Ladies and gentlemen, thank you for standing by, and welcome to Telefonica's January June 20 13 Results Conference Call. If you'd like to ask a question, please press 1 for your telephone keypad. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Pablo Gueron, Head of Investor Relations.
Please go ahead, sir.
Good afternoon, ladies and gentlemen, and welcome to Telefonica's conference call to discuss January Jan 2013 results. I'm Pablo Leon, Head of Investor Relations. And before proceeding, let me mention that this document contains financial information that has been prepared under an international financial reporting standards, and this financial information is inaugurated. This presentation may contain announcements that constitute forward looking statements, which are not warrantings of future performance and involve risks and uncertainties. And that further results may differ materially from those in the forward looking statements as a result of various factors.
We invite you to read the complete disclaimer included in the first page of the presentation, which you will find in our website. We encourage you to review our publicly available show documents filled with the relevant securities market regulators. If you don't have a copy of the relevant press release and slides, please contact Telefonica's Investor Relations in Madrid by dialing the following telephone number, 3 4914-8287, double 0. Now let me turn the call over to our Chief Financial and Corporate Development Officer, Mr. Angel Mila, who will be leading this conference call.
Thank you, Pablo. Good afternoon, ladies and gentlemen, and welcome to Telefonica's first half twenty thirteen 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 telefonica has released today a strong set of results based on the execution of the management priorities established for 2013. Revenue picked up notably in the 2nd quarter, returning to positive growth year on year.
Led by a significant improvement in telefonica Latin America and mobile data. Our profitability continues to progress in the right direction, reflecting a limited year on year margin erosion and reflecting cost savings from efficiencies offsetting higher trading around smartphones. In the last 12 months, We have reduced our net debt figure by close to EUR 10,000,000,000, demonstrating our focus on deleverage. As a result, net debt declined to 1,000,000,000, including announced divestments pending closing. Our free cash flow posted an outstanding improvement in the second quarter to almost 2,000,000,000 and also EPS improved sequentially to the transaction announced 2 days ago will allow us to crystallize value in the German market as it will further enhance our growth profile.
Diversification, scale and cash flow without increasing our leverage ratios. Let me now start with a summary of key Reported year on year performance is negatively impacted by ForEx effect and changes in the perimeter of consolidation. FX deducted around 5.5 percentage points to revenues and OIBDA in both periods. We Revenues showed in the 2nd quarter and acceleration from first quarter year on year. Performance of 2.1 percentage points to reach EUR 14,400,000,000.
OIBDA reached EUR 4,900,000,000 0.7% over year on year in organic terms. Operating cash 6 months exceeding 1,000,000,000, 3.4 percent higher than a year ago organically, while net income surpassed 1,000,000,000 in the first half, roughly stable year on year. Year to date results are fully aligned with our internal expectations. So we do reiterate our outlook for the full year. On the next slide, free cash flow generation posted a very solid performance in the second quarter.
And grew 16% year on year, topping 1,000,000,000. As a result, free cash flow in the first half improved to almost 1.5 dollars. Let me mention that first half figures include payments from spectrum acquisition of EUR 1,100,000,000. So isolating this effect, free cash flow would have reached 1,000,000,000, posting a remarkable growth of 19% year on year. EPS also improved on a sequential basis and reached in the period April to June and in January to June.
In Slide 6, you can see how commercial activity is intensifying. In the second quarter, we have intensified our commercial efforts in every category to further focus on value and sustainable growth. As such, we have recorded a strong acceleration in mobile contract net adds that reached 2,100,000, the highest since Q3 twenty eleven. Especially worth mentioning is the rapid expansion of the smartphone base, with record net adds the quarter and with penetration increasing 8 percentage points year on year to 24%. At the same time, fixed broadband and fixed line deployment of full development services.
30 percent of our fixed accesses are currently ready for these services, and out of them, 10% are already connected. Let's turn to Slide number 7, for the review of top line growth reacceleration. In the second quarter, we have returned to organic revenue growth year on year. Revenue trend is 210 basis points better than in the first quarter, improving simultaneously in our 2 regions of operations. It is worth mentioning 360 basis points higher versus Q1, highlighting once again the benefits of our best in class diversification.
Excluding the DAC from MTR cuts, 1st half organic increase would be 1%, turning also to positive growth. By services, mobile data revenues continue to enjoy strong momentum with a 10% year on year organic growth and already accounting for over 1 third of mobile service revenues. Non SMS sales drove this performance on the back of a profitable data monetization Turning to profitability in Slide number 8. I would like to stress the ongoing efficiency improvements delivered from key transformational initiatives in the commercial and operational model. These savings drove to flat EBITDA margin in persons the first half of twenty twelve to 33%, offsetting higher commercial spend in Telefonica LatAm during the quarter in order to capture market growth opportunities and transforming towards a more sustainable model.
As such, OIBDA margin in the 2nd quarter stood at 33.7% declining point 4 percentage points year on year organically. Telefonica Global Resources on slide number 9 is consistently contributing to higher efficiencies, cost reduction and transformation driven by further execution of priority projects. In networks and operations, We are driving the deployment of LTE sites, and we are launching the pilot test of our network virtualization in Brazil. In 2019, simplification of our operative model is delivering results while we continue to progress in infrastructure consolidation. In devices, we are advancing to more balanced vendor map through strategic agreements with several industry players.
Let me highlight that Telefonica Espana was first worldwide to launch Firefox OS device. Finally, on procurement and thanks to our scale, our savings are on track. Next, I'd like to talk about a few highlights of Telefonica's digital during the quarter. Demonstrating Telefonica's innovation as a digital telco. Firstly, there were financial services developments in and Europe.
