Hi, and welcome to Telefónica's January-September 2012 results conference call. At this time, all participants are in a listening 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 Ms. María García-Legaz, Head of Investor Relations. Please go ahead, madam.
Good afternoon, ladies and gentlemen, and welcome to Telefónica conference call to discuss January-June 2012 results. Before proceeding, let me mention that this document contains financial information that has been prepared under International Financial Reporting Standards. This financial information is unaudited. This presentation may contain announcements and events that constitute forward-looking statements, which are not guarantees of future performance and involve risks and uncertainties, and that certain results may differ materially from those in the forward-looking statements as a result of various factors. We invite you to read the complete disclaimer included in the first page of the presentation, which you will find in our website. We encourage you to review 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 the slides, please contact Telefónica Investor Relations team in Madrid by dialing the following telephone number, 34 91 482 8700. Now, let me turn the call to Ángel Vilá, who will be leading this conference call.
Thank you, María. Good afternoon, ladies and gentlemen, and welcome to Telefónica's 2012 third quarter results conference call. It is my pleasure to chair this call. Today, I have with me José María Álvarez-Pallete, Chief Operating Officer, Eva Castillo, Head of Telefónica Europe, and Santiago Fernández Valbuena, Head of Telefónica Latin America. Also with me are Matthew Key and Guillermo Ansaldo, Heads of Telefónica Digital and Telefónica Global Resources, respectively. During the Q&A session, you will have the opportunity to ask questions directly to any of them. During the last months, we have continued executing our strategy with significant progress and visible results in three key areas. First, on the operational side, Q3 results confirm the consolidation of the recovery trend initiated in the previous quarter, with a sequential improvement in underlying EPS underpinned by sequential growth in OIBDA, both in absolute terms and in margins.
Second, on the financial side, we have significantly improved our financial position with a net debt reduction of close to EUR 5.5 billion since the end of June, on the back of the substantial improvement in free cash flow and the fast execution of asset disposals. We are particularly proud of the successful IPO of Telefónica Deutschland, which has been the largest IPO in Europe year to date and has been executed in a record time. On top of that, we have been very active on the financing front with over EUR 13 billion refinance year to date, increasing our total liquidity to EUR 18 billion. Third, we continue making progress in our transformation into a digital telco, achieving significant milestones in the quarter. Let me now start with a summary of key financials on slide four.
In the first nine months of both 2012 and 2011, we booked several significant exceptional items, with Q3 '11 results being particularly impacted by the provision for the redundancy program in Spain. Accordingly, to better understand the underlying performance of the company, we are providing a P&L excluding those non-recurrent effects and non-cash impacts. January to September revenue reached over EUR 46.5 billion, while underlying OIBDA totaled nearly EUR 16 billion. Net income was over EUR 4.4 billion in underlying terms. The good news in the third quarter is that we posted a much better performance from OIBDA to net income, confirming the quarter-on-quarter improvement trend initiated in Q2. I would also like to highlight that although material items such as asset write-downs are flowing into the P&L, there are other transactions that are enhancing our equity but not flowing through the P&L.
For example, the restructuring of the Colombian operations, which increased shareholders' equity by EUR 1.6 billion. As slide number five shows, we continue improving profitability across the group. In absolute terms, underlying OIBDA grew sequentially for the second quarter in a row with a consistent performance in Europe and Latin America. As a result, consolidated OIBDA margin stood at 35.1% in the third quarter, up 230 basis points in the last six months, leading to improved year-on-year trends. As we anticipated, OIBDA margin in the second half of the year would be better, and we are fully on track to deliver on our target. Improved trends in OIBDA flow directly to the bottom line, leading to an inflection point in underlying EPS.
As you can see on slide number six, underlying EPS reached EUR 0.36 in the third quarter, with a significant improvement since the beginning of the year, both in absolute terms and on year-on-year basis. EPS in the nine months to September was close to EUR 1, well above our 2013 dividend commitment, and we still have another quarter to provide further support to dividend sustainability. Strong diversification continues to be one of our key strengths, as shown in slide number seven. We would particularly highlight the growing contribution from our Latin American businesses, which already account for 49% of consolidated sales, and for the first time, exceed revenue generated in Europe. It is also important to highlight our lower dependence on Spain, which now is just 24% of our sales and 32% of our OIBDA. Turning to slide number eight.
