Ladies and gentlemen, thank you for standing by. Welcome to Telefónica's January-September 2013 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 01 on your telephone keypad. If you should require any assistance during this call, please press star zero. As a reminder, today's conference call 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, ladies and gentlemen. Welcome to Telefónica conference call to discuss January-September 2013 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 and that this financial information is not audited. This presentation may contain announcements that constitute forward-looking statements, which are not warranties of future performance and involve risk and uncertainties, and that certain results may differ materially from those in the forward-looking statements as a result of various factors. We invite you to read the complete disclaimer included in the first page of the presentation, which you will find on our website. We encourage you to review our publicly available disclosure documents filled with the relevant securities market regulators.
If you don't have a copy of the relevant press release and the slides, please contact Telefónica's Investor Relations team in Madrid by dialing the following telephone number, 34 91 482 8700. Let me turn the call over to our Chief Financial and Corporate Development Officer, Mr. Ángel Vilá, who will be leading this conference call.
Thank you, Pablo. Good afternoon, ladies and gentlemen. Welcome to Telefónica's 2013 third quarter results conference call. Today with me are the members of the Executive Committee. During the Q&A session, you will have the opportunity to address to them any questions you may have. The results released today show how a strong operating and financial execution enables us to achieve full-year outlook earlier, as we have made significant progress in three areas. First, Q3 confirmed the acceleration of year-on-year organic revenue growth for a second consecutive quarter, with sales up to September turning positive 2.04%. Second, organic OIBDA stabilizes. Top-line growth, efficiency gains, and cost control have proven to be successful, limiting OIBDA margin erosion to 0.2 percentage points despite intensified commercial activity.
The operational improvement, together with strong financial execution, allowed free cash flow excess spectrum to remain stable year-on-year in the first nine months, despite FX headwinds and changes in the perimeter. The third key strategic pillar is on balance sheet improvement. Net debt decreased substantially in the quarter to EUR 46 billion or 2.30 times net debt to OIBDA. In addition, our focused portfolio management keeps progressing in the right direction, with the Czech Republic transaction being the latest example. Including post-closing events, net debt would stand below EUR 45 billion, implying a EUR 14 billion reduction since June 2012, when the leverage was established as a priority. Finally, let me stress that we fully confirm our goals for 2013 and our dividend commitment, of which EUR 0.35 were already paid on Wednesday. Let me now start with a summary of key financials on slide four.
In organic terms and in July-September period, revenues posted the highest growth for the last 12 quarters at 2.1%, topping EUR 14.1 billion. OIBDA reached EUR 4.7 billion and reduced its quarterly decline to 0.3% year-on-year, while profitability stood at 33.3%, 0.8 percentage points lower than a year ago, impacted by commercial investments linked to revenue streams. From a cash generation standpoint, January to September operating cash flow stood at EUR 9.1 billion, excluding spectrum, virtually flat year-on-year. It is important to highlight that reported headline figures and their year-on-year trends are negatively impacted by FX and to a lesser extent, by changes in the consolidation perimeter. July to September period is impacted by the sharply weaker Latin American currencies, especially the Brazilian real, which deducted around 10 percentage points of revenues and OIBDA year-on-year change.
Nevertheless, let me highlight that this negative FX impact is mitigated at free cash flow level as shown in the next slide. Moving to slide number five, free cash flow generation before spectrum payments remains stable year-on-year in the first nine months, EUR 4.7 billion, absorbing the mentioned adverse FX impacts. This performance is driven by an improving free cash flow throughout 2013, supported by better operating results and strong management of non-operating results flowing directly to cash. Free cash flow reached almost EUR 2 billion in the third quarter and EUR 3.4 billion in the first nine months after spectrum. Earnings per share up to September was EUR 0.70, and free cash flow per share totaled EUR 0.75, both providing strong comfort about our EUR 0.75 cash dividend commitment for 2013. Slide six shows the solid results delivered by our strategy centered around high-value customers.
The accelerated growth of contract customers set the basis to keep smartphone uptake acceleration. Smartphone penetration is up more than eight percentage points year-on-year to 25%. As highlights, I would like to point out that first, quarterly contract net adds were 1.6 times higher than a year ago and 1.8 times in the case of LatAm, leverage on very rapid smartphone adoption. Second, that our commercial proposition allows us to capture all profitable growth opportunities. Our increased investments in retail broadband prove our commitment on quality growth, with coverage reaching 32% and with 11% of customers already connected at the end of September. We are also advancing on LTE in our main markets. In slide seven, I would like to show the improved organic performance year-on-year from top line to OIBDA in Q3.
Since the beginning of the year, group revenues are consistently improving on a quarterly basis. A combination of very good evolution at Latin America and very robust mobile data. In addition, Telefónica Digital maintained its accelerating growth trends, while Europe continued with its progressive stabilization. This performance led group revenues to show a sequential organic improvement of 160 basis points and 50 basis points in OIBDA. Good progress on profitability in the third quarter underlines the benefits of our best-in-class diversification, balancing the capture of growth opportunities in LatAm with a margin expansion in Europe. Let me stress that if we exclude the negative impact of regulation, our revenues would have grown 2% and OIBDA 0.7% versus the first nine months of 2012, or +3.9% and 0.9% respectively in the third quarter.
