge. Exclusivity in retail outlets or phones is banned, and the obligation of sharing infrastructure as well as unbundling of the local loop.
All those chapters, 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 to maintain or even increase the trend that we have right now. In terms of the quality of the network, we need to keep investing. That's why the level of CapEx in Mexico is relevant, because we cannot afford not to take advantage of the opportunity. 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 Luis Prota of Morgan Stanley. Please go ahead.
Yes, thank you. Two questions, one on Spain and one on Brazil. On Spain, it would be helpful if you could give us some indication on the impact from, first, 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 to 28% and then to 25%, whether that is going to give rise to some tax savings in the next few years. The question on Brazil is related to GVT, which is an asset that you were interested in the past, and then you seem not to be interested anymore, but it is now coming on the table in some market talks, whether you might be interested in this asset again. Thank you.
Okay. Hi, Luis. Thanks for the question. The impact on the pension fund is roughly between around EUR 50 million per quarter. It's relevant, but it's manageable in terms of the other effort that we are doing in terms of insourcing and so on. It's pretty limited. We are developing, as we speak, other source of savings in the cost structure of Spain. Remind also that the commercial effort that we are doing, we will dosify that depending on the market conditions, and therefore, the level of margin, OIBDA margin in Spain is going to be depending on how attractive we see the market and how much value we think we can capture. On the GVT question, I pass it to Ángel.
Well, before GVT, regarding the impacts of tax changes in Spain, what I can say is that for this year, we stick to our guidance of cash tax rate of around 25%. For the coming years, we will give the appropriate guidance, but that should be trending towards a lower figure. Regarding GVT, 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 is not Brazil, a conversion market today, but may evolve in that direction in the future. We are monitoring all possible scenarios and we're going to be ready to act potentially in a expeditious way if needed.
Thank you, Luis. Next question, please.
Thank you. Ladies and gentlemen, as a reminder, please press star one on your telephone keypad to ask a question. To cancel, please press star zero. We will now take our next question from Fabián Lares of JB Capital Markets. Please go ahead.
Hi. Thank you for seeing my questions. With regard to the fiber deployment in Spain, you already mentioned that by 2016, you want to reach 18 million households. That's the totality of the Spanish households, basically. You want 100% coverage. This would imply somehow that you would probably need 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-home review is coming along at the regulator, when we should have some kind of a ruling on that, and how that would affect your plans and rollout? That's my first question. Second, with regards to 4G in Spain, the digital dividend in Spain is coming online January 1st of this coming year. Do you plan to have an extensive rollout given your limitations in the 1,800 MHz reform frequency?
When you receive the 800 MHz, do you 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, when we were talking about 18 million, we were talking about 18 million premises, not household. It is the metric that our competitors are also using. It's a different metric that we were talking about. In terms of the regulation on the potential of the fixed broadband access or infrastructure. The commission is doing a public consultation, which is expected to happen early fourth quarter of this year. Our position there is as follows. We think that the traditional broadband and the ultra broadband should have a different approach. The next generation network deployed should be deployed under competitive conditions, therefore, should not be regulated. They don't want to hinder the investment and sustainable competition.
Cable operators are undoubtedly also under this chapter, next generation, and therefore they are market leaders because they have cable network that have been updated to DOCSIS 3.0. There are no entry barriers to the market that the bottlenecks have been solved, and alternative operator has access to the essential facilities, civil infrastructure, and to in-building fiber infrastructure, therefore have gained significant economies of scale and scope. On top of that, there is a consolidation trend in the market. As a 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 that framework. Was that not to be the case, then we will reconsider our deployment plan.
In terms of the LTE, our 1800 network will be an overlay network, based on the most efficient multimode base station technology, therefore offering 3G and 4G over all the spectrum asset that we have. As soon as we will have access to the 800 megahertz, we will deploy also wide LTE 800 network, in order to provide a better indoor experience. In terms of the technology and the assumptions, we are already working on the model that we will be able to take usage and to take advantage of the different bands.
Thank you, Fabián. Next question, please.
Thank you. We will take our next question from David Wright of Bank of America. Please go ahead.