In the first nine months of 2012, consolidated revenues grew 1.1% year-on-year, excluding the impact of regulation, driven by solid growth in two key strategic areas. First, Latin America, where revenue growth accelerated in the third quarter to 8% year-on-year in organic terms, ex regulation again. Second, mobile data revenues, which continue to enjoy a strong momentum with a 14% year-on-year growth and already account for over one-third of mobile service revenues. This performance is driven by our data monetization strategy, focused on increasing smartphone penetration with attractive data propositions based on tier pricing and integrated tariffs. On the efficiency side, on slide number nine, I would like to highlight our ability to deliver cost savings, with OpEx down 1% year-on-year in the third quarter.
Key transformational efficiency initiatives are bearing fruit, with significant savings from more rational subsidy models across our footprint, commissions management, and headcount reductions, among others. We are fully confident on our ability to continue delivering significant cost cutting across regions, a key lever to offset top line pressures in some of our European businesses. On top of local and regional efficiency measures, Telefónica Global Resources is further exploiting scale benefits, helping to maximize business profitability. The unit is consistently contributing to higher efficiencies and cost reduction, driven by new ways of sourcing, building and operating our networks and IT. Evolved sourcing models and a clear focus on the right map of vendors are providing the expected results. Additionally, global end-to-end devices management is starting to provide tangible results, not only in terms of cost reduction, but also in terms of stronger market relevance.
Please turn now to slide number 11 to review our operations by region, starting with Latin America. In the third quarter, mobile commercial activity remained strong, maintaining a clear focus on high-value customers. Contract net adds were solid, especially in smartphones, where we are doubling accesses year-on-year. It is also remarkable the improved trends in the fixed business, with positive net adds in the traditional business for the first time in two years, and higher fixed broadband and PTV net adds in the quarter. Revenue growth acceleration in Q3 to above 8% year-on-year was fueled by improved trends in fixed revenues and robust mobile service revenues, up 13% year-on-year. Healthy diversification by businesses was coupled with a well-balanced contribution by our three Latin American regions, with all of them contributing to enhanced growth.
As slide 12 shows, the solid revenue performance, easier comms on commercial costs, and ongoing efficiency measures drove further improvement in OIBDA and margin expansion in the quarter. OIBDA year-on-year growth in underlying terms ramped up to close 5% in the quarter, with a significant progression from the virtually flat year-on-year performance at the beginning of the year. OIBDA margin also consolidated its improved trends year-on-year and reached over 35%. Please turn now to slide 13 to start reviewing our Brazilian operations. Our focus on quality and the integration of the fixed and mobile operations have allowed us to materially widen the gap in customer satisfaction indexes versus our main competitors. There has been a marked turnaround in the fixed business since we launched Vivo as a single brand. On top of that, our new convergent propositions continue to underpin a better performance across segments.
Targeted commercial actions and our leading quality resulted in additional market share gains in the mobile business, reaching 37% in the contract segment, combined with a very robust performance in the prepaid segment, both in terms of accesses and top-ups. Meanwhile, we continue to transform the fixed business, launching a new 200 megabyte fiber proposition to speed up uptake, while we are reinforcing our PTV business with a new IPTV platform already launched. On the financial side, in the third quarter, Vivo delivered a strong set of results with acceleration in revenue and OIBDA growth. Top line rose 5% year-on-year and 3% quarter-on-quarter, driven by the sustained performance in mobile service revenue and the improved trend in the fixed business, both year-on-year and sequentially. Fixed revenues reflected the better commercial performance in the quarter.
The ramp-up in revenues, coupled with increased efficiency, led to an acceleration of OIBDA growth along the year, with Vivo retaining its best-in-class profitability despite the negative impact from regulation. As such, OIBDA margin reached 34.5% in the quarter, both year-on-year and quarter-on-quarter, excluding specific factors booked in the second quarter. Please turn now to slide number 15. The main highlight of the Southern region is the margin expansion across the region, with a particularly strong performance in Peru, where the robust commercial momentum was coupled with a ramp-up in revenue and OIBDA growth year-on-year. The only exception was Argentina, where despite the positive revenue performance, high commercial activity dragged OIBDA margin in the quarter. In the Northern region, as in the rest of LATAM, we delivered a widespread improvement in revenue and profitability quarter-on-quarter. We did spend PEN 134 million.
