Ladies and gentlemen, thank you for standing by, and welcome to Telefonica's January September 2013 Results Conference Call. At this time, all participants are in a listen only mode. Later, we'll conduct a As a reminder, today's conference call is being recorded. I would now like to turn the call over to Mr. Pablo Geron, Head of Investor Relations.
Go ahead, sir.
Good afternoon, ladies and gentlemen. Welcome to Telefonica conference call to discuss January, September 2013 results. And Pablo, you don't have Investor Relations. And before proceeding, let me mention that this document contains financial information that been prepared under international financial reporting standards and that this financial information is not audited. This presentation may contain announcements, but constitutes forward looking statements, which are not guarantees of future performance and involve risks and uncertainties.
And that certain results may differ materially from those in the forward looking statements as a result of various factors. We invite you to read the complete disclaimer included in the first page of the presentation, which you will find in our website. We encourage you to review the available disclosure documents filed with the relevant securities market regulators. If you don't have a copy of the relevant press release and the slides, please contact telefonica's Investor Relations team in Madrid by dialing the following telephone number 3,491, 48,287, double 0. Not now let me turn the call over to our our Chief Financial And Corporate Development Officer, Mr.
Angeliki, who will be leading this conference call.
Thank you, Pablo. Good afternoon, ladies and gentlemen, and welcome to Telefonica as 2013 third quarter results conference call. Today with me are the members of the Executive Committee, So during the Q And 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 First, Q3 confirmed the acceleration of year on year organic revenue growth for the 2nd consecutive quarter. With sales up to September turning positive 2.04 percent.
2nd, organic OIBDA stabilizers. Topline growth, efficiency gains and cost control have proven to be successful. Limiting OIBDA margin erosion 2.2 to 0.2 percentage points despite intensified commercial activity. The operational improvement together with strong financial execution allowed free cash flowex spectrum to remain stable year on year. In the 1st 9 months, despite FX headwinds and changes in the perimeter.
The 3rd key strategic pillar is on balance sheet improvement. Net debt decreased substantially in the quarter to 1,000,000,000 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 1,000,000,000 in playing a 14,000,000,000 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 35 cents were already paid on Wednesday.
Let me now start with a summary slide 4. Quarters at 2.1percenttopping14.1000000000. OIBDA reached 1,000,000,000 and reduced its quarterly decline to 0.3% year on year, while profitability stood at 33.3 percent, 0.8 percentage points lower than a year ago, impacted by commercial investments linked to revenue streams. From a cash generation standpoint, flow stood at 1,000,000,000, excluding spectrum virtually flat year on year. It is important 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 5, free cash flow generation before spectrum payments remains stable year on year in the 1st 9 months at 1,000,000,000, absorbing the mentioned adverse FX 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 directly to cash. Free cash flow reached almost €2,000,000,000 in the third quarter and €3,400,000,000 in the 1st 9 months after spectrum.
Earnings per share up to September was 0.70. And free cash flow per share totaled 0.75 euros, both providing strong comfort about our 0.70 EUROCI's dividend commitment for 2013. Slide 6 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 8 percentage points year on year to 25%.
As highlights, I would like to point out that first, portal e 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. And second, that our commercial proposition allows us to capture all profitable growth opportunities. Our increased investments in Utah Broadband, proof 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 7, 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 fairly robust mobile data. In addition, Telefonica incident 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 50 basis points in OIBDA.