In Brazil, we've launched Zoom, a JV with Mastercard that provides banking services for the unbanked. We've also agreed to create a JV with Santander and Casa Bank that we become a pioneering alliance between financial institutions and Atelco to create new digital services. Secondly, Telefonica Digital is investing in new information security capabilities. We've set up 11 paths, which will act as a hot house, driving radical innovation in security for Telefonica's clients. In Machine to Machine, Telefonica signed an agreement with Dell to deliver Dell Net Ready, a pay as you go mobile broadband service for notebooks and tablet Finally, the first five FOX OS handset was launched in Spain on July 2nd for Next launches of Firefox handsets will take place in Columbia and Venezuela along the third quarter of 2014.
Please turn now to Slide number 11 to review our operations in Latin America where our strategy based on capturing the most valuable customers is delivering very positive results. We keep committed to our long term growth strategy, as proven by the outstanding commercial activity in the second quarter. We reached a record high in contract gross adds reinforcing our regional leadership in this segment, At the same time, we improved our performance thus top line strongly accelerated in the 2nd quarter, exceeding 10% year on year. Showing a widespread ramp up across the region and across services. Booming mobile data is the main growth driver and fixed businesses recovering and returning to positive growth this quarter.
OIBDA growth of almost 3% year on year in organic term terms, lacks revenue growth, mainly due to the higher commercial effort done in the quarter as we are capturing value clients that have higher upfront costs but make revenues more sustainable longer term. In Brazil, turning to Slide number 12, Commercial activity has been impressive in the most valuable mobile segments. Vivo captured almost 6 percent of the contract net adds in Vivo's network quality, a differential service proposition. Let me remark that Vivo keeps working in maintaining this quality gap as shown by the recent launch of 4G in 22 Cities. The higher quality of our customer base can also be seen in the prepaid per months.
Our stricter disconnection policy is driving prepaid base, down by 5% year on year, while on the other hand, top ups grew at a healthy 12% rate year on year. In the fixed business, our turnaround plan is on track. Broadband net adds benefited from the segmented approach of our strategy and doubled year on year with enhanced quality in our DSL services and with Vivo fiber starting to gain traction. As a result, the success of our commercial strategy is starting to flow into revenues as shown in Slide 13. Excluding regulatory impacts, revenue accelerated to almost 5% year on year in the second quarter.
Maintaining the solid growth in the mobile business while significantly improving revenue trend in the fixed business as operational KPIs started to recover. On the other hand, profitability declined year on year this quarter by mainly 2 factors: the strong commercial momentum and the of some one offs that positively affected Q2 last year. Moreover, let me remind that following the roadmap of the integration of mobile and fixed businesses, the final step of the corporate restructuring has already been approved This will lead us to capture additional synergies that will flow to the bottom line onwards. Please turn now to Slide 14 to review further businesses in Latin America. In Peru, Revenue in OIBDA continued accelerating, while strong commercial activity remains, reaching a record high in contract gross adds this quarter.
In Argentina, top line continued posting a solid pace, while pressure on profitability was mainly coming from the strong commercial momentum posted a significant improvement versus the first quarter as new commercial proposals launched in April started to gain traction. Revenue accelerated by almost 6 percentage points to 3% year on year, while Okta grew on the back of efficiency efforts. In Colombia, turning to Slide 15, revenues reverted the trend and grew 2.6% year on year this quarter, driven by solid commercial activity. In addition, OIBDA margin improved year on year as the benefits stemming from the fixed and mobile integration offset the higher commercial costs. In Mexico, the new telecommunications law already signed will prove higher dynamism to the market, and we will be an active part of that process.
In the meantime, revenue slightly recovered when we continued our operational transformation. Lastly, in Venezuela, the impressive operating performance remains. It is relevant to highlight that the main for revenue growing at almost 50% are growing volumes. Contract base is increasing by 32% year on year. Smartphones by 37%, while raising ARPU is driven by data traffic explosion and by voice traffic which grew by more than 20%.
The reason is that value customers demand quality of service and there, our service is the market reference. Turning to slide 16, we will review our operations in Europe Amita challenging environment, the Defonica Europe continues executing its transformation strategy towards a more sustainable model to strengthen its market position mobile net adds increased over 2 fold quarter on quarter, and smartphone adoption continued to expand, reflecting the value for money for renewed, simple and transparent portfolio of built around increasing data usage. In terms of financials, top line performance improved sequentially and margin expanded year on year for a 3rd consecutive quarter, driven by further efficiencies. Especially worth mentioning is that despite expansion of FDM fiber networks, operating cash flow up to June was stable year on year. Leveraging targeted CapEx allocation.
Slide 17 provides more color on the Spanish business. MobiStar Fusion's commercial traction remains solid, reaching 2,200,000 customers as of June which means that almost 40% of consumer fixed broadband accesses in Spain are already in Fusion. It is also a news that sustained improvement in the mix of new customers and upselling to 56% in the 2nd quarter, 9% points more than the previous quarter. And sound increase in additional mobile lines. On the impact of lower value packages, Fusion Ferro Let me mention that more than 70 percent of Fusion quarterly gross adds chose higher value packages.
I would like to highlight the higher rationality seen in the market with focus on tariffs rather than on handsets subsidies. In this context, new mobile tariffs launched in April led to a significant reduction in the contract debt loss in Q2, although aggressive conversion offers continued impacting profitability trend. Finally, convergence is also allowing us to continue improving churn levels and customer satisfaction across services. On Slide 18, we can see the details of financial performance in Spain. Revenue ex handset sales improved sequentially its year on year trend as in the previous 2 quarters.