In Mexico, the turnaround process continues, with the strategy focused on quality growth, driving ARPU acceleration, and inflection in mobile service revenue performance with positive year-on-year growth in the quarter. In Venezuela, once again, operational performance was impressive, with revenue growth acceleration and margin expansion amid strong commercial activity. Let's now review our operations in Europe on page 17. I would like to highlight that Q3 results reflect the benefits of the commercial and efficiency initiatives we have executed across our countries. The successful tariff refreshment allowed us to compete better in the marketplace, driving mobile churn reduction and leading to a quarter-on-quarter increase in net adds. Handset upgrades were down in the quarter as customers delayed renewals ahead of the launch of new devices, and we tactically reduced the pace in Spain ahead of the launch of Fusión, our new convergent offer.
Our focus on value customers resulted in higher contract and smartphone penetration across our footprint, with one-third of our customers already enjoying mobile data plans. Our targeted actions on the commercial side, together with a set of efficiency measures, led Telefónica Europe to consolidate a sequential improvement in OIBDA and profitability, with over 30% OIBDA margin in the quarter. Turning to slide 18 to start with our operations in Spain, I would like to highlight that after one year of execution, there are visible results from our turnaround plan, which we are implementing in different stages. The first step was the launch of the new fixed broadband and mobile tariffs, which had a great traction among our customers, leading to a sharp reduction in churn, the cornerstone of our initial push.
Once the customers were comfortably installed in the new tariffs, we took a second step forward and removed subsidies for new customers, leading to significant savings in commercial costs. The third step was the implementation of several measures in order to increase efficiency with an aggressive simplification of processes across the company, from workforce to IT, enhance the portfolio, while increasing quality levels to improve customer satisfaction. All these efforts have led to a radical improvement in our financial results. Though revenues continue to be under pressure, operating cash flow performance has improved significantly, reflecting our levers to enhance OpEx and CapEx efficiency. Q3 OIBDA is up on a sequential basis for the second consecutive quarter, with margin higher than a year ago. Let me also stress that the double-digit reduction in CapEx is sustainable without jeopardizing our increased fiber rollout efforts.
The fourth transformation step in Spain is the launch of Movistar Fusión. This is a key milestone in our strategy to regain commercial leadership in the market. Movistar Fusión is the best convergent offer in the market and the first time our customers will benefit from a single bill. It bundles fixed broadband, TV, and mobile services at very attractive prices, and we offer add-ons to adapt the offer to our customer needs. We aim at increasing the customer base who have all their telecommunication services with Telefónica, what we call totalized customers, leading to further churn reductions, and we also expect to capture new customers in the market. At the same time, Movistar Fusión will lead to lower commercial costs on the back of changes in our loyalty program and the introduction of handset financing facilities. The best way to describe the attractiveness of the offer is customers' reaction.
Just one month after the launch, we have already reached 350,000 customers. Please turn now to slide 20 to review our operations in the U.K., where trading activity continued to be solid in Q3. Contract gross adds rose 18% year-on-year, though lower upgrade activity as customers delayed renewals in anticipation of the new devices launch at the end of the quarter. Together with increased gross adds led to solid net adds in the contract segment, with smartphone penetration growing 18 percentage points to 44% in September. Topline pressure continued in Q3 with mobile service revenue reflecting impacts from MTR cuts and the new roaming regulation, with total revenues posting stabilizing year-on-year trends. Profitability continued improving, with sequential growth in OIBDA, both in absolute levels and in terms of margin, which stood at 25.3% in the third quarter.
The lower upgrade activity, together with the positive impact from the ruling on ladder pricing, drove the quarter-on-quarter margin expansion. Coming to slide 21, the recently listed Telefónica Deutschland continued posting very good results, gaining value market share on the back of a strong commercial offer and the success of our data monetization strategy. 3D activity was strong, with a consistent momentum in net adds in the quarter. In addition to this, data revenue grew at a faster pace than data traffic, with the gap between these two metrics widening year-on-year. Mobile service revenue growth remains strong, with stable ARPU trends. As a result, Telefónica Deutschland is now the number 3 mobile player in the German market by revenues.