Please turn now to slide number eight for a fast review of some initiatives we are adopting to increase the benefits of our scale. On top of local and regional efficiency measures, Telefónica Global Solutions further enhances business profitability and contributes to the fast and efficient development of networks and IT, adapting to the current needs of transformation. This can be seen in the fast rollout of LTE and fiber, key tools to capture market growth, and in the virtualization process that further contributes to the efficient digitalization. In terms of IT, we are also changing the way we operate and keep on taking transformational actions with 33% of servers virtualized, 1,400 physical servers, six data centers closed, and more than 700 applications decommissioned. Regarding devices, we are proactively rebalancing operating systems by reaching agreements with key players. Finally, global end-to-end procurement transformation continued to provide very tangible results.
Next, in slide number nine, I'd like to talk about progress in our key product areas, showing our traction as a digital telco. Firstly, we have successfully established products and services in new markets. In August, Telefónica was awarded with a GBP 1.5 billion contract to deliver smart meter communication services in the U.K., clearly demonstrating our strong position in the machine-to-machine market. We have also made some important progress in the financial services space. The JV we're setting up with Santander and CaixaBank has been cleared by the European Union antitrust authorities, paving the way for us to start to jointly create new digital financial services. Secondly, we are continuously evolving our core communications proposition, building the best range of value-added services for our customers. Firefox OS handsets were already launched this quarter in Spain, Colombia, and Venezuela, in October in Brazil, and in November in Peru.
Meanwhile, in the U.K., we launched TU Go, our unique communication service, a commercial push with Telefónica U.K.'s Be More Dog campaign, reaching 161,000 active users. Lastly, we have made investments in partnerships like Rhapsody, Pinterest, and Evernote. Please turn to slide number 10 to review our operations in Latin America. Commercial activity remains strong in the most valuable segments, with contract mobile net adds once more reaching a record high this quarter. This is key to continue strengthening our regional leadership in smartphones. At the same time, fixed services improved once again this quarter. The strong commercial effort developed on recent quarters is driving revenue and OIBDA acceleration. Revenue growth ramped up to almost 11% year-on-year on strong mobile service revenue performance, mainly boosted by data adoption. This improvement is quite widespread among different markets.
Regarding OIBDA, it is also starting to reflect the strong revenue acceleration, growing by almost 5%, despite margin pressure mainly due to the more intense commercial activity. The outstanding commercial performance is especially remarkable in Brazil, where we keep strengthening our leadership on high-value customers, as shown in slide number 11. Thus, we captured 64% of market growth in the contract segment this quarter, reaching 1.5 million net adds, the highest quarterly figure achieved by a Brazilian operator ever. This growth is further improving the quality mix of our customer base and accelerating smartphone adoption, which already reached almost 15 million. On the fixed services, commercial turnaround continues with better operational momentum underpinned by improved quality and offers across services. Turning to slide number 12, we provide more color on Brazilian financial performance.
Mobile service revenue accelerated to 7% year-on-year in Q3, mainly driven by strong data growth and despite the two percentage points negative impact from regulation. In the fixed business, revenue deceleration stems from the volatility on corporate IT projects and some specific factors negatively affecting traffic trends this quarter. Finally, profitability is showing the effects of the strong commercial efforts. In slide number 13, we review other operations in LATAM. In Peru, gradual revenue and OIBDA growth consolidated in Q3, maintaining solid commercial momentum. In Argentina, best-ever mobile net adds fueled top-line acceleration, while OIBDA trend also improved on easier year-on-year comparisons. Finally, in Chile, we're also posting enhanced trends as we shape commercial data-centric offers are driving KPIs recovery, underpinning solid revenue and OIBDA growth. Turning to slide number 14. In Colombia, commercial activity remains strong.
Revenue ramped up as a result of improved trends across services, while OIBDA margin reflected the strong commercial activity in the quarter. In Mexico, the progressive adoption of new commercial proposals had a negative impact on revenue performance this quarter as customer base is repositioning to new plans. In the meantime, the process to change the regulatory framework keeps fulfilling scheduled steps. Lastly, in Venezuela, increased usage is the main driver of the outstanding revenue performance, with voice traffic jumping more than 20% year-on-year and data traffic more than 40% in Q3. This growth is based on a differential quality proposition and is fueling revenue and OIBDA growth above 50% this quarter ahead of inflation. Turning to slide 15, we will review our operations in Europe. In the third quarter, we enhanced our tariff portfolio with a clear focus on LTE, reinforcing our market positions.
As such, we increased the value for money proposition in Spain with a strong focus on fiber. We launched O2 Refresh in all direct channels in the U.K., and we further pushed on the O2 Blue tariffs in Germany. In terms of financials, top-line performance improved sequentially, despite a higher negative impact from regulation. Profitability expanded year-on-year in organic terms for a fourth consecutive quarter, driven by sound cost control and efficiencies. Lastly, let me remark that we continue adapting ultra broadband networks to capture the demand for higher speeds, leveraging also on a rational CapEx approach, including network sharing. Moving to Spain on page 16, Movistar Fusión, one year on, consolidated as game changer in the Spanish market, and one of the pillars of our commercial strategy, reaching 2.6 million customers.