Especially remarkable is the continued improvement achieved in profitability, driven by the ongoing benefits of the new operating model, coming from disruptive initiatives. As such, along with progressive new savings, OIBDA margin in Q2 stood at 48.4 percent, expanding 3.6 percentage points year on year. Let me remark that this is the 4th consecutive quarter with margins above 47% and significant margin expansion year on year. Operating cash flow in the first half of the year remained flat year on year. With CapEx focus on fiber rollout acceleration, which ensures our commitment to capture a new wave of growth.
In a nutshell, that the Fonigas Panya Q2 results evidence the sustainable benefits of our transformation strategy which led to a meaningful improvement in the company's operating leverage. Please turn to Slide 19 for a review of our operation in UK. From a trading standpoint, strong momentum continued in the 2nd quarter. With contract churn maintained at historical low levels and healthy contract net adds. Auto refresh proved to be a successful proposition, with a 20% uptake among contract trading, despite it is only available to the direct channel and high end devices.
The benefits of this commercial approach are starting to be redirected towards a more sustainable distribution model based on increasing the direct mix. Even though the upfront cost of transactions, through the direct channel has a negative impact in the short time, lifetime value of the customer is significantly higher, making the model more sustainable. It should be highlighted that mobile service revenues improved their year on year performance for the 3rd consecutive quarter. Lastly, let me give some detail on the impact of O2 Refresh. In the second quarter, it has contributed with 5.5 percentage points to revenue growth, with no relevant negative impact in mobile service revenues.
Part of this positive contribution has been offset by the higher upfront costs of increasing activity in direct channel and as a result, the net positive in OIBDA margin was 2.3 percentage points. In Germany, commercial dynamics reflect accelerated market transformation towards data monetization, with practically all handset sales being smartphone, As such, the new auto group offers position us in this direction and we continue to an LTE deployment to address the upselling opportunity. LTE is starting to get traction representing 40% of handsets sold in Q2 and two times the ones in the first quarter. In this context, mobile service revenue continued decelerating as growth in data services does not offset yet the pressure of tariff renewals, lower SMS traffic and the lower base growth. The positive trends in data resulting into non SMS revenue growth of 25% year on year in the second quarter, which already represents 65 percent of data revenues.
We are seeing increasing evidences of LTE monetization with more than 60% of customers showing higher beta usage after migrating to this technology. Revenue pressure is should be mitigated by the company's focus on efficiency measures, with a EBITDA margin at 25.5% in the second quarter. The recently announced transaction will provide us with the opportunity to further generate synergies and to be able to face from a much stronger platform the market transformation towards data. Now in Slide 21, let me briefly summarize the offer we have launched for a glass for creating a leading digital telco in Germany. Total consideration for the acquisition is 1,000,000,000 and a final stake in the enlarged entity of 17.6 percent.
The structure of the payment is composed of 2 consecutive steps. First, the rights issue of Telefonica Deutschland of 1,000,000,000 and state in the combined entity of 24.9%. And then Telefonica will acquire a 7.3% stake to PPN for 1,300,000,000. Telefonica will commit 1,000,000,000 for this transaction. 1,000,000,000 to subscribe the rights issue plus 1,000,000,000 to acquire the additional stake.
The strategic rationale for this transaction is compelling. Combining a great pass with a brighter future due to strong potential to capture data loss. Capturing significant value from synergies with an MPV in the range of 1000000000 to 1000000000, enhancing profitability and free cash flow metrics and creating a platform to deliver superior customer experience to over 43,000,000 customers. In Slide 23, let me remark the better scale and diversified profile with Telefonica becoming the 2nd largest European mobile operator by customers. In terms of revenues, Germany will end up representing 13 percent of group sales at 5 percentage points on 2012 pro form a, improving geographical diversification.
All of this will be financed without increasing leverage. Of the required EUR 4,100,000,000, 50% to 65% will be financed through hybrid instruments. 20% to 30% through a mandatory convertible, and therefore, there will be only be incremental debt of 10% to 20% of the required amount. The incremental debt plus the debt component of the high rate is estimated to be around 2 times the incremental EBITDA from Iplaz. Finally, let me wrap up the key value creation points for our shareholders.
The announced transaction will unlock significant synergies for Telefonica. Will better position us to capture future growth. It will reinforce geographical diversification increasing exposure to an attractive market. It will have a positive impact on telephonic cash, cash flow generation profile. It will be EPS and free cash flow to improve.
Let me now move to the financial site on financial site on Slide 24. Telefonica is making substantial progress on its deleveraging process by taking decisive actions. Net debt including post closing events, decreases by more than 1,000,000,000 compared to December 2012 net debt adjusted by the devaluation of Venezuela. If we look back 1 year, we have made remarkable progress in debt reduction for around 1000000000. Positive free cash flow pre spectrum has contributed with EUR 2,600,000,000.
This has been complemented with additional portfolio management initiatives, such as the sale of our IDH business, 40% of Central America, and a stake in universities. Again, we reiterate our target to reduce our net debt below 1,000,000,000 in 2013. On slide 25, I would like to highlight how efforts to strengthen liquidity lead us to show recurring maturity coverage in excess of 24 months. Telefonica's financing activity has been intense during the first half of the year through owned and loan markets. Several long term financing operations have allowed to raise nearly EUR 8,000,000,000 year to date and to increase our average debt life while smusing the maturities profile.