In addition, OIBDA increased 14% year-on-year, with growth accelerating in the quarter, reaching an OIBDA margin of 27.2% in the third quarter, up 2.4 percentage points year-on-year. Operating cash flow was robust, reaching EUR 533 million up to September. Let me now update you on the progress made in our journey to become a digital telco in the last few months. To enhance our position as connectivity provider, we have recently launched new convergent propositions both in Spain and Colombia, while in Brazil, we have strengthened through the broadband and Pay TV offerings. In our enabling/retailer role, we have extended operator billing agreements to new countries, and we have also launched new machine-to-machine services in key industries. While services like Kantoo are having a great traction with over 3 million Brazilian learning Spanish, English, or French via mobile phones.
Finally, as a provider of digital services, we're also advancing rapidly. To be highlighted is the recent approval by EU authorities of our JV for advertising and financial services in the U.K. The agreement signed with Aurasma, the world's leading augmented reality platform, and the success of Wayra, with over 170 collaboration agreements with startups. Let's now move to the financial side on slide 23. Net financial debt has been reduced by EUR 2.3 billion in the quarter, mainly due to the significant free cash flow generation since the end of June, coupled with the completion of asset disposals, mainly the sale of China Unicom stake. As already anticipated in previous calls, free cash flow generation has been enhanced on the back of a better operating performance and the unwinding of the working capital consumption recorded in the first half of the year.
We continue to see further positive impacts from our asset rationalization strategy, with additional cash proceeds from the IPO of Telefónica Deutschland and at 10% stake Rumbo and other minority stake disposals. On top of that, the refinancing of the preferred shares, currently accounted as debt, will reduce debt by EUR 800 million through the swap by Treasury stock at market value. All these post Q3 events will contribute to reduced net debt by an additional EUR 3.2 billion. Let me stress that as of today, we are pointing towards EUR 50 billion net financial debt by year-end, compared to a debt figure of over EUR 58 billion at the end of last June. On slide 24, we detail how we are performing an excellent financing activity so far in the year, totaling EUR 13.4 billion. This compares quite favorably with last full year financing activity at EUR 11.5 billion.
This has been achieved despite decreased sovereign risk and a harder financial environment in 2012. Since June, Telefónica has raised over EUR 5 billion long term financing in the credit markets, with extremely strong support from credit investors, both in Europe and in Latin America, as shown by the heavy oversubscription of the bonds raised nearly 11 times in Colombia or Chile, and above nine times in the Euro market. It is to note the broad diversification of our financing activity. Only 15% of total banking financing raised along the year corresponds to Spanish financial entities, while American and European, such as Spain, have contributed 30% each, and Asians, the remaining 26%. On top of that, 77% of total undrawn facilities are signed with non-domestic financial entities. It is also to highlight the ample diversification by funding instrument, proving that Telefónica maintains all markets open.
Roughly one third of the financing has been raised through bonds at the holding level, another third corresponds to syndicated loans, and the remaining third coming from bonds in Latin America and other funding sources. Productive financing activity, which has allowed us to build a significant liquidity cushion of EUR 18 billion, and EUR 4 billion since June. Our cash position, excluding Venezuela, stood at EUR 7.8 billion at the end of September, while total and drawn credit lines amount to EUR 10.1 billion, with nearly 90% maturing long-term. This places us in a quite comfortable position to manage debt maturities which are covered beyond 2014. I wish to highlight that all the financing efforts have been completed while keeping effective interest costs in line with previous quarters and continue to remain at the middle part of our guidance.
Our average debt life is back again of six years, as per our guidance. To wrap up, let me stress that our strategy is delivering visible results. Sequential OIBDA improvement across regions is driving an outstanding improvement in EPS, with nine months' performance consistent with our full year guidance, which we confirm. We're also increasing materially our financial flexibility with a significant step forward in debt reduction in the second half of the year, and a well-diversified access to financial markets, with the recent success of the IPO of Telefónica Deutschland, providing a new platform for additional flexibility. It is also important to note our progress to become a digital telco. All in all, we are accelerating the transformation of Telefónica.
We are now open to any questions you may have.
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 phone or hands-free phone. There will be a short silence while questions are being registered. Our first question comes from Tim Boddy from Goldman Sachs. Please go ahead with your question, sir.
A question about Spain. Obviously, in the press, we read about Yoigo potentially being up for sale. Can you remind us what contribution to EBITDA Yoigo currently represents in the Spanish business? Secondly, given the very strong momentum you've achieved in de-leveraging and refinancing, as you highlight, does it still make sense to look at listing options in Latin America? Given it seems, relative to current trading multiples, you might not get the value for those attractive growth assets. Thanks very much.