Good progress on profitability in the 3rd 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 have grown 2% and OIBDA 0.7% versus the 1st 9 months of 2012. Or plus 3.9% and 0.9% respectively in the 3rd quarter. Please turn now to slide number 8 for the first review of some initiatives we are adopting to increase the benefits of our scale. On top of local and regional efficiency measures, Telefonica Global Resources 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 LTM fiber. Key tools to capture market growth and in the virtualization process that further contributes to 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, 1400 physical servers, 6 data centers closed, and more than 7 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 9, I'd like to talk about progress in our successfully established products and services in new markets. In August, Telefonica was awarded with a £1,500,000,000 contract to deliver smart meter communication services in the UK. 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 Tanderankasha Bank has been cleared by the European Union antitrust authorities paving the way for 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, Venezuela, in October in Brazil and in November in Peru. Meanwhile, in the UK, we launched To Go, our unique communication service, a commercial push with telephonic UK, UK's B More dog campaign reaching 161,000 active users. Lastly, we have made investments in partnerships like Grubs deep interest 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 percent of market growth in the contract segment this quarter, reaching 1,500,000 net adds. The highest quarterly fever 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 15000000. On the fixed services, commercial turnaround continues with better operational momentum under print by improved quality and offers across 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 2 percentage points negative impact from regulation. In the fixed business, revenue acceleration stems from the volatility on corporate IT projects and some specific factors negatively affecting traffic trends this quarter. Finally, profitability 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 some commercial momentum.
In Argentina, best ever mobile net adds fueled top line acceleration while OIBDA trend also improved on easier year on year comparisons. And finally, in Chile, we're also posting enhanced trends as we shift commercial data centric offers, are driving KPIs recovery, underpinning solid revenue and OIBDA growth. Turning to slide number 14. In Columbia, 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. Last Lee in Venezuela, increased usage is the main driver of the outstanding revenue performance with voice traffic, temping 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 fiber. We launched auto refresh in all direct channels in the UK, and we further pushed on the auto blue tariffs in Germany. In terms of financials, top line performance improved sequentially despite a higher negative impact from regulation. And profitability expanded year on year in organic terms for a 4th 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. MobiStar Fusion 1 year on consolidated as game changer in the Spanish market, and one of the pillars of our commercial strategy reaching 2,600,000 customers. It is especially remarkable that 60% of gross 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. Potentially is huge, as reflected in our target to reach 8,000,000 home passed by 2015 if current regulation is maintained. In mid September, Telefonica Espana enhanced the value of its offer leveraging on its differential advantages, namely fiber, 4 g and TV, widening the quality gap of its portfolio. Let me note that first positive signs of improved trading were already seen in October 1st week of November. Turning to slide 17, we will review Telefonica Espana Financials.
Total revenue 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 3 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 continue 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 distributing further savings in the coming quarters.
On CapEx and 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. Telefonica 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. 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 modem. 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 telephonic and Germany, please turn to slide 19. With LTG green interaction and 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 3 times higher data usage.
Main metropolitan areas are already covered as we are doubling LTE related CapEx year on year. Oil 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 declines stabilized. At the same time, OIBDA and OIBDA margin evolution reflect increased commercial efforts.
The announced transaction to acquire ePlus is on track. KPN shareholders voted in favor and we are confident merger cleanings 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 a market. Let me now move to the financial side on slide 20. Telefonica continues to harvest the benefits of bold actions towards the leveraging.
Reported net debt as of end of September stands at 1,000,000,000, already below 2013 year end target, on both net debt figure and leverage ratio. If we were to include announced divestment spending closing, as Czech Republic and Ireland, but we were to exclude the hybrid linked to the Plus acquisition, net debt would stand at 1,000,000,000 Let me summarize how we have reduced a €7,500,000,000, our net figure compared to December 2012 net debt adjusted by the Venezuela devaluation. Half of this figure, 1,000,000,000 stems from free cash flow and FX savings. And the other half, €3,700,000,000 comes from portfolio and financial management. On slide 21, I would like to emphasize how we continue smoothing our maturity profile.
So in 2014 2015, debt maturities are slightly above €5,000,000,000 per year. We are also increasing our average debt life to close to 7 years, more than half year longer than in December 2012, all contributing to an outstanding liquidity cushion. Telefonica's extended and diverse fight financing activity year to date has been an important pillar in reinforcing our financial flexibility. We have raised in excess of €10,000,000,000 including hybrids. Again, this quarter, I would like term off 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 towards the stabilization. Free cash flow posted a strong performance around 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. And now we are ready to
1 to register question and 2 to cancel. We'll kindly ask you to ask a maximum of two questions per participant. And if possible, we'll manue not to use your cell or hands free phone. There will be a short silence while questions are being registered. Our first question comes from the line of Singh Mandeep from Redburn Partners.