This successful financing has contributed to an additional improvement in our liquidity position, reaching EUR 21,700,000,000 as of June above the level of March 2013. It is also worth mentioning the decreasing effective interest cost during the last 12 months, almost 25 basis points to 5.23% close to the bottom of the range of our We are returning to revenue growth, leveraging diversification and strong commercial push. We are exploiting our strong execution and transformation capabilities efficiencies and reinvesting them in increasing customer lifetime value, allowing us to maintain community for EBITDA year on year trend, practically stable. We have posted a very solid free cash flow generation in the second quarter leading to a sequential improvement of forward in debt reduction decreasing EUR 10,000,000,000 since June 2012. We have announced 2 days ago, a transaction that will allow us to realized value in the German market.
So all in all, we are progressing in our transformation strategy. Thank you very
Once again, that's 1 to register a question and 2 to cancel. We'll kindly ask you to ask 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, both questions are being registered. Our first question comes from the line of Paul Mars from Burberg.
I think your domestic OpEx fell by 1,000,000 in Q1 and I think it was 1,000,000 in Q2 compared to the previous year. But as I understand it, the comp gets tougher into the second half. So do you think you can sustain that run rate of cost reduction in the range of 1000000 to 1000000 per quarter through the second half? And if not, can you give some indications to what level of OpEx reduction we can expect to see through the second half. And then secondly, just while your contract churn fell in Spain, it looks slightly still churned about 815,000 contract subscribers in Q2.
And that's a similar level to Q4 when you launched the Fusion product So it looks like you still need to do a lot more on contract churn and gross additions. So what more can you do and have you actually got the cost flexibility to do Thanks.
Thank you, Paul. I think that on your first question, as we stated in the last few quarters, We are confident we can maintain similar levels of cost reductions and moreover to sustain our current margin level. We feel confident we continue with our simplification in sourcing and other of our projects in the in the Telefonica Espana operation. Secondly, with regard to the contract churn, we have agreed with the investor community that we needed to continue working on that. We believe we have set up the right values and we are covering all the segment presently well now.
And just to say that what we have noticed is more equilibrium in the market, so that we are looking more into both the fixed and the mobile as opposed to just looking at the mobile. We have seen some improvement on contract net adds, but overall, we will continue working on this part of the business.
Thank you, Paul. Next question, please.
Our next question comes from the line of Mandeep Singh from Redburn Partners. Please go ahead.
Thank you. I've got two questions, please. First of all, just a quick one on your position regarding telecom italia. A couple of your partners in telcos 5 indicated they want to exit telecom italia. Wanted to understand if you were going to take up their shares or what your future intentions were regarding Teleportalia.
That's the first question. And the second question is really about your full year EBITDA. I appreciate you, guide on an organic basis, but you've done 1,000,000,000 of EBITDA in the first half. And market expectations are about 1,000,000,000 for the full year. That requires significantly more than doubling your first half EBITDA.
Are you comfortable with market expectations? Or if you can't answer that question, what do you think could actually drive an absolute increase in H2 EBITDA versus H1 EBITDA.
Thank you. This actually Milan with the first question regarding Telecom Italia. We believe that there is a value in keeping the investment in telecom italia under a joint vehicle that has a substantial stake which has significant influence in a major European telecom operator. So we are talking to our partners about the merits of preserving this ownership structure, and that is still an ongoing dialogue. So we are not contemplating taking full control of Telco, but, we are talking to our partners, to convince them on the merits of standing such structure.
Taking your question on the on OADA for the full of the year, as you know, we have no guiding on OITA, we have been guiding on OVA margin as we have guided on revenue growth. So I would focus my answer revenue growth and on margin, if you don't mind. Revenue growth, we announced that we'll be improving sequentially throughout the year. As we are seeing quarter on quarter, the 2nd quarter has been better than the first one. And we think that according to the trends that we are seeing internally, this is going to be the case in the 3rd and 4th quarter, namely Latin America, various strong commercial activity, namely contract allow us to see better trends in terms of ARPU.
And therefore, we feel comfortable that the challenging profile of growth that we have in our own budget and that we have shared with the market is going to be imminent. And in Europe, it's been a tough year. As you know, overall, namely in Spain, but we are seeing progressively stabilization of the drops of the rates of broadband slightly improving some cases. So overall, in revenues, we feel comfortable with the trends that we are seeing. On top of that, in the places where revenues have been weaker than we expected.
The cost contention is being higher. Because we are significantly matching both things, revenue growth and subscriber acquisition costs, so to say. And therefore, the overall thing is that we feel comfortable and we related to our guidance of revenue growth and a better performance of OIBDA margin for the full year.
Thank you, Mandeep. Next question please.
Our next question comes from the line of Luis Peralta from Morgan Stanley. Please go ahead.
Yes, thank you. I have two questions, please. The first is on fiber regulation in Spain. What I've heard about a public consultation regarding a potential mandatory wholesale offer for fiber based on competitive levels by region. So I don't know whether you could elaborate a bit on what's going on, give us an update on this regard and what would be potential outcome?
And the second question is on Argentina and what's your current cash position in the country and whether you have any kind of edge ahead of a potential currency devaluation in the country?
Thank you, Luis. With regard to your first question or what you believe we are referring to a pre consultation process that it was before analysis markets, but we cannot give you more information as such.
Hello, Luis. This is Angel regarding our cash position Argentina. The net cash is around 1,000,000, equivalent. Is remunerated at 15.5%. And, we don't have special hedges on that position.