Thank you very much. On your first question, as you know, we cannot disclose that figure, but as you can imagine, we are following the process very closely, and we are reviewing anything as the outcome is known.
With respect to the second question, we continue our internal work of analyzing and assessing the options with respect to potential IPO of our Latin American businesses. No decision has been taken on such a transaction, but we are working in the preparations in the case we decided to move ahead with it.
Okay, thanks so much.
Next question, please.
The next question comes from Luis Prota from Morgan Stanley. Please go ahead with your question, sir.
Yes, thank you. Two questions also on Spain. First is regarding the Movistar Fusión and the 430,000 customers you were mentioning. I don't know whether you can give us some light on what % of these new customers are coming from your existing customer base and therefore will give rise to some revenue dilution, and whether you expect the net balance of new customers taken from competition and cannibalization to give rise to any kind of short-term pressure in revenues and EBITDA. The second question is on margins. Your margins in the third quarter were very strong in Spain. I don't know whether you could give us some light on what savings were generated from the lack of subsidies, headcount cut, and others.
Also with a stronger commercial activity in the fourth quarter, whether we should expect margins to drop materially and the third quarter margins to be considered as a kind of one-off. Thank you.
Thank you, Luis. I think that as you saw, the number that we are releasing is the 430,000 customers year to date. I will not be able to give you more details around the mix on those customers. I have to say that since the pre-registration that we saw late September till today, all we are seeing are the right trends, and we will definitely give you more details towards the fourth quarter. For the best value offer that there is now in Spain. As you know, we are starting to see the proper and the right reaction from our current customers, the ones that they were already with us partially or in totally. Definitely the ones with whom we can uplift and foster new services, and with the new customers.
As you know, our aim is to go both for the current customers and also for the new ones. With regards to the second questions and regarding the margins per se, we are very pleased with the second quarter result on the margin. It is a clear improvement and is showing that our strategy on the transformation journey since the beginning of the year, moreover, since the end of last year, is paying results. What we need to focus is specifically on the cost reductions that are allowing maintaining these high margins, which we believe are sustainable. In particular, when you look at each of the contribution to this performance is both on the incremental savings and personal costs throughout the year. As you remember, this happens through every quarter and through next year.
It is also the cost efficiencies initiatives that are not only removing the subsidies, but also creating new ways of operating within the Spanish operation. I have to highlight that I have been in this new role for only seven weeks, and it is very impressive to see how the Spanish team is leading this commercial strategy, is leading effort within the OIBDA and in the Spanish telecoms operations. They are also taking very seriously the efficiency program, both on personnel and the rest of the efficiencies within the network. We believe this is a continuing program. There is room for more efficiencies, and we are working on that very closely. Next question, please.
Our next question comes from Mathieu Robilliard of Exane BNP Paribas. Please go ahead with your question, sir.
Good afternoon. Thank you very much. I have two questions. Please, with regards to revenues first. You are running slightly below your full year guidance, yet you've reiterated the guidance. I was wondering where you expect a re-acceleration in Q4. It does seem to me that in LatAm, despite the strong growth, comps are a bit tougher in Q4, and there's no acceleration in the growth when you look at the revenues, including the regulatory impact. I assume it must be from Spain or from Europe, but maybe if you can give a little bit of color of where you expect the acceleration revenue to come from. The second question has to do with cash flow development. I wanted to have a little bit more detail into one of the items that appears on page 23, which is FX commitments, cancellation, and others.
Quarter after quarter, this is a big consumption of cash. This quarter, it's EUR 900 million. Previous quarter, I think it was EUR 700 million. Before that, around EUR 400 million. Maybe if you could give us a little bit of color and guidance into that item. Thank you very much.
Thanks for your question. Taking your first part of it on revenues and the guidance. Let me first stress that the guidance was given under a certain framework of exchange rate that we encourage to check, because this is the framework in which you should review your projections. The second part in terms of on a region basis in Europe, we have revenue pressure. It is true that it has been affected by regulation. We are very focused on value on average margin per user. We expect OIBDA to continue improving, mainly driven by efficiencies and the trends that we have been seeing in this quarter should continue. In Latin America, we see revenues accelerating in Q4 due to a very solid customer base growth. OIBDA evolution in Q4. You need to consider that it was impacted last year by tower sales.
Therefore, excluding tower sales in the second part of this last quarter of the year, our OIBDA growth should continue to improve. Basically, we see the trends that we are having in the third quarter being extrapolated to the fourth quarter. Please consider the framework of the exchange rates in which we were giving the guidance at the beginning of the year.
