Ladies and gentlemen, thank you for standing by. Welcome to Telefónica's January-June 2013 results conference call. At this time, all participants are in listen only mode. Later, we'll conduct a question and answer session. If you'd like to ask a question, please press 01 on your telephone keypad. If you should require any assistance during this call, please press star zero. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Pablo Eguirón, Head of Investor Relations. Please go ahead, sir.
Good afternoon, ladies and gentlemen. Welcome to Telefónica's conference call to discuss January-June 2013 results. I'm Pablo Eguirón, Head of Investor Relations, and before proceeding, let me mention that this document contains financial information that has been prepared under International Financial Reporting Standards, and this financial information is unaudited. This presentation may contain announcements that constitute forward-looking statements, which are not warranties of future performance and involve risks and uncertainties, 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 disclosure documents filed with the relevant securities market regulators.
If you don't have a copy of the relevant press release and slides, please contact Telefónica's Investor Relations Team in Madrid by dialing the following telephone number, 34 914828700. Let me turn the call over to our Chief Financial and Corporate Development Officer, Mr. Ángel Vilá, who will be leading this conference call.
Thank you, Pablo. Good afternoon, ladies and gentlemen, and welcome to Telefónica's first half 2013 results conference call. Today with me are the members of the Executive Committee. During the Q&A session, you will have the opportunity to address to them any questions you may have. Telefónica 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 second quarter, returning to positive growth year-on-year, led by a significant improvement in Telefónica 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 billion, demonstrating our focus on deleverage.
As a result, net debt declined to EUR 48.6 billion, including announced divestments pending closing. Our free cash flow posted an outstanding improvement in the second quarter to almost EUR 2 billion, and EPS improved sequentially to EUR 0.25. The transaction announced two 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 financials on Slide 4. 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. Revenues showed in the second quarter an acceleration from first quarter year-on-year performance of 2.1 percentage points to reach EUR 14.4 billion. OIBDA reached EUR 4.9 billion, 0.7% lower year-on-year in organic terms.
Operating cash flow keeps growing in the first six months, exceeding EUR 6.3 billion, 3.4% higher than a year ago organically, while net income surpassed EUR 2 billion in the first half, roughly stable year-on-year. Year-to-date results are fully aligned with our internal expectations. 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 EUR 1.9 billion. As a result, free cash flow in the first half improved to almost EUR 1.5 billion. Let me mention that first half figures include payments from spectrum acquisition of EUR 1.1 billion. Isolating this effect, free cash flow would have reached EUR 2.6 billion, posting a remarkable growth of 19% year-on-year. EPS also improved on a sequential basis and reached EUR 0.25 in the period April to June and EUR 0.46 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 2.1 million, the highest since Q3 2011. Especially worth mentioning is the rapid expansion of the smartphone base with record net adds in the quarter, and with penetration increasing eight percentage points year-on-year to 24%. At the same time, fixed broadband and fixed line improved momentum, especially in Latin America. Finally, we continue with the selective deployment of ultra-broadband services. 30% of our fixed accesses are currently ready for these services, and out of them, 10% are already connected. Let's turn to slide number seven for the review of top-line growth re-acceleration.
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 two regions of operations. It is worth mentioning that Telefónica Hispanoamérica performance accelerated its year-on-year growth rate to 10.4%, 360 basis points higher versus Q1, highlighting once again the benefits of our best-in-class diversification. Excluding the DUC from MTR cuts, first 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 one-third of mobile service revenues. Non-SMS sales drive 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 versus the first half of 2012 to 33%, offsetting higher commercial spend in Telefónica LatAm during the quarter in order to capture market growth opportunities and transforming towards a more sustainable model. As such, EBITDA margin in the second quarter stood at 33.7%, declining 0.4 percentage points year-on-year organically. Telefónica Global Solutions on slide number nine 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 IT, simplification of our operative model is delivering results while we continue to progress in infrastructure consolidation. In devices, we are advancing to a more balanced vendor map through strategic agreements with several industry players.