What we have is a positive cash position in solid currencies and some debt position in local currency.
If I may add on my previous question, just to clarify that our deployment of fiber in Spain is directly related to the current regulation. So if there's any other regulation on new regulation, we will adapt to it.
Okay. Thank you.
Thank you, Luis. Next question please.
Our next question comes from
the line of Georgios Yaroniacono from Citi. Please go ahead. I've got two questions, please. First one is around leverage. Your target for the full year is to go below 1,000,000,000 of net debt.
And you're currently on reported numbers around 1,000,000,000 short of that. And the interim dividend, which is just in excess of a 1,000,000,000. So you more or less need to generate around 1,000,000,000 in the second half to deleverage to that level. So I'm not sure if Ireland will close in time for that. So my question is to clarify whether the target is for the reported net debt or the one with the closing events is the one we should be focusing on.
And perhaps if it's the reported number linked to that, it give us any color as to how you expect to deliver that target? My second question is on consolidation. With announcement of Ireland last quarter and Germany this week, there is limited room for validation in Europe that at least with your direct involvement. But I wanted to extend perhaps the discussion about Latin America. Are there any markets in the region where you believe returns need to improve for investment to be viable and sustainable and where the market structure is currently suboptimal?
And do you believe it is feasible, for consolidation to be delivered or are there any barriers we could prevent that?
Hello Georgios. We respect to leverage our net debt at the end Offune stands at 1,000,000,000. If you were to include the transactions that we have already signed, some of them like Central America already, all the conditions to closing have been fulfilled. So that is going to be closed around the second half of August. And we are aiming to close Ireland ideally in the last quarter of this year, maybe in the first of next year.
So with these investments, we would be at 1,000,000,000. We have a target of 1,000,000,000 net debt by year end. And as you rightly say, we're going to pay dividend in November, which is around 1.6 1,000,000,000. So we're estimating that with the free cash flow that we are going to generate in the second half plus the closing of these transactions, we should be reaching that objective. Having said this, you should expect that to continue being active in our strategy of active portfolio management not so much geared to achieving this debt figure by year end, but because we believe it makes sense, our approach has been all along this year to try to strengthen the operations in the markets where we are present.
We have been very pragmatic So in some places like Ireland, we have allowed ourselves to be consolidated while in other places such as Germany were aiming to be the consolidator. This type of, approach to the markets, trying to get a better position in those markets, be it in market share, being potential to create value, which will continue. And we will explore opportunities for doing so in each one of the markets where we operate and potentially also in Latin America.
If I may complement, the answer that say that, for us, consolidation, it not just corporate deals, but also about network sharing. We think it makes sense. The amount of network that we have, in some places, mainly in Europe, we think that, having 6 pleasures is not the right number. So I think that consolidation is going to happen. We have already shared our network in the UK We are doing negotiating deals in Germany, the Czech Republic, and here in Spain.
We are doing exactly the same in Latin America. So for us, it's becoming much more pragmatic in terms of allocating our capital and in terms of looking for other sources of differentiation, then on the business intelligence and customer insight and products and services. So yes, we should expect from us to be very active on this kind of consolidation And in this kind of making sure that we set up the right differential, competitive differential points in our value chain.
Thank you. Your your next question, please.
Our next question comes from the line of team buddy from Goldman Sachs. Please go ahead.
Yes. Thanks. It's been another quarter with a lot of volatility in currencies. Obviously, sort of later in the quarter, so you haven't yet felt the full impact in EBITDA. I guess the question on that is, have you thought any more about your ability to reduce your exposure to Latin currency is obviously given your your debt is, nominated in, in, in, in, in, mainly in euros, is there anything you can do?
I appreciate hedging costs are very high, but anything structurally you can do to change that And then related to that as well, do you still have in mind a kind of target leverage goal for the group? Because obviously, while the deleveraging has been very strong, the net debt to EBITDA ratio hasn't materially reduced. 2nd, I just wanted ask a bit about, the timing in Germany. And, obviously, this is a transaction that's made sense for very many years. What changed made you think that this was the right time to take on that transaction?
Hi, Tim. We expect to, to our ability to reduce exposure to LatAm currencies. We have a hedging policy, which is, for LatAm currencies, 2 times free cash flow, pre interest on those currencies. Our aim is not to have a specific percentage of debt within different geographies, but to protect the solvency. So so, reducing the sensitivity of leverage ratios to FX movements.
So for instance, some of the weakness that we've seen in the Brazilian real translating into our OIBDA is offset by the reduction of the cost on the exposure of the Brazilian debt in our balance sheet. So our hedging policy is aimed to protect solvency reducing the sensitivity on leverage ratios. With respect to target ratio, if you look at Slide number 24, at the end of June, at 2.4 times net debt to EIBDA. If, you were to contemplate the figure after divestments announced still pending closing, you will see that the ratio is 2.36 times, which is closer to the target that we have for the year. With respect to the timing on Germany, as to Jose Maria.
Why, why now is the right timing? And, even though this, this idea or this potential has been on top of the table for several quarters, so to say. Well, first of all, right now, there are some elements that are brand new, and that has, align the elements to make this transaction doable right now. First thing is that commercial momentum is heading into the right direction. 2nd, we have an asset that is differential, like, is the spectrum that we have in Germany, the 800 for LTE purpose.
3rd, I would mention the IPO that we need to forward German business, last quarter of last year. Allow us to have another currency and attractive currency and attractive flat tone to develop these transactions. So overall, I think that, today, right now, we can present towards shareholders, KPN and telephonic and telephonic authorities and shareholders, but mostly to the customers of, Germany, a very appealing proposal. And therefore, I think that right now, we have all the elements aligned to make a very sound and robust case for this transaction to go through.