Hello, Matthew. This is Ángel. With respect to your second question. In this column of FX commitments, cancellation, and other, we have various effects. The first one is the impact of interest accruals over interest payments, which is basically reversing what we saw to the contrary in the first quarter of the year. This would be around EUR 355 million of the total EUR 899 of this column. We also have the mark to market of interest rate hedges, which is around EUR 270 million. The rest FX is around EUR 60 million, and the rest is the part of the employee retirement commitments that become due, in the year, and they become debt.
Next question, please.
Our next question comes from Keval Khiroya of Deutsche Bank. Please go ahead with your question, sir.
I've got two questions, one on Spain and one on Brazil. It looks like Vodafone is extending its handset subsidies beyond summer. Do you feel a need to respond to this at all?
Brazilian fixed line revenues remain weak. They're still falling 9%. Your KPIs in Pay TV, in particular, are quite poor. What steps are you taking to improve this? When will the revenue trend improve with that as well?
Thank you. First of all, on your first question, we have seen some of our competitors going back to subsidies, and as you know, this is our commitment within the Spanish strategy, not to go back to subsidies. We don't think it's necessary to respond on that front. In fact, our aim is to continue working on our transformation program. Right now, we are in the 4 stage, by which the launch of Fusión has already impacted positively our clients, and the reaction is positive. I think that we show a very clean business, a very clean operation, and we don't see any need to go back to subsidies. In fact, some of our competitors have replicated our offer. They came out very recently, and our belief is they're not so much using the subsidy handsets anymore. That obviously, you need to analyze.
I think that that was the question. Thank you.
Yes, this is Santiago. Brazilian fixed, you know their situation there is very competitive. There are a number of one-offs that you might want to single out before making the final comparison. This has a lot to do with the improvement that we have had in Q3. We feel much better about how things are going, and we have a number of actions, including the deployment of our IPTV platform this month, launching some OTT products that are going to reinforce the value of our fiber and VDSL product, and the renewal of the satellite TV product. It's not as good as it sounds, but it is certainly pointing in the right direction in the sense that once you exclude the one-offs, the improvements are quite real.
Next question, please.
Our next question comes from Torsten Achtmann of JPMorgan. Please go ahead with your question, sir.
Torsten. Two questions, please. The first one on Brazil, the competitive intensity is increasing, and the regulator is introducing more aggressiveness on MTR reduction and on, say, wireline asset opening up. Can you give any early indications how you think it will change the competitive landscape and your business and how you look to respond? Secondly, on the buyback Telesp has introduced, is that more pretty formal flexibility measure, or is it really that you're trying to implement that over the next year and therefore reducing the minority float off Telesp? Secondly, on potential asset sales outside of LatAm, are you looking at further options of other assets where you could list minorities or sell partial stakes on assets you have in your portfolio? Thank you.
Thank you, Torsten. This is Santiago again. On the latest plans from the regulation, I think it's fair to say that after all has been said and done, it is lighter than we had feared. It is worse than we had expected at the beginning of the year. I think the brighter part is that we finally have no bill and keep or partial bill and keep measure anymore, and I think that's the right development. This is going to make adjustments in the future MTRs easier. As to the pace of decline in MTRs, it's true that they are lower than we had expected at the beginning of the year, but they're also manageable. It's a bit early to understand what the full impacts are going to be, but remember two things.
First, that if you have an integrated operation like we have in São Paulo, the final net effect is likely to be lower than if you are mobile only. Second, that unlike in some other markets, the Brazilian market is characterized by fierce competition and very small differences between the market share of the top player, which is us, and the bottom player. That helps reduce the impact of any MTR at the end of the day. Once the tariffs are lowered or are very similar, it's difficult to make a lot of elasticity from one network to the next.
Torsten, this is Ángel. Could you please repeat your second question?
Second one was literally on potential further asset sales outside of LatAm. Are you looking at any other assets or stakes of assets you could potentially monetize next year if you decide not to do LatAm or on top of LatAm?
Okay. Well, what we already communicated back in May, June, we have been delivering. We also said that we would be analyzing the potential IPO of Telefónica Latinoamérica, which, as I said before, we are still in the process of internal analysis. We do not need to do that transaction, but we may decide to do it, depending on what provides the best value for our shareholders. We still maintain a small stake in PT, which we are monitoring market conditions to see when is the best moment to monetize. We have received expressions of interest from potential interested parties in some of our assets. We will assess those always with the perspective of seeing whether they provide value for Telefónica.