Let me highlight that Telefónica España was first worldwide to launch Firefox OS device. Finally, on procurement, thanks to our scale, our savings are on track. Next, I'd like to talk about a few highlights of Telefónica Digital during the quarter, demonstrating Telefónica's innovation as a digital telco. Firstly, there were financial services developments in LatAm and Europe. In Brazil, we've launched Zuum, a JV with Mastercard that provides banking services for the unbanked. We've also agreed to create a JV with Santander and CaixaBank that will become a pioneering alliance between financial institutions and a telco to create new digital services. Secondly, Telefónica Digital is investing in new information security capabilities. We've set up ElevenPaths, which will act as a hothouse, driving radical innovation in security for Telefónica's clients.
In machine-to-machine, Telefónica signed an agreement with Dell to deliver Dell NetReady, a pay-as-you-go mobile broadband service for notebooks and tablets. Finally, the first Firefox OS handset was launched in Spain on July 2nd for EUR 69. Launches of Firefox handsets will take place in Colombia and Venezuela along the third quarter of 2013. 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 in the fixed business with positive net adds in all services.
Top line strongly accelerated in the second 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 are recovering and returning to positive growth this quarter. OIBDA growth of almost 3% year-on-year in organic terms lags 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 60% of the contract net adds in the market this quarter, mainly due to the explosion of smartphone demand, as customers can find 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 performance. 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 two factors, the strong commercial momentum and the impact 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 number 14 to review other businesses in Latin America. In Peru, revenue and OIBDA continued accelerating while strong commercial activity remained, 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 and inflation-driven costs. Chile posted a significant improvement versus the first quarter as new commercial proposals launched in April started to gain traction. Revenue accelerated by almost six percentage points to 3% year-on-year, while OIBDA grew on the back of efficiency efforts. In Colombia, turning to slide 15, revenues reverted their 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 while we continued our operational transformation. Lastly, in Venezuela, the impressive operating performance remains.
It is relevant to highlight that the main drivers for revenue growing at almost 50% are growing volumes. Contract base is increasing by 32% year-on-year, smartphones by 37%, while rising 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. Amid a challenging environment, Telefónica Europe continues executing its transformation strategy towards a more sustainable model to strengthen its market position and profitability. Contract mobile net adds increased over twofold quarter-on-quarter, and smartphone adoption continued to expand, reflecting the value for money for renewed, simple, and transparent portfolio built around increasing data usage.
In terms of financials, top-line performance improved sequentially, and margin expanded year-on-year for a third consecutive quarter, driven by further efficiencies. Especially worth mentioning is that despite expansion of LTE and 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. Movistar Fusión's commercial traction remains solid, reaching 2.2 million customers as of June, which means that almost 40% of consumer fixed broadband accesses in Spain are already in Fusión. It is also good news, the sustained improvement in the mix of new customers and upselling to 56% in the second quarter, 9 percentage points more than the previous quarter. Movistar Fusión continues fostering strong fiber uptake and sound increase in additional mobile lines.
On the impact of lower value packages, Fusión Cero, let me mention that more than 70% of Fusión 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 net loss in Q2, although aggressive convergent offers continued impacting portability trend. 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 two quarters. Especially remarkable is the continued improvement achieved in profitability, driven by the ongoing benefits of the new operating model coming from disruptive initiatives.
Along with progressive new savings, OIBDA margin in Q2 stood at 48.4%, expanding 3.6 percentage points year-on-year. Let me remark that this is the fourth 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. Telefónica España 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 U.K. From a trading standpoint, strong momentum continued in the second quarter, with contract churn maintained at historical low levels and healthy contract net adds.