It is especially remarkable that 60% of gross adds in the quarter were from new customers and upselling. Quality differentiation is another pillar to strengthen our market leadership, as reflected in our decisive bet on fiber. Fiber adoption has doubled year-on-year and is contributing to foster revenues, as well as reducing churn. Potential is huge, as reflected in our target to reach 8 million homes passed by 2015 if current regulation is maintained. In mid-September, Telefónica España enhanced the value of its offer, leveraging on its differential advantages, namely fiber, 4G, and TV, widening the quality gap of its portfolio. Let me note that first positive signs of improved trading were already seen in October and the first week of November. Turning to slide 17, we will review Telefónica España financials.
Total revenues, ex handset sales, maintain its gradual improvement trend in the third quarter once the regulation impact is excluded. In Q3, OIBDA margin reached a record level at 50.2%, more than three percentage points higher year-on-year, reflecting the deep business transformation. Margin improved also from previous quarter, reflecting further cost reduction and the moderate commercial activity, which I said before, was intensified from October. On top of that, we continued taking decisive actions on priority projects, such as the insourcing of activities, the redefinition of CRM, and the reshaping of distribution channels aimed at improving the quality of the sales while delivering further savings in the coming quarters.
On CapEx, despite intensive effort in deploying LTE and fiber, a high level of efficiency is flowing to the operating cash flow, which is stable year-on-year in organic terms, with an operating cash flow margin close to 40%. Turning now to slide 18, Telefónica UK maintained commercial momentum, supported by the success of O2 Refresh. This is a promising trend considering that LTE was only available from the end of August. We are now accelerating the speed of LTE rollout, with 11 cities covered by now. Initial figures show encouraging results, with customers opting for higher value offers and a visible ARPU uplift. We continue to gain high-value customers, with contract customer base expanding by more than 9% year-on-year, and on top of that, market-leading contract churn.
The strong commercial traction flows into financials, with mobile service revenues posting a stabilizing trend year-on-year, despite the negative impact of Refresh. In terms of profitability, OIBDA margin grew 0.2 percentage points year-on-year, benefited by the new commercial model. Finally, let me remind that the company continues working towards a more sustainable business model based on increased direct distribution activity and optimizing investments through the execution of network sharing agreement. To review Telefónica in Germany, please turn to slide 19. With LTE gaining traction as a differentiating tool in a very dynamic market, we are optimistic on the increased opportunity to monetize data ahead of us. We are seeing very positive signs of LTE adoption, with 55% of devices sold being LTE-enabled and three times higher data usage. Main metropolitan areas are already covered as we are doubling LTE-related CapEx year-on-year.
While service revenue declined by 1.8% year-on-year in Q3, affected by a combination of trading momentum, tariff renewals, and lower SMS volumes. On the positive side, we managed to improve the tariff mix, and as a result, ARPU decline stabilized. At the same time, OIBDA and OIBDA margin evolution reflect increased commercial efforts. The announced transaction to acquire E-Plus is on track. KPN shareholders voted in favor, and we are confident that merger clearance will be granted by the second quarter of 2014. This merger will give us the right scale to become an even more competitive player in the market. Let me now move to the financial side on slide 20. Telefónica continues to harvest the benefits of bold actions towards deleveraging.
Reported net debt as of end of September stands at EUR 46 billion, already below 2013 year-end targets on both net debt figure and leverage ratio. If we were to include announced investments pending closing, such as Czech Republic and Ireland, but we were to exclude the hybrid linked to the E-Plus acquisition, net debt would stand at EUR 44.6 billion. Let me summarize how we have reduced EUR 7.5 billion, our net debt figure, compared to December 2012 net debt adjusted by the Venezuela devaluation. Half of this figure, EUR 3.8 billion, stems from free cash flow and FX savings, and the other half, EUR 3.7 billion, comes from portfolio and financial management. On slide 21, I would like to emphasize how we continue smoothing our maturity profile. In 2014 and 2015, debt maturities are slightly above EUR 5 billion per year.
We are also increasing our average debt life to close to seven years, more than half a year longer than in December 2012, all contributing to an outstanding liquidity cushion. Telefónica's extended and diversified financing activity year-to-date has been an important pillar in reinforcing our financial flexibility. We have raised in excess of EUR 10 billion, including hybrids. Again, this quarter, I would like to point out that effective interest cost continued its downward progress within the bottom of guided range, 18 basis points below December 2012. To conclude, let me highlight that in the third quarter, we have delivered solid financial and operating performance, meeting full year targets in advance. We continued recovering growth, with organic revenues accelerating and flowing directly to OIBDA stabilization. Free cash flow posted a strong performance along the year and is stable year-on-year before spectrum acquisitions, despite the currency's volatility.
We are strongly reinforcing the quality of our balance sheet, progressing in our deleverage priority. Moreover, by actively managing our portfolio, we are improving our financial flexibility while enhancing our growth potential at the same time. Thank you very much. Now we are ready to take your questions.
Ladies and gentlemen, if you'd like to ask a question at this time, please press 01 on your telephone keypad. To cancel your question, please press 02. Once again, that's 01 to register a question and 02 to cancel. We will kindly ask you to ask a maximum of two questions per participant, and if possible, we recommend you not to use your cell or hands-free phone. There will be a short silence whilst questions are being registered. Our first question comes from the line of Mandeep Singh from Redburn Partners. Please go ahead. Our first question comes from the line of Mandeep Singh from Redburn Partners. Please go ahead.
Hi, can you hear me?
Yes, we can.