And just
a quick follow-up, if I may. Just could you remind me on your long term leverage target for the group?
We have, a target of leverage, by year end of 2.35 times. We have not multiyear target, but you should assume that our aim is going to be to continue deleveraging both pre and post closing the announced transaction.
Our next question comes from the line of Tibon Lial from BBVA. Please go ahead with your question.
Hello. Good afternoon, everybody. I have two questions. The first one is, I don't know if you could help us to try to, to figure out how mobile ARPUs are going to perform in Spain in second half and twenty 18, I guess, the spot of the repricing of the base and lower prices coming from where we start pushing on asset to the first subscriber base. So I don't know if you have some numbers on the third quarter and, which can help to use, which can help us to to try to see if that is decelerating or not.
And on that said, it would be very interesting if you could give us an idea of what kind of mobile ARPU you're getting on the movie star Fusion Federal contract, which I guess where is where the risk of mobile voice cannibalization is more evident. That's the first one in Spain. And the second one in Brazil, you're blaming the margin pressure on two issues. 1, which I guess is more temporary, which is postpaid, postpaid growth. And second one, which I guess may be more structural, which is redressing your fixed line business.
So I don't know if you could give us a figure on how long can it take for etras that fixed line operation and what cost it may have in terms of EBITDA margin in the country?
Thank you, Ivan. I think that with regards to Spain and in particular, what is going on with ARPUs there. But as I stated earlier, some new situation, first of all, the market is moving more towards more balanced fixed and mobile market model. So the convergence seems to be the key driver in fixed business. In mobile business.
So that is moving more towards a SIM only model. We are seeing stabilization in revenues, Xhance sales and have to say that we believe we're moving towards improvement at the end of the year. So we will see some improvement second half, but more at the end of the year. And we believe that will continue being part of the commercial traction coming from Mucci on and the new mobile portfolio, the fido, considering the negative impact of the NTR's drop in July. With regards to your question, around Fusion Ferro.
What I have to say is that something that Ajay mentioned earlier in his presentation is that despite us having that lower levels at that lower possibility through Fusion 0, more of the take ups and Fusion go to the higher value package. So more than 70% are moving into that direction. Without being able to be more specific, I think that is a very good trend for Fusion.
Okay. And the improvement that you're mentioning is already visible on July trends?
I think that we will see more towards the second half of the year, as I mentioned earlier, but we are seeing the right trends in the take up.
Yvonne, this is Santiago. On Brazilian margins, 2 statements. One is that we're happy we're making the progress we thought we could make on capturing data growth and upgrading customers from prepaid to contract. Our net share our share of net it's about 10 points or so better than our market share. And so this is working.
And the second thing that is working, as you mentioned, this improvement in fixed line. It's still not enough. It's still not out of the water, but certainly it is pointed in the right direction. We have confidence that slowly, but surely this will be the trend over the coming couple of quarters. And about positive margins or long term numbers.
So we certainly do not have 1, but we think we continue to have benchmark numbers for the industry in Brazil And that to the extent that the industry consolidates stabilizes or stops growing, which it is not showing any sign of doing, maybe cost could be managed differently. But we think that the sign of the times today is come through that growth. The growth of Ares but then be very aggressive on cost management. Of course, there is always a balance. But at this point, we think that capture the growth is a priority.
Okay. Thank you, Sandeep.
Thank you, everyone. Next question, please.
Our next question comes from the line of Giovanni Montalte from UBS. Please go ahead.
Hello, good morning. Just two questions. There's been some acceleration in the line with Spain. Just was wondering if you could give us the trends behind these and what you expect for the coming quarters? And don't Brazil, would you I mean, I know how much can you answer to this, but looking at the political and regulatory environment, would you see, feasible, let's say, a breakout of 1 of the 4 mobile operators.
Among the three ones that will remain.
Johnny? Sorry, could you repeat the last part of your second question?
Again, just assuming a breakout of 1 of the 4 operators, in Brazil among the 3 that would remain. You see this as a feasible scenario considering? I mean, the regulatory view, government's view about the evolution of the industry, just just wanted to understand what's your, your opinion about, how the regulator would see such such as CO. Thank you.
Thank you, Giovanni. I think that with regards to your question on the fixed line business in Spain, it's true that net loss has increased during the month of April specifically because it was affected by the connection fee increase that was specifically 2.9%. On to June, which impacted a lower gross adds.
Joan, in terms of what the shape or the future shape of Brazilian telecoms will be, all the options can possibly be open. We, of course, you've used. But let me say just one thing. It will not require a change in regulation, but a change in the rules that the government has set up to control and direct the industry to attack things like the one you mentioned. I think it is of no use that we could share our views.
But certainly, we have seen in other geographies that things can change. We're trying to do just that in Germany, but that is not necessarily a lead on what would be good for Brazil. So I think you'll probably as well place the semi of us to have a view on what can and what cannot happen. But it is not only a regulatory issue. It is a highly charged political industry ship industry view.
So sorry if I may, just a very quick follow-up, but would would you consider the current framework as, in some ground, would you see some margin for this to happen, I don't know, over the next, 2 years, let's say, over the short medium term, let's say, or do you see that there is still too much that has to happen?