O2 Refresh proved to be a successful proposition with a 20% uptake among contract trading, despite it is only available through the direct channel and for 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. The upfront cost of transactions through the direct channel has a negative input in the short term, 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 third consecutive quarter. 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 cost of increasing activity in direct channel, and as a result, the net positive impact 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 smartphones. As such, the new O2 Blue offers position us in this direction, and we continue to focus on 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% of data revenues. We are seeing increasing evidences of LTE monetization with more than 60% of customers showing higher data usage after migrating to this technology. Revenue pressure is partially mitigated by the company's focus on efficiency measures, with OIBDA 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. In slide 21, let me briefly summarize the offer we have launched for E-Plus for creating a leading digital telco in Germany. Total consideration for the acquisition is EUR 5 billion and a final stake in the enlarged entity of 17.6%. The structure of the payment is composed of two consecutive steps.
First, a rights issue of Telefónica Deutschland of EUR 3.7 billion and a stake in the combined entity of 34.9%. Telefónica will acquire a 7.3% stake to KPN for EUR 1.3 billion. Telefónica will commit EUR 4.1 billion for this transaction, EUR 2.84 billion to subscribe the rights issue, plus EUR 1.3 billion to acquire the additional stake. The strategic rationale for this transaction is compelling. Combining a great past with a brighter future due to strong potential to capture data growth. Capturing significant value from synergies with an NPV in the range of EUR 5 billion-EUR 5.5 billion. Enhancing profitability and free cash flow metrics, and creating a platform to deliver a superior customer experience to over 43 million customers. In slide 23, let me remark the better scale and diversified profile, with Telefónica becoming the second-largest European mobile operator by customers.
In terms of revenues, Germany will end up representing 13% of group sales at five percentage points on 2012 pro forma, improving our geographical diversification. All of this will be financed without increasing leverage. Of the required EUR 4.1 billion, 50%-65% will be financed through hybrid instruments, 20%-30% through a mandatory convertible, and therefore there will be only the incremental debt of 10%-20% of the required amount. The incremental debt, plus the debt component of the hybrid, is estimated to be around two times the incremental OIBDA from E-Plus. Finally, let me wrap up the key value creation points for our shareholders. The announced transaction will unlock significant synergies for Telefónica, 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 Telefónica's cash flow generation profile.
It will be EPS and free cash flow accretive from year one, and it will be credit friendly with a financing structure designed for leverage ratios to improve. Let me now move to the financial side on slide 24. Telefónica is making substantial progress on its deleveraging process by taking decisive actions. Net debt, including post-closing events, decreases by more than EUR 3.5 billion compared to December 2012 net debt adjusted by the devaluation of Venezuela. If we look back one year, we have made remarkable progress in debt reduction for around EUR 10 billion. Positive free cash flow pre-spectrum has contributed with EUR 2.6 billion. This has been complemented with additional portfolio management initiatives, such as the sale of our Irish business , 40% of Central America, and a stake in Inversis. We reiterate our target to reduce our net debt below EUR 47 billion 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. Telefónica's financing activity has been intense during the first half of the year through bond and loan markets. Several long-term financing operations have allowed us to raise nearly EUR 8 billion year to date and to increase our average debt life while smoothing the maturities profile. This successful financing has contributed to an additional improvement in our liquidity position, reaching EUR 21.7 billion 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 guidance and despite the strong liquidity position. To wrap up, we are returning to revenue growth, leveraging diversification and strong commercial push.
We are exploiting our strong execution and transformation capabilities to deliver targeted efficiencies and reinvesting them in increasing customer lifetime value, allowing us to maintain cumulative OIBDA 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 both free cash flow per share and earnings per share. We have made a significant step forward in debt reduction, decreasing EUR 10 billion since June 2012. We have announced two days ago a transaction that will allow us to crystallize value in the German market. So all in all, we are progressing in our transformation strategy. Thank you very much, and now we are ready to take your questions.
Ladies and gentlemen, if you'd like to ask a question at this time, please press 01 on your telephone keypad. To cancel your question, please press 02. Once again, that's 01 to register a question and 02 to cancel. We will kindly ask you to ask a maximum of two questions per participant, and if possible, we recommend you not to use your cell or hands-free phone. There will be a short silence while questions are being registered. Our first question comes from the line of Paul Marsch from Berenberg. Please go ahead.