Okay. My question is actually on Telecom Italia. I've got two questions on Telecom Italia. The first one is, in terms of the mandatory convert, can you confirm what the Telecom Italia management said last night that you participated in the transaction and therefore have increased your exposure to Telecom Italia? That's the first question. The second question is, can you give us a bit more color on your medium-term intentions regarding your TI position? Thank you.
Thank you for the questions. This is Ángel Vilá. Yes, we participated last night in the mandatory convertible issued by Telecom Italia. We are indirectly the largest individual shareholder of TI, and we decided to express our support to the new plan issued by Mr. Patuano and his team. The amount that we invested in the mandatory convertible was EUR 103 million. That allows us to mitigate dilution of our indirect stake. For this, a waiver was granted by our Telco partners just for this specific purpose. With regard to our intentions in Telecom Italia, as we said in our previous conference call, we believe that it was important to provide stability to the company with Telco as a reference shareholder, and that's why we reached an agreement to recapitalize Telco. Being indirectly the largest shareholder in Telecom Italia, we are the most interested in the company's value creation.
Our final goal, as the largest individual shareholder, is to support the management to unlock TI's value potential. Yesterday, TI top management defined a new strategy, which is in the right direction in terms of strengthening the domestic business and investing more in broadband in Italy. Also, there are actions to delever and regain financial flexibility. We believe that this plan, as I was saying, is in the right direction, and we decided to show our support to it by participating in the mandatory convertible.
Thank you very much.
Thank you, Mandeep. Next question, please.
Our next question comes from the line of Luis Prota from Morgan Stanley. Please go ahead.
Yes, hello. Two questions, please. First is on Brazil. When should we expect investment for growth to slow down in that country and maybe margins to pick up again? In other words, do you still see growth opportunities in that market going into 2014? Which are those growth opportunities? Should we expect top-line acceleration going into next year? Excuse me. The second question on Spain. With the big tariff cuts that we saw in the fourth quarter 2011, then launching Fusión in the fourth quarter 2012, and with customers progressively migrating to the new tariffs, should we expect a big delta in terms of year-on-year growth in the fourth quarter revenues in Spain, thanks to an easier comparison in terms of average pricing. Do you see, you were mentioning in the presentation some positive evolution in KPIs, thanks to the new tariffs launch in September.
Can you elaborate a bit more on what are you seeing there? Thank you.
Hi, Luis. This is Santiago. On the Brazilian question, two observations. One is that we manage Brazil for growth and transformation. Growth in the better part of the mobile world, where we're making, we think, good progress, and our margins ought to be stabilizing at a very sensible and healthy level going forward. The transformation part comes from the transformation of the fixed line, in which we have longer period, longer duration investments that are being made, especially in fiber, that are going to be slower to bear fruit, but that we think will eventually prove for themselves to be the right things.
We will continue to invest in the Brazilian business in 2014, although the final numbers have not been put together yet, because we do perceive that there is a lot of value in transforming the prepaid onto the postpaid base and accessing the data opportunity as we have been doing this year.
Thank you for your question, Luis. I think that with regards to how we're seeing the offer, the market now is moving towards increasing the value of the offer, so what we call value for money, and price repositioning is actually expected to be less intense, and we are seeing that already from September. I think that when you ask about the repositioning, we believe it's pretty much done, and we're not seeing any new repositioning. In fact, we have seen very much stability in that, and I have a lot of details I could give you off the line. Regarding the new commercial portfolio, as you know, we have focused a lot on two items. One, the convergent offer, and the second one in the only mobile offering.
In convergent arena, including 4G in all Fusión products, including TV, meaning all Fusión fiber bundles are increasing mobile minutes allowance in the bundle. That is already showing an increase in the take-up, especially when you look at the fiber, which is not only since September doing really well, but just to anticipate that we have had record fiber net adds in October compared to September. When you look at mobile-only space, we believe we have completed the portfolio with the Movistar 20. As you know, it's also getting 4G, including 4G also in the Movistar Total, the EUR 35 offer, and removing the mobile commitment in all the new and existing customers, and also the SIM lock. Another thing that might be interesting for you is we have improved the handset financing program, so we don't have any financial cost to customer, and we have a better pricing.
With regards to trends, we believe revenue trends are to continue into the fourth quarter. We have seen, as in previous quarters, we said in previous quarters, the positive impact of the loyalty program already phasing off. In the third quarter, the impact is smaller than in previous quarters. This impact probably will be diluted, as we already stated, when we start the comparing on like-for-like basis. I hope I covered all the questions.
Yeah. Thank you very much.
Thank you.
Thank you, Luis. Next question, please.
Our next question comes from the line of Fabián Lares from JB Capital Markets. Please go ahead.
Hi, good afternoon. Thank you for taking my questions. With regard to the Fusion evolution in Spain, I would like to know a little bit more with regards to what the tendency has been with clients demanding, if any, the offering more in between, if there is demand for this, and if you're thinking about doing something about this, given that you are positioned both in the 10 MB range in ADSL and in the fiber to the home 100 MB range. That would be my first question. With regards to the deployment of fiber to the home in Spain, I see that you're maintaining your target for 2015 of 8 million homes. Are you in any way, shape, considering that this target could fall short if the dynamics or the costs should change, or if in the review by the CNMC, new obligations are made on fiber access?