Please go ahead. Our first question comes from the line of Singh Mandeep from Redburn Partners. Please go ahead.
Hi. Can you hear me? Okay. My first question, 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 Italian management said last night that you participate in the transaction and therefore, have increased your exposure to telecom italia? That's the first question. And the second question is, can you sort of give us a bit more on your medium term intentions regarding your TI position. Thank you.
Yes. We participated, last night in the mandatory Convertible issued by telecom italia. We are indirectly the largest individual shareholder of TIA, and we decided to express our support to the new plan issued by Mr. Padwan on on his team. The amount that we invested in the mandatory convertible was €103,000,000 that allows us to mitigate dilution of our indirect stake And for this, however, was granted by our telco partners just for this specific purpose.
With regard to to intentions in telecom Italia, and and as we said in 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. So our final goal as the largest individual shareholder is to support the management to unlock TIA's value potential. Yesterday, TIA, 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 deliver and regain financial visibility.
And we believe that this plan, as I was saying, is in the right direction, and we decided to shore some to it by participating in the mandatory convertible.
Next question, please.
Our next question comes from the line of Luis Fruta 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? Or in other words, do you still see growth opportunities in that market going in 2014, which are those growth opportunities? And should we expect top line acceleration going into next year. Excuse me. And the second question on Spain with the big tariff cuts, that we saw in the fourth quarter 2011 and then launching Fusion 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 4th quarter revenues in Spain.
Thanks to initial comparison in terms of average pricing. And do you see you were mentioning in the presentation some positive evolution KPIs, thanks to the new tariff launch in September. Can you elaborate a bit more on what are you seeing there?
Hi, Louis. This is Santiago. On the Brazilian question, 2 observations. 1 is that we manage Brazil for growth and transformation, growth in the part of the mobile world where we're making, we think, good progress and core margins ought to be stabilized at a very sensible and healthy level going forward. And 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.
So we will continue to invest in the Brazilian business in 2014, although the final numbers have not been put together yet because we do receive 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 the with regards to how we seen 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 in in from September. I think that when you ask about the the repositioning, we believe it's pretty much done, and we're not seeing any any repositioning any We have seen very much stability in 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 2 items. 1, the convergent offer and the second one in the only mobile offer In convergent arena, including 4g in all Fusion product, including TV, meaning all fusion fiber bundles, and increasing mobile mini allowance in the bundle. That is already showing an increase in 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 completed the portfolio with the movie star 20, as you know, is also getting 4g, including 4g also in the movie star the offer and removing the mobile commitment in all the new and existing customers and also the SIM log. Another thing that might be interesting for years, 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 into the fourth quarter. And we have seen, as in previous quarters, we said in previous quarters, the positive impact of the loyalty program already facing off. And in the third quarter, the impact is smaller than in previous quarters, and 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.
Thank you very much.
Thank you, Luis. Next question, please.
Our next question comes from the line of Fabian 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 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, if you're thinking about doing something about this, given you are positioned both in the 10 megabyte range, in ADSL and in the fiber to the home, 100 megabyte range. That would be my my my first question.
With regards to the deployment of fiber to the home in Spain, I see that you're maintaining your for 2015 of 8,000,000 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 c the CNMC new obligations are made on fiber access.
Thank you very much. Let me start with the first question. And and I think, you know, what the evolution of Fusion expense so far continues being the pillar of our offering here in Spain. We reached to, the expected levels of, total customers with a 2,600,000 at the end of the terminal. And also we are seeing as, as, Angela mentioned earlier that we have the right mix with regards to the the new upselling customers in the gross adds.