Yeah, thank you very much. I think your domestic OpEx fell by EUR 500 million in Q1, and I think it was EUR 400 million in Q2, compared to the previous year. As I understand it, the comp gets tougher into the second half. Do you think you can sustain that run rate of cost reduction in the range of EUR 400 million-EUR 500 million per quarter through the second half? If not, can you give some indications to what level of OpEx reduction we can expect to see through the second half? Secondly, just while your contract churn fell in Spain, it looks like you still churned about 815,000 contract subscribers in Q2. That's a similar level to Q4 when you launched the Fusión product. It looks like you still need to do a lot more on contract churn and gross additions.
What more can you do, and have you actually got the cost flexibility to do it? 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 levels. We feel confident we continue with our simplification, insourcing, and other of our projects in the Telefónica España 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 tariffs, and we are covering all the segments perfectly well now. 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 of 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.
Thank you, Paul Marsch. 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 Telco SpA have indicated they want to exit Telecom Italia. I wanted to understand if you were going to take up their shares or what your future intentions were regarding Telecom Italia. That's the first question. The second question is really about your full year EBITDA. I appreciate you guide on an organic basis, but you've done EUR 9.4 billion of EBITDA in the first half, and market expectations are about EUR 19.7 billion for the full year. That requires significantly more than doubling your first half EBITDA. Are you comfortable with market expectations? 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 is Ángel Vilá. With the first question regarding Telecom Italia. We believe that there is 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. We are talking to our partners about the merits of preserving this ownership structure, and that is still an ongoing dialogue. 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 OIBDA for the full of the year. As you know, we have not been guiding on OIBDA. We have been guiding on OIBDA margin, and we have guided on revenue growth. I will focus my answer on 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 second quarter has been better than the first one.
We think that according to the trends that we are seeing internally, this is going to be the case in the third and fourth quarter, namely in Latin America, very strong commercial activity, namely in 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 met. In Europe, it's been a tough year, as you know, overall, namely in Spain, but we are seeing progressively a stabilization of the drops, of the rates of drop and a slightly improve in some cases.
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 cost, so to say. Therefore, the overall thing is that we feel comfortable, and we reiterate our guidance of revenue growth and a better performance of OIBDA margin for the full year.
Thank you.
Thank you, Mandeep. Next question, please.
Our next question comes from the line of Luis Prota from Morgan Stanley. Please go ahead.
Yes, thank you. I have two questions, please. The first is on fiber regulation in Spain, where I've heard about a public consultation regarding a potential mandatory wholesale offer for fiber, based on competitive levels by region. I don't know whether you could elaborate a bit on what's going on, give us an update in this regard, and what could be the potential outcome. The second question is on Argentina, and what's your current cash position in the country, and whether you have any kind of hedge ahead of a potential currency devaluation in the country. Thank you.
Thank you, Luis. With regard to your first question, what you believe we are referring to a pre-consultation process that it was before analysis of the market, we cannot give you more information as such.
Hello, Luis. It's Ángel. Regarding our cash position Argentina, the net cash is around EUR 100 million equivalent. It's remunerated at 15.5%, we don't have special hedges on that position. What we have is a positive cash position in solid currencies and some net 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. If there's any other regulation or 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 Ierodiakonou from Citi. Please go ahead.
Hello. I've got two questions, please. First one is around leverage. Your target for the full year is to go below EUR 45 billion of net debt. You are currently on reported numbers around EUR 3 billion short of that. There's interim dividend, which is just in excess of EUR 1 billion. You more or less need to generate around EUR 4 billion in the second half to deleverage to that level. I'm not sure if Ireland will close in time for that. 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. Perhaps if it's the reported number, linked to that, if you could give us any color as to how you expect to deliver that target. My second question is on consolidation.
With the announcement of Ireland last quarter and Germany this week, there is limited room for consolidation in Europe that at least with your direct involvement. 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? Do you believe it is feasible for consolidation to be delivered, or are there any barriers which could prevent that? Thank you.