Hello, guys. Just one question, really. Obviously, in Spain, convergence is your core strategy. You've even mentioned convergence within the framework of your Brazilian outlook. It does seem like the U.K. 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 plans for the U.K. and why, perhaps, you've looked to invest less on the fixed line infrastructure side? Thanks.
Thanks for the question. First, we think that in the U.K. today, convergence is not a factor. First of all, the interest of the customers have been significantly limited so far. There are different market structures between the wireless and the wireline commercial distribution networks, I mean, in terms of retail, direct, and indirect, 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, Virgin is already offering that, and it has, for the time being, limited market demand. It is true that BT has announced that, and has started a significant effort on the content side, and has also announced that it has intention to move to a mobile data network operator profile into the wireless side of the market.
It is also true that BT tried that previously, and it has proven not to be easy. That's why, for the time being, we think that convergence is not the name of the game yet or today or for still on the U.K. market. As you might imagine, we monitor permanently. If you allow me, I think that the U.K. 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 namely in this quarter, and according to the figures that have already been published, Everything Everywhere is the leader in contract, taking advantage of the 4G coverage, but we are immediately after. On prepaid, is Vodafone the leader, we are immediately after, and we have best-in-class churn.
Which means that the loyalty of our customers is significantly higher than the ones of our competitor based on two factors. First, we have a pretty solid network, and we keep investing for 4G. Most of all, we have been able to provide to our customers through experiences like Priority Moments or Refresh that allow us to think that we have one of the best distribution networks as well and one of the best value proposition. As we speak, as of today, as of this quarter, we think this is the name of the game in the U.K., we will monitor permanently.
Okay, thank you.
Thank you, David. Next question, please.
Thank you. We will now take a question from Jean-François Paren of Crédit Agricole. Please go ahead.
Thank you. Good afternoon. Very quick question. Just want to have your thoughts where we are in terms of the process of funding and financing 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?
The answer is yes. We are planning to issue a mandatory convertible on Telefónica shares to complete the financing for Ooredoo's acquisition. The hybrids were already issued, and the debt portion is being accommodated in our balance sheet. This issuance is still not in the market, but since we would be expecting to get unconditional approval in the coming weeks and Telefónica Deutschland to fulfill the rights issue, then would be the time to see if market conditions are right for such issuance.
Okay. Thank you.
Thank you, Jean-Francois. Next question, please.
Thank you. We will now move to Jerry Dellis 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. Then the second question, please, just on Brazil. Obviously, the cost base has been stabilizing progressively over recent quarters. In particular, again, selling expenses seem to have been particularly flat last quarter.
I just wondered really how sustainable you think that is going forward. Thank you.
Thanks for your question. In Spain, first, we think that we can keep going with the TCC measures, namely, the ones in which we are focused as we speak is simplification, namely of IT and network processes, insourcing of activities, and focusing on a much more efficient distribution channel. Let me elaborate a little bit on those. In terms of simplification, Ángel has mentioned the effort that we are doing in terms of shutting down applications.
Every single time that we converge or that we standardize one of the IT applications that are not providing us with a significant competitive advantage, we significantly save money in terms of storage capacity, processing capacity, you will see that the IT effort that we are doing all along the group, namely in Spain, in terms of radically transforming our systems, would allow us to radically simplify the way we process information, should go immediately into a further commercial cost reduction in terms of number of calls to our call centers, number of claims, namely of incidents. In terms of the distribution model, we are aiming to reducing by roughly 20% the points of sale that we have, from roughly 2,100 to 1,600, fostering the online channel.
At the end of 2013, we have online activity of 7%, we are more than doubling that, more than 20% or in the neighborhood of 20% at the end of this year. On top of that, we have also been working significantly in terms of the insourcing activities. It's basically not about assuming that we are going to be changing our commercial approach. Let me also highlight that in this second quarter and in this summer campaign so far, again, too soon to conclude, but so far the market is showing more rationality. Therefore, I think that the commercial effort that we are showing is also installing some kind of discipline on the market, being as the leader.