I would like to stress that all the divestments that we have done this year so far have been done in such a way that they do not alter at all the equity story of Telefónica.
Next question, please.
Our next question comes from Ivón Leal of BBVA. Please go ahead with your question, sir.
Yes. Hello, good afternoon, everybody. My two questions are in Spain. The first one, since the launch of Movistar at the beginning of October, there are a number of competitors that have already matched your offer. Actually now, how do you feel the new commercial proposition has improved your position in the market, given the price out there are already matching yours? The second one, maybe if you could help us, how you expect to compensate the ARPU declines that I guess you expect to get through 2013 due to this Movistar Fusión. Could you give us a number in terms of what is the market share you need to increase in fixed and mobile in order to compensate that? Or is the compensation coming from commercial cost reduction?
Thank you, Ivón. I think that since the launch of Fusión at the very beginning of October, we are seeing the right evolution within our clients. As I mentioned earlier, I am able to give you the number of 430,000 customers year to date, that is fully Fusión customers. I can give another signal of how this is going with regard to the fixed broadband, which we are up to 43,000 so far. The positioning of the launch of Fusión, as I mentioned earlier, is part of a program. Since we launched the program, we knew our competitors would have the capacity to react, and some of them have done so. Analyzing the latest new offerings, obviously, they were able to do the replicability of the offer. We still believe that Fusión is the best value offering for clients that were already with us and the new clients.
Obviously, we cannot give you yet the mix of the clients, because it is very early days. Again, to reinstate that all that I am seeing is the right trends, and hopefully, we will be able to give you more details very soon. When you ask what can we do in order to compensate ARPU declines or initial ARPU declines, I think that the offer is very well studied. You go step by step. And to some of the potential initial ARPU decline as we compensate and we have the mix of clients that we want within our offering. Contracting fixed broadband, so the customers who contract fixed broadband are positive to our mobile services. It is also positive on mobile customers which contracted fixed broadband and the fixed voice service. It is a positive again in any mobile additional lines.
Of course, as you can imagine, any new customers adding to the offering. Another very important factor is that the churn continues its trend of going down. And overall, all the strategy that we had in mind is provoking a more dynamic market in Spain. We are happy to say that we believe we are leading that new dynamic market with this commercial strategy, which at the moment is leading the offerings in the market. I think that I answered all together, no? I am not missing any. Okay. Thank you. Next question, please.
Our next question comes from Robin Bienenstock from Bernstein Research. Please go ahead with your question, ma'am.
Thanks very much. Just say congratulations, because I think a breathtaking amount of work went into delivering those results. Two questions, if I may. The first is about Spain. You're focusing on total telecom offers, and clearly these are going to put wireless companies under a lot more pressure, wireless-only companies.
Sorry, Robin. There's a problem with the line, and we cannot hear you properly. Can you repeat, please?
Yep. Can you hear me now? Hopefully. On the total telecom offers that are going to put wireless-only companies under a lot more pressure, I guess what I would like to know is whether or not you're going to face the same headwinds in Germany and Mexico, where you are the wireless-only businesses rather than the total telecom businesses. Separately, with Latin American MTRs falling, a lot more longer term pressure on wireless revenues in Latin America. I'm wondering whether that means you need more CapEx sooner in Latin America and wireline to reduce any eventual cannibalization.
Robin, this is Santiago. Robin, the sound was not too good. If I did not understand you correctly, please do correct me. If I understand what you're pointing at, you're talking about the headwinds facing some of our operations and whether or not CapEx would need to be deployed at a faster pace than we've done up until now to compensate for that. I think you probably may be right in terms of the fixed lines, especially in São Paulo, as I think I mentioned in one of the earlier questions.
I think that we have almost everything we need to counter the possible headwinds on wireless, as we've already done most of the investments, as we're already in the process of not seeding, but harvesting some of those CapEx efforts, especially in the markets that you mentioned, namely Mexico. I cannot speak for Europe, but I would assume that my colleagues are probably going to be on time. Yes, the environment is challenging, but no, I don't think we're lagging behind with the possible exception of a minor push that we have to do in fixed line Brazil.