Hello, Georgios. With respect to leverage, our net debt at the end of June stands at €49.8 billion. 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. It is going to be closed around the 2nd of August. We are aiming to close Ireland ideally in the last quarter of this year, maybe in the first quarter of next year. With these investments, we would be at €48.6 billion. We have a target of €47 billion net debt by year-end. As you rightly say, we're going to pay dividend in November, which is around €1.6 billion. We are 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 us to continue being active in our strategy of active portfolio management, not so much here to achieving this net 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. In some places like Ireland, we have allowed ourselves to be consolidated, while in other places such as Germany, we're 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, be it in potential to create value, 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, I would say that for us, consolidation is not just corporate deals, but also about network sharing. We think it doesn't make sense the amount of network that we have in some places. Mainly in Europe, we think that having 60 players is not the right number. I think that consolidation is going to happen. We have already shared our network in the U.K. We are doing network sharing deals in Germany, the Czech Republic, and here in Spain. We are doing exactly the same in Latin America. For us, it's becoming much more pragmatical in terms of allocating our capital and in terms of looking for other sources of differentiation, namely on the business intelligence and customer insight and products and services.
Yes, you 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 competitive differential points in our value chain.
Thank you, Georgios. Next question, please.
Our next question comes from the line of Tim Boddy from Goldman Sachs. Please go ahead.
Yes, thanks. It's been another quarter with a lot of volatility in currencies. Obviously, 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 LatAm currencies? Obviously, given your debt is nominated 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? Then related to that as well, do you still have in mind a 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. Secondly, I just wanted to ask a bit about the timing in Germany, and obviously, this is a transaction that's made sense for very many years.
What changed, which made you think that this was the right time to take on that transaction? Thank you.
Hi, Tim. With respect to our ability to reduce exposure to LatAm currencies, we have a hedging policy which is for LatAm currencies, two 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. Reducing the sensitivity of leverage ratios to effects movements. For instance, some of the weakness that we've seen in the Brazilian real translating into our EBITDA is offset by the reduction of the cost or the exposure of the Brazilian debt in our balance sheet. 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, we're at 2.4 times net debt to EBITDA.
If you were to contemplate the figure after the investments 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, I'll pass to José María.
Why now is the right timing, even though this idea or this potential transaction has been on top of the table for several quarters, so to say. First of all, right now, there are some elements that are brand new, that has aligned the elements to make this transaction doable right now. First thing is that commercial momentum is heading into the right direction. Second, we have an asset that is differential, like is the spectrum that we have in Germany on the 800 for LTE purpose . Third, I would mention the IPO that we did for our German business last quarter of last year allow us to have another currency, an attractive currency and attractive platform to develop this transaction.
Overall, I think that today, right now, we can present to all shareholders, KPN and Telefónica, and Telefónica Deutschland shareholders, but mostly to the customers of Germany, a very appealing proposal. 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.
Just a quick follow-up, if I may. 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. You should assume that our aim is going to be to continue deleveraging both pre and post-closing the announced transaction.
Thank you, Tim. Next question.
Thanks very much.
Our next question comes from the line of Iván Leal 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 figure out how mobile ARPU is going to perform in Spain in second half and 2014. I guess there's part of the repricing of the base and lower prices coming from mobile service has to the first subscriber base. I don't know if you have some numbers on the third quarter which can help us to try to see if that is decelerating or not. On that sense, it would be very interesting if you could give us an idea of what kind of mobile ARPU you're getting on the Movistar Fusión Cero contract, which I guess is where the risk of mobile voice cannibalization is more evident. That's the first one in Spain.
The second one in Brazil, you're blaming the margin pressure on two issues. One, which I guess is more temporary, which is postpaid growth, and the second one, which I guess may be more structural, which is redressing your fixed line business. I wonder if you could give us a figure on how long can it take to address that fixed line operation and what cost it may have in terms of EBITDA margin in the country.