When you asked me specifically about, Fusion Mini or the lower end of our offer, we've seen limited impact. At the moment, we have more than 66% of our convergent gross adds of team for the standard Fusion products, or if you look at the, from the customer base, 10% would be Fusio and Mimi, and the the rest would be at at 90%. Again, I would highlight the like I would always continue to highlight that the fiber continues to show strong commercial traction and we expect to accelerate deployment into the 4th quarter. We believe there's a strong upside potential. At the moment, we have around 12% of Fusion customer in fiber bundles.
So you can see what the potential upside is. I pointed out, that the the 3rd quarter had a strong, adds made of 63,000 versus 59,000 in the second quarter and anticipated that October had record fiber net adds, at the moment. I think that in terms of the fiber plan, we have committed greatly to established 8,000,000 Households by 2014, sorry, 15, 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. Ariane, next question please.
Next question comes from the line of 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 and now the market seems to be relatively stable. So 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 And then secondly, just in terms of the whole theme of consolidation, if I understand correctly, a couple of quarters ago suggestion or the feeling from yourselves was that the Irish deal would close by year end. So I guess just keen to understand if you're surprised that the deal has gone to 2, and whether you see that have any significant implications? And from that, any other color and commentary around when you expect the Theft Dorsch and E plus review to be completed would be useful as well?
Thanks.
Okay. So if I start with this first question, on the mobile trading environment, the contract net adds are still a concern for us, deterioration, which is a result of a strong competition in the quarter. But 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 Twenty, we believe we filled the gap at the medium level. And now we address the customer needs with the complete and 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 have seen 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, 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 recovery consumption to the precrisis level will take much longer.
And 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.
Yes. Thank you.
Okay. Taking your second question on the consolidation and the Irish and, German transactions. We are not, surprised that it, the ISB 1 went into phase 2. I mean, that could happen. This, as you know, is being headed by, Hachin Sonuqua in the buyer.
They have submitted the case. I think that, we think they 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 more financial power to invest more heavily and more rapidly, and therefore, to increase competition on that market. And exactly the same case applied for the second one for the German transaction that we are hitting as being the buyer. In the European Commission. Our case in German, I think is very solid in terms of presenting a entity that is going to be a much more, strong, a stronger 3rd player, and therefore, being able to compete more fiercely and more intensive with probably the best or one of the best mobile networks in Germany and therefore be much more competitive namely on the SMEs and and corporate market.
So, 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.
And I think now it's to the European Commission to, to, to who and to finally, and to finally clear transaction when, when, when the time is, convenient. So everything is on track. And therefore, all both transactions are going into, into the direction that was foreseen when, when structured.
Thank you again. Next question, please.
Our next question comes from the line of Giovanni Muntali from UBS. Please go ahead. Our next question comes from the line
Sorry, good afternoon. May I ask you if you have had discussions with the Brazilian regulator to assess the viability of your market consolidation there?
There are no discussions going on to official level. Everyone is, using the spreadsheets and understanding what might been there, but 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, but 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 if we can see a materialization of a consolidation in the market.
We have no time horizon on anything like that. The rules are quite clear. The laws have been written, and they could be changed, but certainly not by us, And that is not something we think is necessary for us to continue to in business the way we are. So should conditions change, we would have to adjust our behavior But so far, we think that the rules are quite clear.
Our next question comes from the line of Justin Funnel from Credit Suisse. Please go ahead.
Yeah. So three quick questions, please. I think Jazztel was recently saying that it was so encouraged by its experience with its fiber JV with Telefonica that it would like to do more than the original 3,000,000, shared, households. So are you sort of open to just extending the the footprints given that you seem to actually perfectly capable of going to 1,000,000 on your own? Secondly, obviously, you've been very successful at deleveraging that starts to raise question marks on where you're heading over the next 12 to 24 months.
Do you want to continue to delever, so far? Or could we start to think about dividends rising from the current level at some point? Is a dividend increase totally off the table? And thirdly, I think, Hi, Mr. Elliot Metz with, president of Italy recently.
I was wondering if there are any takeaways, does does Telefonica feel welcome to proceed in Italy.