Thank you very much. Let me start with the first question. I think you know what the evolution of Fusion has been so far. Continues being the pillar of our offering here in Spain. We have reached to the expected levels of total customers with the 2.6 million at the end of September. Also we are seeing, as Ángel and Pablo mentioned earlier, that we have the right mix with regards to the new upselling customers in the gross adds. When you ask me specifically about Fusion Mini or the lower end of our offer, we're seeing limited impact. At the moment, we have more than 66% of our convergent gross adds opting for the standard Fusion products, or if you look at from the customer base, 10% would be Fusion Mini, and the rest would be at 90%.
Again, I would highlight, like I would always continue to highlight, that the fiber continues to show strong commercial traction, and we expect to accelerate deployment into the fourth quarter. We believe there's a strong upside potential. At the moment, we have around 12% of Fusion customer in fiber bundle, so you can see what the potential upside is. I pointed out that the third quarter had a strong net adds of 63,000 versus 59,000 in the second quarter, and anticipated that October had a record fiber net adds at the moment. I think that in terms of the fiber plan, we have committed greatly to our established 8 million households by 2014. Sorry, 2015. Always, we are happy to evaluate based on the take-up and the regulation situation. We believe we are on track and doing quite well there.
Thank you. Fabián, next question, please.
Our next question comes from the line of Akhil Dattani from JPMorgan. Please go ahead, sir.
Yeah. Hi, good afternoon. Can I ask two questions, please? Firstly, on Spanish Mobile. If you look at the CMT data that's been provided over the last year, we seem to have seen quite a strong improvement in the net add momentum. The market was losing about 300,000 customers a month at the beginning of the year. Now the market seems to be relatively stable. Just quite keen to understand from you what you feel is driving that change, and whether within that, you think there's any signs that either from this or any other metrics that you seem to be tracking, whether you feel that there is signs here that economic or customer spending behavior is now starting to inflect. Secondly, just in terms of the whole theme of consolidation.
If I understand correctly, a couple of quarters ago, the suggestion or the feeling from yourselves was that the Irish deal would close by year-end. I guess just keen to understand if you're surprised that the deal has gone to phase 2, and whether you see that have any significant implications. From there, any other color and commentary around when you expect the Telefónica and E-Plus review to be completed, would be useful as well. Thanks.
Okay. If I start with this first question, on the mobile trading environment, the contract net adds are still a concern for us due to the number portability deterioration, which is a result of a strong competition in the quarter. The Spanish market, as we are seeing it, is about convergence, and we believe we have a strong position there. With the launch of Movistar 20, we believe we have filled the gap at the medium level, and now we address the customer needs with a complete and competitive portfolio, we believe. Additionally, as you know, we have enhanced our Only mobile portfolio, and we are giving more value for the same price. We are seeing positive preliminary results in October, and overall, we believe we have a very complete offer there.
With regard to the macro environment that we are tracking very closely, we are seeing a very slight improvement in some of the macro parameters. To start seeing a positive impact on our business, we believe it is necessary that the disposable income show a recovery trend that would foster the private consumption, which is so key for our sector. We believe that recover consumption to the pre-crisis level will take much longer. In the meantime, what it is clear to us is the company is very well positioned with the fiber and a very solid convergent offer to capture the growth when those households start getting more consumption or they can improve in consumption levels. Hope this is answered.
Yeah. Thank you.
Okay. Taking your second question on the consolidation and the Irish and German transactions, we are not surprised that the Irish one went into phase II. That could happen. This, as you know, is being headed by Hutchison Whampoa being the buyer. They have submitted the case. I think that we think they have a solid case for approval because it really makes sense in the Irish market to consolidate based on the fact that the joint entity will have a more financial power to invest more heavily and more rapidly, and therefore, to increase competition on that market. Exactly the same case apply for the second one, for the German transaction that we are heading as being the buyer in the European Commission.
Our case in German, I think, is very solid in terms of presenting a joint entity that is going to be a much more stronger third player and therefore being able to compete more fiercely and more intensively with probably the best or one of the best mobile networks in Germany, and therefore, be much more competitive, namely on the SMEs and corporate market. We are not surprised things are going on track. We keep having the same message. There is no room for so many players in Europe. Therefore, consolidation makes sense. I think now it's to the European Commission to rule and to finally clear transaction when the time is convenient. Everything is on track. Therefore, both transactions are going into the direction that was foreseen when structured.
Thank you, Akhil. Next question, please.
Our next question comes from the line of Giovanni Montalti from UBS. Please go ahead. Our next question comes from the line of Giovanni Montalti from UBS.
Sorry, good afternoon. May I ask you if you have had discussions with the Brazilian regulator to assess the viability of a market consolidation there? Thank you.
There are no discussions going on at the official level. Everyone is using their spreadsheets and understanding what might happen there are no official or unofficial open conversations about that. We can all make our assumptions. We certainly think it is not impossible that the market eventually consolidates, there is no movement at this point on that direction.
Sorry, should you have a time horizon for such a scenario? Would you look for 2014, 2015, or do you think there is still a lot that has to happen before we can see a materialization of a consolidation in the market? Thank you.
We have no time horizon on anything like that. The rules are quite clear. The laws have been written, they could be changed, but certainly not by us. That is not something we think is necessary for us to continue doing business the way we are. Should conditions change, we would have to adjust our behavior, but so far, we think that the rules are quite clear.
Thank you, Giovanni.