Thank you, Iván. I think that with regards to Spain and in particular what is going on with the ARPUs there, what I think that I stated earlier, some new situation. First of all, the market is moving more towards a more balanced fixed and mobile market model. The convergence seems to be the key driver in fixed business and in mobile business. That is moving more toward a SIM-only model. We are seeing stabilization in revenues, it's handset sales, and I have to say that we believe we're moving towards improvement at the end of the year. We will see some improvement second half, but more at the end of the year. We believe that will continue being part of the commercial traction coming from Movistar Fusión and the new mobile portfolio, despite or considering the negative impact of the MTR drop in July.
With regards to your question around Fusión Cero, what I have to say is that something that Ángel mentioned earlier in his presentation is that despite us having that lower level, that lower possibility through Fusión Cero, most of the takeups in Fusión go to the higher value package. More than 70% are moving into that direction. Without being able to be more specific, I think that is a very good trend for Fusión.
Okay, 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, we are seeing the right trends in the takeup.
Okay, thanks, Eva.
Iván, this is Santiago. On Brazilian margins, two 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 share of net adds is about 10 points or so better than our market share. This is working. The second thing that is working, as you mentioned, is the improvement in fixed line. It's still not enough, it's still not out of the water, certainly it is pointing in the right direction. We have great confidence that slowly but surely, this will be the trend over the coming couple of quarters.
About the stability of margins or long-term numbers, we certainly do not have one. We think we continue to have benchmark numbers for the industry in Brazil, that to the extent that the industry consolidates, stabilizes, or stops growing, which it is not showing any sign of doing, maybe costs could be managed differently. We think that the sign of the times today is capture that growth, the growth there is, rather than be very aggressive on cost management. Of course, there is always a balance, but at this point, we think that capturing the growth is a priority.
Okay. Thank you, Santiago.
Thank you, Iván. Next question, please.
Our next question comes from the line of Giovanni Montalti from UBS. Please go ahead.
Hello, good morning. Just two questions. There's been some acceleration in the line losses in Spain. Just was wondering if you could give us the trends behind this and what you expect for the coming quarters. On Brazil, 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 breakup of one of the four mobile operators among the three ones that will remain? Thank you.
Giovanni, sorry, could you repeat the last part of your second question?
Yeah. Again, just assuming a breakup of one of the four operators in Brazil, among the three that would remain, would you see this as a feasible scenario, considering the regulatory view, government view about the evolution of the industry? Just wanted to understand what's your opinion about how the regulator would see such a scenario. Thank you.
Thank you, Giovanni. I think that with regards to your question on the fixed line business in Spain, it's true the net loss has increased during the month of April, specifically because it was affected by the connection fee increase. That was specifically 2.9%. That increase was finally postponed to June, which impacted in lower gross adds.
Giovanni, in terms of what the future shape of Brazilian telecoms will be, all the options can possibly be open. We, of course, have a few views, 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 a thing 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. I think you're probably as well-placed as any of us to have a view on what can and what cannot happen.
It is not only a regulatory issue, it is a highly charged political and industry shape, industry view.
Sorry, if I may, just a very quick follow-up. Would you consider the current framework as, let's say, favorable, providing some ground? Would you see some margin for this to happen, I don't know, over the next two years, let's say, over the short, medium term, let's say? Do you see that there's still too much that has to happen?
Look, there is still growth, and there is a lot of growth coming from the segments that I mentioned, contract, upgrade, and data. Brazil is a large market, and all of us have reasonably close market shares. It is highly competitive. There is no obvious need for it to disappear, as many other smaller markets might be. You have large markets with two or three players and very small markets with five players. This is the shape of the industry that's morphing. We don't have a strong view about what is best. We certainly will try to adapt to whatever the conditions are.
Thank you.
Next question, please.
Our next question comes from the line of James McKenzie, from Fidentiis. Please go ahead.
Hi, good afternoon. Just two very quick questions. Firstly, there's been a lot of press comment about an agreement with Yoigo in Spain. I don't know if you can give us any detail on that or if there are indeed any negotiations going on. Secondly, I wonder if Santiago, you could give us your view of what the new telecoms law could mean for you 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 other 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. We will maintain that open-minded 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 LTE specifically, we believe that the potential massive launch will depend first on market demand, on technological maturity, and on spectrum availability. As we have mentioned in other locations, the usage of the 1800 spectrum and the 2600 spectrum bands definitely provide service in a temporary measure until the 800 is available.