Look, there is still growth and there is a lot of growth coming from the that I mentioned, contract, upgrade and data, but the Brazil is a large market and all of us have reasonably closed the shares. It is highly competitive. And so there is no obvious need for it to disappear as many other smaller markets might have large markets with the 2 or 3 players and very small markets with 5 players. And this is the shape of the industry that's more we don't have a strong view about what is best, which we're trying to adapt to whatever the conditions are.
Our next question comes from the line of James McKinsey from Fidenti. Please go ahead.
Hi, good afternoon. Just
two very quick questions. Firstly, there's been
a lot of press comment about an agreement with Yoygo in Spain. I don't know if you've seen any detail on that, if there are any, indeed, any negotiations going on. And then secondly, I wonder if something other, if you could give us, your view of what the new telecoms law could mean for you in in in Mexico.
Thank you. I think that if we look into what is going or what's happening in the press, what I'd like to say and to clarify as we said in all the moments is that we are quite open minded to reach agreements in sharing infrastructure We've done it everywhere in Europe and we have done it in Spain. So we will maintain that on provided objective. I think that if it is a rational movement that improves the market economics and optimize capital investment, it's always good to look at it. When we look at LT specifically, we believe that the massive or the potential massive launch will depend first to market demand.
On technological maturity and on spectrum availability. As we have mentioned in other locations, the usage of 1 the 1800 spectrum and 2600 spectrum bands definitely provide service in a temporary measure. Until the 800 is available. So for us, we the band in which we will focus the quality and the attention will be on that one when it is released in Spain. So we will have to offer quality and we will have to offer the first the best service to our clients and that will be
our goal. James. And in terms
of the Mexican law, you know that the most interesting things are still to be written. The buy laws and the secondary laws are in the process of being put together and those will show the details. The highlights are, however, very well known. The highlights are that the government of Mexico wants and has written in the institution to limit market shares down to 50%. It's obvious that some of the dominant players or predominant player way about that.
And so there are a number of known ways to get from where they are to 50. That includes asymmetric pricing. That includes caps. That includes other things, which are going to be in the details. We think this is going to be healthy.
For the Mexican market and we will try to take advantage of whatever opportunities present themselves to do that. There are no no longer going to be in restrictions about the ownership. That's the second feature. And we think there is a third line that is in beta tail, the new regulator that is likely to have an impact on how fast any dispute is resolved. And how easy or rather how difficult will it be to bring it to the legal courts, which has been a feature of the Mexico market slowing down quite dramatic in the thing.
So the most interesting things are still to come, but limited market share through any of the known means strengthening the regulatory power, regulatory body powers and lifting all restrictions, we think are going to be quite and interesting for the Mexican market.
Okay. Any idea of a sort of time frame for when you might start to benefit from this?
We think that the interest in decals will be known before the end of this year and it will be somewhat in effect and this is just a guess. In the first half of twenty fourteen. But of course, we will be updating the market on the like of this as the Mexican government will be doing.
Our next question comes from the line of Jerry Dulles from Jefferies. Please go ahead.
Yes. Good afternoon. Thank you for taking my questions. First question has to do with capital intensity. You noted in the slides how capital investment in Spain was heavily reduced this quarter.
In general terms, CapEx across the European footprint seems to be trending at around about 2 thirds of DNA. And I wonder to what extent that might be sustainable going forward. How should we think about that, please? And then secondly, just in terms of Spanish mobile, you alluded earlier to the onset of $0.01 termination rates in Spain from July obviously, in other markets such as Italy, that has been the precursor to quite progressive pricing activity. The retail by competitors.
I wondered if you're seeing any evidence of that, and what initiatives you have in place to prepare the way and defend yourself in the event of any competitor activity? Thank you.
Thank you very much. I think that with regard to the CapEx question, to clarify, we are accelerating definitely our fiber investments and obviously the AP across Europe. So what you might have seen is just some trends that towards the end of the year, we will adjust to those targets. So nothing strange there, moreover, the opposite because we are targeting 58 very importantly. So capital allocation and making sure that we do the right thing on prioritization is being key, but maintaining target and maintaining definitely our objectives in all across Europe and Spain as well.
The second question, I'm not sure if I understood it altogether didn't hear the whole thing. But with regard to the mobile business and with regard to specifically what is going on in the market, I think there is an MTR effect that we will see in July more specifically. And secondly, what we wanted to make sure is that we focus on data monetization and that data monetization should be the focus for us in all across Europe. In the case of Spring, even more so as convergence is also helping us to focus on it. We are seeing coming also from other of our competitors, but what we wouldn't like to see is so the competitors jeopardizing these day opportunity.
This data monetization opportunity.
Thank you, Gary. Next question, please.
Our next question comes from the line of Will Milner from Additive Research. Please go ahead.
Thanks. Just had a question on, Telefonicadeutsch and the acquisition of E Plus, would you expect going forward? I mean, assuming the merger completes an increase in the Telefonica Deutschland dividend, that would cover the incremental interest costs on the €4,000,000,000 of debt that you're taking on to finance that deal. And the second question is, Spanish mobile. I think this quarter, You'll lap the launch of Fusion last year.
And as a result, you'll, annualize the benefits of lower low loyalty point discount which I think looks like quite a headwind in the third quarter. I mean, should we expect the mobile service revenue trend in Spain to deteriorate as a result of lapping lower loyalty point discounts, or are you confident as you seem to, suggest earlier that service revenue trend would accelerate and improve in Spain.
With respect to the first question on the dividend of Telefonica land. First thing I have to say is that this is a matter that corresponds to Telefonica Dutchland and its governing bodies. But what I can comment is that, and there are 2 stages. 1 is pre closing of the deal and the other one is post closing of the deal. So pre closing of the deal, the 2013 dividend, that should be paid in early 2014.