I start with the Spanish question. With regard to our current agreement, we we're quite happy with it and we're happy with our commitment on initial 3,000,000. Obviously, if there's a need, we will be happy discuss.
Regarding debt reduction,
deleveraging and and dividend. Well, we have already achieved our 2013 leverage targets. We keep committed to to continue in the direction of, of deleverage. While at the same time, strengthening our operations and fostering growth. And as such, for instance, we have structures in Oli plus transaction in such a way that it would improve leverage metrics while at the same time, you know, we are expanding and strengthening our position in in Germany we don't have any urgency regarding, execution of, new deals for any deleverage.
We have many opportunities to keep, to keep improving if that, if that is, if that's the case. Regarding after after we suspended it in 2012, we resumed shareholder remuneration 2015. We have set from commitment of in cash. We already paid, 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 shareholder remuneration, and to have a reasonable level of debt. So, this, future dividend will be announced when we do the full year results presentation in the beginning of next year. Regarding Italy, well, what I can say is that we have proven to be loyal and stable shareholder of Telecom Italia. We believe that it was important, as I was seen before, to provide stability To help our reference shareholder, we have shown our commitment by by investing even in in in last night's mandatory convertible.
And we are supporting, new management's plan, which is which is showing in very few weeks, clear ideas and and it's showing execution and it has moves which we believe in the right direction. So, you know, we are supportive of of of Telecom, Italy, 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 if I may. First, I'm just wondering if you can tell me Brazil specifically, but Latin American weren't 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? So to what extent do I have to worry that were actually, that you were suffering from the effects of inflation in Latin America. And separately, Are you worried at all that telco could dissolve as early as June 2014? And 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 cost So I'd say it's about 5050, although if you say very uneven, depending on the country you're talking to, before they go before they go into the more inflationary economy, more difficult it is to pass costs on to prices. But, you know, more than happy to entertain further details, on offline.
Regarding hi, Robin. Regarding telco, when we renegotiated the agreement back in September, no of the shareholders, requested the demerger. We set up a window in June 2014 And then, the shareholder agreement expires in February 2015. We don't know what is intention of of the partners, my assumption. My personal assumption would be that, they would rather look at February 2015 June 2014.
And would it be a problem for
you to change their mind?
No. No, no, I don't think it would be a problem.
Our next question comes from the
for me, firstly, on the UK, if you could explain as a full year benefit of the, on the EBITDA of the change in handset accounting. So handset revenues were up about 1000000 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 1,000,000 to 1,000,000 non cash. And then maybe we can ask the question the other way, looking at how much negative working cap we should expect for the UK business this year and And secondly, just on Venezuela, if you could just update us on how much cash you have there in euros and just to confirm that you use the rate of 8.4 5, fully evapor euro in this calculation. Thank you very much.
Hi, Frederic. If I understood correctly, And and I can explain our EBITDA performance in the UK and specifically because of refresh is right now impacted by 2 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, but that at the same time has an accounting impact for the full recognition of handset sale upfront 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 will point it out that, that or one hand improves the efficiency of our distribution model, but also, the direct channels have higher upfront, cost than 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, increased efficiency of our distribution model.
And just to clarify, can you just, confirming the increase I'm saying 4,000,000 for the year is a good move off.
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. And 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, higher up front of direct volumes as we are moving more into the direct channel. I hope it is clear.
Cash position, in euros equivalent that the official exchange rate amounts to €2,400,000,000. This figure is not included or has been excluded of the liquidity figure that I previously presented on slide number 21 off of the presentation.
So it is included in your net debt number?
It is in the net debt number.
Thank you very much.
Thank you, Fred. Next question, please.
Our next question comes from the line of Torto Sierra Khano from Citi. Please go ahead.
Yes. Hello. I've got two questions, please. The first one around telco and I was wondering regarding the conversion of the class C shares to voting shares. If I'm not mistaken, you have not yet ask the Carja for approval.