For us, really, the band in which we will focus the quality and the attention will be on that one when it is released in Spain. We will have to offer quality, and we will have to offer the best service to our clients, and that will be our goal.
Okay. Thank you very much.
Yes, James. In terms of the Mexican law, you know that the most interesting things are still to be written. The bylaws and secondary laws are in the process of being put together, 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 Constitution to limit market shares down to 50%. It is obvious that some of the dominant players or predominant players are wary about that. There are a number of known ways to get from where they are to the neighborhood of 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. We will try to take advantage of whatever opportunities present themselves to do that.
There are no longer going to be any restrictions about the ownership. That is the second feature. We think there is a third line that is the strengthening of IFT, 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 court, which has been a feature of the Mexican market, slowing down quite dramatically the thing. The most interesting things are still to come, limiting market share to any of the known means, strengthening the regulatory body powers, and lifting all restrictions, we think, are going to be quite healthy and interesting for the Mexican market.
Okay. Any idea of the sort of timeframe for when you might start to benefit from this?
We think that the interesting details will be known before the end of this year. It will be somewhat in effect, this is just a guess, in the first half of 2014. Of course, we will all be updating the market on the likelihoods as the Mexican government will be doing.
Yeah. Thank you very much.
Thank you, James. Next question, please.
Our next question comes from the line of Jerry Dellis 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 two-thirds of D&A. I wondered to what extent that might be sustainable going forward. How should we think about that, please? Then secondly, just in terms of Spanish mobile, I know you alluded earlier to the onset of EUR 0.01 termination rates in Spain from July. Obviously, another market such as Italy, that has been the precursor to quite aggressive pricing activity at the retail level 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 LTE across Europe. What you might have seen is just some trends or that towards the end of the year we will adjust to those targets. Nothing strange there. Moreover, the opposite because we are targeting fiber and LTE very importantly. Capital allocation and making sure that we do the right thing on prioritization has been key, but maintaining targets and maintaining definitely our objectives all across Europe and in Spain as well. The second question, I'm not sure if I understood it all together.
I 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 that there is an MTR effect that we will see in July more specifically. Secondly, what we want is to make sure is that we focus on data monetization, and that data monetization should be the focus for us all across Europe. In the case of Spain, even more so, as convergence is also helping us to focus on it. We are seeing that coming also from other of our competitors, but what we wouldn't like to see is all the competitors jeopardizing this data monetization opportunity.
Thank you, Jerry. Next question, please.
Our next question comes from the line of Will Milner from Oddo BHF Research. Please go ahead.
Thanks. The second question is Spanish mobile. Just had a question on Telefónica Deutschland, the acquisition of E-Plus. Would you expect going forward, assuming the merger completes, an increase in the Telefónica Deutschland dividend that would cover the incremental interest costs on the EUR 4 billion of debt that you're taking on to finance that deal? I think this quarter, you'll lap the launch of Fusión last year, and as a result, you'll annualize the benefit of lower loyalty point discounts, which I think looks like quite a headwind in the third quarter. 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 seemed to suggest earlier, that the service revenue trend would accelerate and improve in Spain?
With respect to the first question on the dividend of Telefónica Deutschland, first thing I have to say is that this is a matter that corresponds to Telefónica Deutschland and its governing bodies. What I can comment is that there are two stages. One is pre-closing of the deal and the other one is post-closing of the deal. 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. After closing, the structure that we have designed will result in Telefónica Deutschland being a very well-capitalized company.
As such, it would make sense that it should have a very high free cash flow payout of dividend, and Telefónica will continue to hold at least 65% of that company. As such, we would be a major beneficiary of those dividends.
Clear. Thank you.