We are not assuming that in the second half of the year we will be saving significantly in terms of our commercial effort, but rather in another initiative. In terms of Brazil, what I can tell you is that we are doing most of the things that we did in Spain, we are also applying into Brazil. We think that the effort that we are doing in order to radically improve the quality of our network, namely the wireline network in São Paulo, should flow into better cost-related savings.
On top of that, we are also being much more selective in terms of the subsidies that we use because we have the best network, and therefore we are significantly trying to rationalize the market because as we speak, we are grabbing more than 60% of the contract market share in Brazil based on other attributes which are not purely the subsidies. On both on the wire and on the wireless side, we are applying most of the methodology that we applied here in Spain. On top of that, we have some sustainable competitive advantage, which is for the time being our 3G network. I think that, yes, we are, let's say, optimistic of the future of our Brazilian margin.
Thank you very much.
Thank you, Jerry. Next question, please.
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? Secondly, on Brazil, do you think CADE is still concerned about the conflict of interest of your Telecom Italia stake following the recent exchangeable bond issue?
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. Probably no divestments elsewhere would be required would the situation evolve in that market. Again, I have to say that there is nothing, there is no agreement so far on any front. Regarding CADE, well, the rulings that CADE issued last December are known by the market. We also have been responding to those. On July 9th, we decided to challenge those rulings in court, and we have made some disclosure about this in our results and documentation today. In parallel, we have taken two measures to reduce our indirect stake in TI.
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 one month ago. Second, following the start of Telco, the merger process, we have placed a bond which is mandatory exchangeable in a fraction of our TI shares. As a result, we would be reducing our stake, eventually, in TI, because now we're still shareholders of Telco. We would be reducing that stake below the levels we had prior to September 13, when we did the capital increase in Telco. These two measures are clearly, from the financial point, helping us to preemptively neutralize about half of the potential debt increase that would come from Telco de-merger. Also we are signaling to the regulators our lack of influence 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 Khiroya of Deutsche Bank. Please go ahead.
Thank you. I've just got two questions on Germany, please. Firstly, obviously your net performance has improved materially versus previous quarters. Can you give us just a little bit more color in terms of what segments these incremental customers have been coming from? 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 customer base you think still potentially needs to be priced towards the newer tariffs you've introduced over the past 12 months? Thank you.
Well, on Germany, first, the performance that we have in terms of the positive net add evolution. In this second quarter, we have tapped in postpaid basically 152,000 net adds, which is double the size of the average of the last four quarters. This is mainly because of two factors, significant traction of two main tariffs. One is the O2 Blue, which is devoted to consumers. As you know, it's a very simple, straightforward proposition that differentiates between 3G and 4G. It's pretty simple, pretty straightforward. It's easy to contract, and it's having significant traction on the consumer side. Namely, we are also having significant traction on the SMEs front with the tariff O2 Unite, which has also proved us to be a significant traction.
It is not the major traction that we are seeing is basically on the both consumers and SMEs, and it's based on repositioning 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 stabilizing that at a level of -4%. We have had lower decline in handset space, -7% compared with -33% in the first quarter. Improved performance on managed service revenue based on those tariffs and based on the effort that we have been doing recurrently and persistently in the last quarters. Therefore, now we are just dropping -2.5%. 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 two factors.
First, LTE right now in Germany, which is literally booming, is just available for the core brands, namely the MNOs participants. The effort that the three of us are doing in terms of coverage is paying off, thus for 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, 21% is prepaid. The experience that we have in terms of the data consumption of the LTE consumers at this stage is that every LTE customer is basically using three times more, higher data usage than a 3G customer. Basically, it also is showing a significant ARPU uplift. We think we are doing the right strategy in Germany, significantly investing in our network, committing to our commercial distribution, simplifying our tariffs.
As a result, we think that the commercial traction should be sustainable in the coming quarters.
That's great. Thank you.
Thank you very much for your participation. We certainly do hope that we have provided some useful insights for you. Should you still have further questions, we kindly ask you to contact our Investor Relations department. We wish you a very good summer break. Good afternoon.
Thank you. Ladies and gentlemen, that concludes our conference call. Thank you for your participation. You may now disconnect your line. Thank you.