Is there a reason for that? And should we expect that will happen between now January. And based on the conversations you had with them, would there be any problems for the status quo at telco to continue, after the conversion. And then secondly on hybrid, can you give us an idea of the you have left to raise hybrids after the plus transaction, whether you would be looking at this option, in case of a physicians, and if you would make any adjustments to your leverage ratios to reflect the use of this hybrid.
With regards to telco, we have not started the discussions with authorities regarding the potential conversion of the CE shares, the non voting shares into into voting shares. We have just, as we announced in September a transaction, announced a transaction, which, has gradual steps. All those gradual steps are at telephonic adoption. Obviously, it's subject to regulatory approvals. They are not an obligation.
And as, and as we see feet and depending on the developments, we will be requesting, the possibility to exercise such options, but they can confirm that as of now, we have not entertained discussions with the authorities towards that that conversion. With respect to hybrids, we have issued, this €1,750,000,000 transaction as part of the financing of the plus transaction. At the time, of the transaction, we announced that 50 to 65 percent of the financing off of the transaction would be, done be a hybrids. We still have, therefore, around, you know, up to half a 1,000,000,000 regarding this transaction that could be issued in currencies, in other currencies, potentially different from euro. And we are monitoring when would be when would be the right, market windows to go ahead apart from this, we are not contemplating at this stage any any other high retitions for the time being.
Thank you, Julius. 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. And every quarter, I guess it seems as though those 2 operations contribute more and more to your, quoted organic trends.
And I just, in that context, wouldn't mind understanding how much cash you've been able to rate from those 2 markets over the last 12 months. I know Venezuela, I think, is 0. But I'd like to get a view on both of those. And then secondly, internally, do you consider those cash flows when you strike the dividend that you have struck? And then the second question is just a bit on Mexico, AMX obviously called out economic weakness in that market.
And 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 Javier. Regarding the first question, we have no repatriated money from Venezuela, Argentina, so far this year. Repatriation from Latin America in the 9 months amounted to 1,000,000, up from 1,000,000 last year. And for full year evaluations. We are aiming over €2,000,000,000 in line with last year.
When we analyze the coverage of our dividend. We do not need the free cash flow, from Argentina Venezuela to be able to pay such a dividend.
Vincent, this is Santiago. And on the Mexican outlook, it is true that the market is a bit weaker than it was and nothing substantial but a bit weaker. We do not achieve 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 6 months, I hope. We are all expecting the, details of the, of constitutional reform that becoming secondary law, and this is going to be substantial for the future developments of the Mexican market.
And we do expect to make significant progress in the wholesale market over the next couple of months. I think all of these three things together should make us be hopeful that we will return to positive growth, sometime next year.
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 UK business. I was wondering if you could give us just two for 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 numbers that that is for Q3? And secondly, you also referenced in your dot a one off in Q3 last year, a positive of the Court of Appeal ruling. Could you quantify how much that was, please? And then secondly, I had a quick question on China Unicom.
I mean, there's a small investment you made recently. You it kind of 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, 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 up front cost coming from the direct volumes.
So the 2.3. Margin in Q2 that you quoted, do you have that in Q3, please?
Think there's a combination of the 2 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 quarter of penal ruling from Q3 last year, please?
Hi, James. This is Pablo. We will we will give you this later on the telephone. Thank you.
Regarding China Unicom in September, we increased, from 4.99percentto5.0 2%. The rationale is that we were diluted in voluntarily due to the issuance of a new share capital of China Unicom due to conversion of some, convertible securities. So we were just re adjusting to the previous situation. And then on November 4th, our percent has decreased to 5.01% due to a new exercise of options. For us, an looking at potential future scenarios to hold, more than 5% would have a better tax treatments than if we were to be below 5%.
Our next question comes from the line of Jonathan Dan from Barclays. Please go ahead.
Hi there. It's a question around, bit stream regulation in Spain. Could you just explain, what's happening? I think there's some thing going along going on with Digital Plus as well. And also, I'm slightly confused how the deal with Yoygo operates.