Thank you.
Next question, please.
Our next question comes from the line of Justin Funnell from Credit Suisse. Please go ahead.
Two, three quick questions, please. I think Jazztel was recently saying that it was so encouraged by its experience with its fiber JV with Telefónica that it would like to do more than the original 3 million shared households. Are you open to Jazztel extending their footprints, given that you seem to be actually perfectly capable of going to 8 million on your own? Secondly, obviously you're very successful at deleveraging, and that starts to raise question marks on where you're heading over the next 12, 24 months. Do you want to continue to delever so fast, or could we start to think about dividends rising from the current level at some point? Is a dividend increase totally off the table? Thirdly, I think Mr. Alierta met with the president of Italy recently. I was wondering if there were any takeaways.
Does Telefónica feel welcome to proceed in Italy?
I start with the Spanish question. With regard to our current agreement, we are quite happy with it and happy with our commitment on initial EUR 3 million. Obviously, if there is a need, we will be happy to discuss.
Regarding debt reduction, deleveraging, and dividend, well, we have already achieved our 2013 leverage targets. We keep committed to continue in the direction of deleverage, while at the same time strengthening our operations and fostering growth. As such, for instance, we have structured, as you know, the E-Plus transaction in such a way that it would improve leverage metrics, while at the same time, we are expanding and strengthening our position in Germany. We do not have any urgency regarding execution of new deals for any deleverage. We have many opportunities to keep improving if that is the case. Regarding dividend, after we suspended it in 2012, we resumed shareholder remuneration. 2013, we have set a firm commitment of €0.75 in cash. We already paid €0.35. The second tranche is going to be paid in cash in the second quarter next year.
At this stage, we are not announcing a new remuneration policy because we prefer to be prudent. Our strategy is to keep an attractive shareholder remuneration, and to have a reasonable level of debt. This future dividend will be announced when we do the full year results presentation the beginning of next year. Regarding Italy, well, what I can say is that we have proven to be a loyal and stable shareholder of Telecom Italia. We believe that it was important, as I was saying before, to provide stability to Telco as reference shareholder. We have shown our commitment by investing even in last night's mandatory convertible. We are supporting new management's plan, which is showing in very few weeks, clear ideas, and is showing execution, and it has moves which we believe are in the right direction.
We are supportive of Telecom Italia, and we feel that we have been a loyal shareholder in the company, and we will continue to be.
Thank you.
Thank you, Justin. Next question, please.
Our next question comes from the line of Robin Bienenstock from Sanford C. Bernstein. Please go ahead.
Yeah, thanks very much. Two questions, if I may. First, I'm just wondering if you can tell me, Brazil specifically, but Latin America more generally, where I saw margin weakness, how much of that is being driven by increased commercial investment, and how much of that is being driven by wage inflation? To what extent do I have to worry that you're suffering from the effects of inflation in Latin America? Separately, are you worried at all that Telco could dissolve as early as June 2014? Do you think that would be a risk or a potential problem for you? Thanks.
Hi, Robin. This is Santiago. If I understood your question correctly, you were asking about the breakdown of wage inflation and the other costs. I'd say it's about 50/50, although it is very uneven depending on the country you're talking to. The further you go into the more inflationary economies, the more difficult it is to pass costs on to prices. More than happy to entertain further details offline.
Thanks.
Hi, Robin. Regarding Telco, when we renegotiated the agreement back in September, none of the shareholders requested a demerger. We set up a window in June 2014. The shareholder agreement expires in February 2015. We don't know what is the intention of the partners. My personal assumption would be that they would rather look at February 2015 than June 2014.
Would it be a problem for you if they change their mind?
No. I don't think it would be a problem.
Thank you.
Thank you, Robin. Next question, please.
Our next question comes from the line of Frederic Boulan from Nomura. Please go ahead.
Hi, good afternoon. Two questions from me. Firstly, on the U.K., if you could explain to the full year benefit on the EBITDA of the change in handset accounting. Handset revenues were up about EUR 100 million in Q3 year-on-year. Is this a good guide of the positive impact on EBITDA for this quarter, and therefore suggesting a full year run rate of EUR 400 million or EUR 500 million non-cash? Maybe we can ask the question the other way, looking at how much negative working capital we should expect for the U.K. business this year and next. Secondly, just on Venezuela. If you could just update us on how much cash you have there in EUR, and just to confirm that you use the rate of 8.5 bolivar per EUR in this calculation. Thank you very much.
Hi, Frederic. If I understood correctly, and I can explain our EBITDA performance in the U.K., and specifically because of Refresh, is right now impacted by two important issues. Of course, the launch of Refresh and our commercial decisions to move volumes into the direct channels. As you understood correctly, the Refresh proposition allows our customers to change the device whenever they want without penalty and enhance our competitiveness in the market. That, at the same time, has an accounting impact for the full recognition of handset sale up front instead of a monthly recognition into the MSR as part of the tariff. Also, and at the same time, as we are moving more volumes to the direct channel, you well pointed out that on one hand improves the efficiency of our distribution model, but also the direct channels have higher upfront cost than the indirect.
Going forward, and I think I said this in the previous quarter, we expect that the positive impact of Refresh will normalize, and we will just see the impact of moving volumes to direct channels increasing efficiency of our distribution model.
Just to clarify, can you just confirm if the numbers I mentioned, EUR 400 million full year, is a good ballpark?