Going into your second question, I think in Spain, now and going forward, the market is moving towards a more balanced fixed and mobile market model. Convergence as a key driver in both fixed and mobile businesses are going to be the key for our focus. As stated 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 end of the full yea r 2013. When you will have a more like for like, more homogeneous comparison basis, because subsidies removal come from March 2012 and will be fully in place also for retention from second quarter 2012. The negative impact that subsidies removal had on the ARPU will also fade off going forward.
You will have a more like for like and more homogeneous comparison. I think that's basically what I have to answer.
Thank you, Will. Next question, please.
Our next question comes from the line of Fabián 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 transaction that reduces the number of players, do you believe that there could be any difficulties in getting regulatory approval? If so, could this somehow compromise your objective of reaching the EUR 47 billion by year-end, as you seem to be counting with the cash in from this transaction already, even though officially it hasn't closed? Perhaps maybe some visibility on the kind of timeline you believe this may have. The second on the E-Plus KPN deal. I was keen to know your thoughts over the statements made already in the press by people from the German antitrust regulator and other authorities that seem to point to a rather negative stance on the transaction. Thanks.
Thanks for your question. First of all, on the Irish deal, we think that the proposal that we are making in Ireland by the sale of our business is very solid and attractive for the Irish market as a whole. I think that the level of competition in the Irish market is high enough to make sure that in spite of this transaction, there is significant tension. In fact, it will be an even more robust third player, and therefore to offer much more attractive offers to customers in the different segments. We do think that the proposal to the customers and to the Irish market is solid enough to justify the transaction, so we are not expecting major hurdles on that. 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. If Europe as a whole, as a region, wants to play its scale, it needs to consolidate. Consolidation is going to be in the interest of European consumers, and therefore it needs to happen. We think that we have a very strong and compelling case in the case of our German business. Let me try to detail that a little bit better. First, from an infrastructure point of view, competition is going to accelerate because right now you have a third and fourth player that because our entry has been later than the other two, we are lagging behind, and therefore we are struggling to be competitive against two very strong players.
The consolidation of the third and fourth should create an infrastructure-based player that is going to accelerate competition. Therefore, we think we have a solid case in terms of adding competition into that market through this transaction. If then we approach this transaction through the eyes of the customer, 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 some segments to which we have not been able to be competitive today in the German market, like the corporate segment. Wherever you approach the transaction, it's going to create more intensity and a better proposal to both the consumers and the society as a whole because it will accelerate investment CapEx, and it would accelerate more attractive offers to the customer.
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 completed, when the transaction is going to be completed, we still have more than 100 brands in Germany because we have more than 100 MVNOs through the German market. 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.
Thank you, Fabián. We have time for one just final question.
Our last question comes from the line of Jonathan Dann from Barclays. Please go ahead.
Hi there. Two questions. One, have you begun to think about partners for fiber beyond 3 million homes? Secondly, in Latin America, apart from Brazil, are there any other sort of low-frequency spectrum auctions coming up in the next two years?
Thank you, Jonathan. I think that our aim is to continue accelerating our fiber deployment, as such, we have the Jazztel agreement. To remind you that our objective is quite aggressive already, and it's to reach 8 million household pass by 2015. We are seeing good traction, the most important here, the demand is there so that we are seeing demand coming from our customers, especially through Fusión. 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 auctions on low frequencies, understanding 700 by that, the upcoming Chilean auction in Q3 is the one we expect. There is strong talks that Brazil, Colombia, maybe 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, it's not easy to clean them up, they might come in 2014. No strict plans that we know of are there yet. Mexico and probably Uruguay will come sometime in 2015. Again, those are more expectations than plans.
Does an auction in Brazil sort of 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 full deployment of LTE and the upcoming sporting events are likely to concentrate the regulatory and industry auction for the next year.
Great. Thank you very much.
At this time, no further questions will be taken.
Thank you very much for your participation. We certainly do hope that we have provided some useful insights for you. Should you still have further questions, we kindly ask you to contact our investor relations department. Good afternoon. Thank you.
Telefónica's January-June 2013