And then a second question, has anything moved on renegotiating debt in Colombia?
Well, with regards to to Yogo, if I may start the the the program, it goes in four parts, and I don't know if if you want me to expand a lot. But the, first of all, you have we have NLP roll out and this is purely shared radio access over Yoyegor's LTE network on the 1800 with the National Roman Agreement until Telefonica deploys its own network, by the way, we are deploying. As you know, we also have a wholesale agreement with, with them on the renewal of the current, national roaming agreement until 2016. We have a real sales agreement to commercialize Fusion through Yoygo and Yoygo distribution channels, and we have also a portion of tower sales. That is functioning well.
And we believe that if you refer to the claim, 2 of our competitors. The regulator has that the way to open procedure is what they've done at the beginning of the and this to you take probably a year and we will explain to the regulator why this is a commercial agreement that makes sense for customers. With, in regards to the the current regulatory framework, that regulatory framework is providing a 4 fiber specifically, that for speeds above 30 megabytes, telephonic competitors have to deploy their own structure, which had established, the asymmetric obligations of civil infrastructure access and sharing cymetrical fiber verticals in buildings. So the opening of packs guarantee the ability of any investor to undertake new projects. Then.
And according to market trends, and the outcome of the inquiry to the market, telephonic aspects at CNMC will come from the limits of the current offer.
Regarding Colombia's debt and the big transaction that led to debt reduction took place last year when we combined the fix and the mobile activities. And some of the liability was was reduced. We continue to see, as I said before in the presentation, very good growth in the company, and we continue holding talks with the partner, the Colombian government, to see, what the best way to capitalize and exploit, that growth and potentially provide them some liquidity, but those talks are ongoing. And, there is no progress to report. And when there would be, we would report that.
Thank you, Jonathan. Next question, please.
Our next question comes from the line of James McKinsey. Pampi Dentis. Please go ahead.
I've got a couple of questions on
Spain, if I may. Firstly, 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 5% that you're reporting on fiber, or is it closer to the 1.8% on contract mobile? And and and its tendency if it's if it's going up or if it's going down. And then just looking on your, 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 And I was wondering what exactly is driving this in the third quarter alone? And are we going to continue to see big, year on year quarterly reductions going forward.
Yes, the churn is well 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, on, I think that what we can say is that the OIBDA margin will be maintained high on the back of, say, the continued effort and the cost discipline that, you know, that we're able to do in the operation, although, we expect it to be impacted by higher trading activity and some more, commercial push into the 4th quarter. This is this is an ability of the margin going forward. Actually, I can give you many more of the measures that we take and some of the benefits. But we continue doing simplification of call centers.
We already have 64% of traffic, insure, and more than 70% of positions are Rodrigo transferred to the regions, but we are optimizing the distribution model. We're focusing a lot in there and we continue doing in sourcing 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 Ybon Lial from BBVA. Please go ahead.
Yes. Good afternoon, everybody. 2 very quick clarifications on Spain, actually. I think you've said that you've seen success on the mobile only, Moistar 20 tariff. I don't know if you're also being successful on attaching more than 2 seams per, Fusion contract.
Okay. And the second one is on, on the loyalty programs you mentioned, I think this is 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 share on share revenue growth?
Okay. 1st, first, thank you, Ron. First of all, to confirm that what we call Fusion Itos. All those additional lines are now 1,000,000, and the trend continue being positive into the 4th quarter. So what we are seeing is is correct, and you see that.
With regards to the loyalty, I think that two issues we need to take into account. 1st of all, and we said this in the previous quarters, the positive impact of the loyal program is fading off. The 3rd quarter impact is smaller than in previous quarters, and we believe also that this impact will be diluted as we start comparing more like for like basis. We are preparing, as you will mention, the launch of a new loyalty program, which is called Poser Movistar with lots of benefits for our customers, which will have a positive effect in tumor satisfaction and a churn evolution going forward. So 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.
Telefonica's January, September 2013 results conference call is over. You may now disconnect your line. Thank you.