I think that also regarding your question of the Refresh effect on the working capital, and as I said last quarter, we expect to factor the handset receivables as we've done in other quarters. The effect on revenues that we have disclosed goes down to the EBITDA levels, as we also pointed out in the previous quarters. We will see higher upfront of direct volumes as we are moving more into the direct channel. I hope it is clear.
Okay, thanks.
Regarding Venezuela, our cash position in EUR equivalent at the official exchange rate amounts to EUR 2.4 billion. This figure is not included or has been excluded of the liquidity figure that I previously presented on slide number 21 of the presentation.
It is included in your net debt number?
It is in the net debt number.
Okay. Thank you very much.
Thank you, Fred. Next question, please.
Our next question comes from the line of Georgios Ierodiaconou from Citi. Please go ahead.
Yes, hello. I've got two questions, please. The first one around Telco, I was wondering regarding the conversion of the class C shares to voting shares. If I'm not mistaken, you have not yet asked AGCOM for approval. Is there a reason for that? Should we expect that will happen between now and January? Based on the conversations you had with them, will there be any problems?
For the status quo at Telco to continue after the conversion. Secondly, on hybrids, can you give us an idea of the capacity you have left to raise hybrids after the E-Plus transaction? Whether you would be looking at this option in case of acquisitions and if you would make any adjustments to your leverage ratios to reflect the use of these hybrids. Thank you.
With regards to Telco, we have not started the discussions with authorities regarding the potential conversion of the C shares, the non-voting shares, into voting shares. We have just, as we announced in September, announced a transaction which has gradual steps. Those gradual steps are at Telefónica's option, obviously subject to regulatory approvals. They are not an obligation. As we see fit and depending on the developments, we will be requesting the possibility to exercise such options. I can confirm that as of now, we have not entertained discussions with the authorities towards that conversion. With respect to hybrids, we have issued this EUR 1.75 billion transaction as part of the financing of the E-Plus transaction. At the time of the transaction, we announced that 50%-65% of the financing of the transaction would be done via hybrids.
We still have, therefore, around up to half a billion regarding this transaction that could be issued in other currencies, potentially different from euro. We are monitoring when would be the right market windows to go ahead. Apart from this, we are not contemplating at this stage any other hybrid issuance for the time being.
Thank you, Georgios. Next question, please.
Our next question comes from the line of Will Milner from Arete Research. Please go ahead.
Thanks. Got a couple of questions. Firstly, on the OIBDA and free cash flow composition. I think in the quarter, you quoted 50% organic OIBDA growth from Venezuela and 25% in Argentina. Every quarter, I guess it seems as though those two operations contribute more and more to your quoted organic trends. I just, in that context, wouldn't mind understanding how much cash you've been able to repatriate from those two markets over the last 12 months. I know Venezuela, I think, is zero. I'd like to get a view on both of those. Secondly, internally, do you consider those cash flows when you strike the dividend that you have struck? The second question is just a bit on Mexico.
AMX obviously called out economic weakness in that market. I wonder if you could give us your thoughts on the outlook in Mexico and the prospects to returning to OIBDA growth there. Thanks.
This is Ángel Vilá. Regarding the first question, we have not repatriated money from Venezuela or Argentina so far this year. Repatriations from Latin America in the nine months have amounted to EUR 757 million, up from EUR 677 million last year. For the full year repatriations, we are aiming over EUR 2 billion, in line with last year. When we analyze the coverage of our dividend, we do not need the free cash flow from Argentina or Venezuela to be able to pay such a dividend.
This is Santiago. On the Mexican outlook, it is true that the market is a bit weaker than it was, nothing substantial, but a bit weaker. We do not attribute to market weakness the numbers that we have. We are continually repricing our prepaid base. We are not done yet, but we will in the next five to six months, I hope. We are all expecting the details of the constitutional reform that is now becoming secondary law, and this is going to be substantial for the future developments of the Mexican market. We do expect to make significant progress in the wholesale market over the next couple of months. I think all these three things together should make us be hopeful that we will return to positive growth sometime next year. Thank you, Will. Next question, please.
Our next question comes from the line of James Ratzer from New Street Research. Please go ahead.
Yes, thank you very much. I had two questions, please. The first one was just going back to the question earlier on the U.K. business. I was wondering if you could give us just two specific numbers, please. In the Q2 presentation, you said that the margin uplift from the new commercial model was 2.3 percentage points in Q2. Could you please just give us the number that is for Q3? Secondly, you also reference in your documentation a one-off in Q3 last year, a positive of the Court of Appeal ruling. Could you quantify how much that was, please? Then secondly, just had a quick question on China Unicom. It was a small investment you made recently. You increased your stake. I was wondering if you could just explain the rationale for that transaction, and is that still a core holding? Thank you.
Thank you, James. I think that continuing with the question earlier, to confirm that the effect on revenues that we have disclosed goes down into EBITDA, and that obviously we need to consider the higher upfront cost coming from the direct volumes.
The 3.3 point margin in Q2 that you quoted, do you have that in Q3, please?
I think there's a combination of the two effects, and as you can imagine, there are maybe moving parts in this moment, so I cannot disclose that number now.
Okay. Did you have the Court of Appeal ruling from Q3 last year, please?
Hi, James. This is Pablo. We will give you this data later on the telephone. Thank you.