This should be fully aligned with what is stated in the IPO prospectus and in line with the dividend that has already been distributed recently. And then after closing, the structure that we have designed will result in Telefonica Deutschland being a very well capitalized company. So as such, it would make sense that it should have a very high free cash flow payout of dividend and Telefonica will continue to hold at least 65 percent of that company. And as such, we will be a major beneficiary of those dividends.
Great.
Thank you. Going into your second question, I think in Spain, now on going forward, the market is moving towards a more balanced fixed and mobile market So convergence as a key driver in both fixed and mobile businesses are going to be the key for our focus. And as I stay it in previous call, the positive impact of the loyalty program will be fading off and it's already fading off. In the second quarter, The impact is lower than in the previous quarter and will be even more diluted towards the end of the 2 year 2013. When you will have a more like for like more homogeneous comparison basis because subsidies and mobile come from March and 12 and what will be fully in place also for retention from a safe quarter 2012 And then the negative impact that substitutable will have on the ARPU will also pay it off going forward.
So you will have a more like for like and more homogeneous comparison. I think that's basically what the path to answer.
Thank you. Next question please.
Our next question comes from the line of Fabian Lares from JB Capital Markets. Please go ahead.
Hi. Good afternoon. Two questions, please, with regards to the Irish deal, considering that this is a try session that reduces the number of players. Do you believe that there could be any difficulties in getting regulatory approval. And if so, could this somehow compromise your objective of reaching the 47,000,000,000 by year end as you seem to be counting with the cash in from this transaction already, even though officially hasn't closed.
So perhaps maybe some visibility on the kind of timeline you believe this this may have. And the second on the the plus KPN deal, I was keen to know your thoughts over the statements made already in the press by, people from German the German antitrust regulator and and other authorities that seem to point to I'd rather negative stance in the transaction. Thanks.
Thanks for your question. First of all, on the IDs, on the Ares bill, we think that, the proposal that we're making in Ireland by the sale of our business is very solid and attractive for the iris market as a whole. I think that the level of competition in the Ares market is high enough to make sure that in spite of this transaction, there is significant tension. And in fact, it will be an even more robust third year and therefore to offer much more attractive offers to customers in the different segments. So we do think that the proposal to the customers and to the Ares market is solid enough to justify the transaction.
So we are not expecting major hurdles on that. And taking your question on the German transaction, it's very similar. Let me make a very bold statement in terms of saying that, again, it doesn't make sense that there are too many players in Europe that if Europe as a whole, as a region wants to play its scale, it needs to consolidate. That consolidation is going to be the interest of, of European Consumers. And therefore, it needs to happen.
We think that we have already a strong and compelling case in the case of our German business. I'm just going to try to detail that a little bit better. First, on an infrastructure point of view, position is going to accelerate because right now you have a third and 4 places that because our entry has been later than the other 2, we are lagging behind and therefore, we are to be competitive against 2 very strong projects. So the consolidation of the 3rd and 4 should create an infrastructure based player that is going to accelerate competition. And therefore, we have a, we think we have a solid case in terms of adding competition to that market through this transaction.
But if then we approach this transaction through the eyes of the customer, I mean, having a stronger player would allow us, in our case, namely, by the combination of O2 Germany and E plus to have a much more competitive offer to Samsung to which we have not been able to be competitive today in the general market like the corporate segment. So wherever you approach the transaction, it's going to create more intensity and better proposal to both the consumers and the society as a whole because it will investment CapEx and it would accelerate more attractive offers to the customer. So in both cases, we think that we have a compelling case. Let me finalize by saying that even at the end of the transaction, if the transaction was to be we still have more than 100 brands in Germany because we have more than 100 and DNOs through the German market. So I don't think This is, going to reduce significantly the competition further the opposite.
It will help us to be much more competitive.
Thank you very much.
Okay. Thank you, Fabienne. We'll have time for one just final question.
Our last question comes from the line of Jonathan Dan from Barclays. Please go ahead.
Hi, hi there. Two questions. 1, you begun to think about, partners for fiber beyond 3,000,000 homes? And then secondly, in Latin America, apart from Brazil, are there any other sort of low frequency spectrum auctions coming up in the next 2 years?
Thank you, Jonathan. I think that the REM is to continue accelerating our fiber and the assets, we have the, the just tell agreement. And to remind you that our objective is for that receipt already. And is to reach 8,000,000 household passed by 2015. We are seeing good traction and the most important here is demand is there.
So that we are seeing demand coming from our customers, especially through Fusion. So we will work well positioned. We have the right partner and we are signing the right agreements.
Yes, Jonathan. In terms of the upcoming spectrum, on low frequencies, understanding 700 by that. Here, I mean, Chilean auction in Q3 is the one we expect. And there is a strong talks that Brazil, Colombia, PVA Ecuador even Peru might do something next year. This is more talk you know that these frequencies tend to be heavily occupied and very noisy.
And so it's not easy to clean them up. And but they might come in 2014, no strict plans that we know of are there yet. Then Mexico and probably Uruguay will come sometime in 2015. Because those are more expectations than plans.
There's an auction in Brazil sort of check?
I mean, does it mean does it give open
up the scope for consolidation? I guess there isn't enough for all five players.
It's difficult to answer because the rural part is still pending and the deploy the full deploy of LTE and the upcoming sporting events are likely to concentrate regulatory and industry action for the next Thank you very much.
At this time no further questions will be taken.
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