Okay. Thank you.
Regarding China Unicom, in September, we increased from 4.99% to 5.02%. The rationale is that we were diluted involuntarily due to the issuance of new share capital of China Unicom due to conversion of some convertible securities. We were just readjusting to the previous situation. On November 4th, our percentage has decreased to 5.01% due to a new exercise of options. For us, and looking at potential future scenarios to hold more than 5% would have better tax treatments than if we were to be below 5%.
Okay. That's clear. Thank you.
Thank you, James. Next question, please.
Our next question comes from the line of Jonathan Dann from Barclays. Please go ahead.
Hi there. It's a question around bitstream regulation in Spain. Could you just explain what's happening? I think there's something going on with Digital+ as well. Also, I'm slightly confused how the deal with Yoigo operates. Then a second question, has anything moved on renegotiating debt in Colombia? Thank you.
Well, with regards to Yoigo, if I may start, the program goes in four parts. I don't know if you want me to expand a lot. First of all, we have an LTE rollout. This is purely a shared radio access over Yoigo's LTE network on the 1800, with the national roaming agreement until Telefónica deploys its own network, which by the way, we are deploying. As you know, we also have a wholesale agreement with them on the renewal of the current national roaming agreement until 2016. We have a retail agreement to commercialize Fusión through Yoigo and Yoigo distribution channels. We have also a portion of tower sales.
That is functioning well. We believe that if you refer to the claim of two of our competitors, the regulator had that the way to open procedure is what they've done at the beginning of the week. This should take probably a year, and we will explain to the regulator why this is a commercial agreement that makes sense for customers. With regards to the current regulatory framework, that regulatory framework is providing for fiber specifically, that for speeds above 30 megabytes, Telefónica competitors have to deploy their own infrastructure, which had established the asymmetric obligations of civil infrastructure access and sharing symmetrical fiber verticals in buildings. The opening of that guarantee the ability of any investor to undertake new projects.
According to market trends and the outcome of the inquiry to the market, Telefónica expects that the CNMC will confirm the limits of the current offer.
Regarding Colombia's debt, the big transaction that led to debt reduction took place last year when we combined the fixed and the mobile activities, some of the liability was reduced. We continue to see, as I said before in the presentation, very good growth in the company, we continue holding talks with the partner, the Colombian government, to see what's the best way to capitalize and exploit that growth and potentially provide them some liquidity. Those talks are ongoing, there is no progress to report, when there would be, we would report that.
Thank you, Jonathan. Next question, please.
Our next question comes from the line of James McKenzie from Fidentiis. Please go ahead.
Just looking at churn, I wonder if you could give us any qualitative feeling as to where churn on your Fusion product is. Is it below the 1.5% that you're reporting on fiber, or is it closer to the 1.8% on contract mobile? Its tendency, if it's going up or if it's going down. Just looking on your cost base in Spain, I see that subcontract costs continue to fall very sharply. Now we've now lapped the elimination of subsidies. I was wondering, one, what exactly is driving this in the third quarter alone? Are we going to continue to see big year-on-year quarterly reductions going forward?
Thank you, James. With regards to your first question, yes, the churn is way below those levels, and with regards to the anniversary of Fusion, we're not seeing any issues at all. With regards to the second question, I think that what we can say is that the OIBDA margin will be maintained high, and that on the back of the continued effort and the cost discipline that you know that we're able to do in the operation. We expect it to be impacted by higher trading activity and some more commercial push into the fourth quarter. The sustainability of the margin going forward, actually, I can give you many more of the measures that we're going to take and some of the benefits. We continue doing simplification of call centers.
We already have 64% of traffic in shore and more than 70% of positions are already transferred to the regions. We are optimizing the distribution model. We're focusing a lot in there, and we continue doing insourcing in new capabilities.
Thank you, James. I think we have time for just one question more, please.
Our last question comes from the line of Ivón Leal from BBVA. Please go ahead.
Yes. Good afternoon, everybody. Two very quick clarifications on Spain, actually. I think you've said that you've seen success on the mobile-only Movistar 20 tariff. I don't know if you're also being successful in attaching more than two SIMs per Fusion contract. Okay. The second one is on the loyalty program, as you mentioned. I think you mentioned the impact on year-on-year growth is ending on the fourth quarter of this year or reducing. Am I right to say that reduction of that impact is going to have a negative effect on year-on-year revenue growth?
Okay. Thank you, Ivón. First of all, to confirm that what we call Fusionitos or those additional lines are now 1 million, and the trend continue being positive into the fourth quarter. What we are seeing is correct, and you see that. With regards to the loyalty, I think that there's two issues we need to take into account. First of all, we said this in the previous quarters, the positive impact of the loyalty program is fading off. The third quarter impact is smaller than in previous quarters, and we believe also that this impact will be diluted as we start comparing a more like-for-like basis. We are preparing, as you well mentioned, the launch of a new loyalty program, which is called Por Ser Movistar, with lots of benefits for our customers, which will have a positive effect in customer satisfaction and churn evolution going forward.
We believe that to be positive.
Thank you very much, ladies and gentlemen, for your participation, and we certainly do hope we have provided some useful insights for you. Should you still have further questions, we kindly ask you to contact our investor relations department. Good afternoon.
Telefónica's January, September 2013 results conference call is over. You may now disconnect your line. Thank you.