Going back to the European question, starting with Germany, as mentioned earlier and yesterday in the conference call, we've seen a solid trading momentum in the quarter and a sustained low contract churn. With regards to the MTR questions, as you know, in Germany, we're not expecting them until December, different to the other markets. What we believe as a whole within Germany, that we need to stick to a balance in between growth and the profitability of the operation. With regard to the CapEx, as you know, in the third quarter is an important increase of 40% year-over-year.
As a signal, we don't expect similar increase in the fourth quarter, although I have to reinstate, there is a continuing investment process into our 3G network, as we want to ensure the stability and the quality of our network, as well as accelerating the LTE deployment in the country. I think that we have been, I don't know if you've seen the results coming from the Connect. This publication is already giving us very important results of our German operation. I encourage you to look at them because they reinstate that the quality and investment is proven a very good one. Next question, please.
Our next question comes from Paul Marsch of Berenberg. Please go ahead with your question, sir.
Thanks. I just have two questions. Firstly, are you expecting the Fusión tariff in Spain to lead to a higher level of handset upgrades? Secondly, maybe you could clarify any progress on the tax and license renewal situation in Peru. How much tax has been demanded by the Peruvian authorities? How much have you paid so far, and has there been any progress actually on the license renewal in Peru?
Well, starting with the Fusión question, I think that just to remind that Fusión does not have subsidies within the offer, as actually we started with that policy at the beginning mid-year. The second question, regarding Fusión, I think it was on upgrade, so we're not expecting that to happen. It's not within the Fusión.
Yes, Paul. This is Santiago again. On an update on Peru, nothing much really to update you on. We do expect that the license renewal process that has gone through a rather long and convoluted administrative path, is coming to an end, is at the end, it may very well be satisfactory, and I think some of the public statements by the ministers in Peru are pointing to that direction. Nothing finalized and nothing is done until it's completed. Certainly, we do think that it's very likely that before the end of the year, that process of renewal, license renewal, will find a satisfactory completion on both grounds. On the tax side, there really isn't much to talk about. This process has been going on for 10 years now.
We don't expect it to close in the next weeks, as it is a very long and protracted and might be complicated from the technical side. What I think is a welcome development is that this is no longer a media issue. This has been and will continue to be a tax-related issue with us and the courts. We will make some progress as time proceeds. You know that we did spend a lot of money at the beginning of the year paying down the partial payment, but no further payments have been done since then. No significant decision has been taken by any of the courts where we have this.
Let me remind that this started almost 10 years ago as a consequence of two things, which we feel very strongly about, and that's why we've been challenging the tax administration's view. Those are related to whether or not we can take off from our income, the revenues that our customers cannot pay to us, and the deductibility or lack thereof of interest when it is devoted to investment. Those 2 items are, we think, crystal clear. Any other constituency in the world would accept them as tax deductible. The fact that the numbers might be so interesting is simply the fact that they've been compounding at a fast rate from the year we started, not because the number itself was very nice. My colleagues point to me that we did spend 134 million PEN. That's about 35 million EUR at the time.
Next question, please.
Our next question comes from James McKenzie from Fidentiis. Please go ahead with your question, sir.
Hi. 2 quick questions on Europe. Firstly, on Spain, your fixed broadband churn has ticked up quarter-on-quarter. We don't have a full series of these. Could you just discuss the reasons for that? Is the market getting more competitive, or is there a seasonal tick up as we've seen in, I think, other operators? Secondly, the lack of handset upgrades in the U.K., does that bode badly for Q4 margins when presumably the upgrades are all going to come through?
Thank you for the question. With regard to Spain, I think that the key messages on the fixed fixed revenues evolution on the nine months is that first of all, we believe that the 11% sequential movement is broadly stable, and the reality is we have seen accesses and voice decline, driven by both a bit of a lower access base and a higher weight of flat rate and bundled traffic coming in competition. With regard with specifically fixed broadband revenues, as you know, they were affected by repositioning of the new tariff portfolio. I can give you numbers up to date. The number or the proportion of clients that have moved to the new portfolio is reaching 76% of residential fixed broadband up till September 2012. That's why the year-over-year evolution in the quarter has worsened a bit.
However, in September, we have started to see a revamp in that evolution, and we have started to reposition in the month compared to last year. It is important to mention the churn, which is much lower, is minus 0.4 percentage points year-over-year, I think that's the best number, which finishes at 1.9%. The rest of the questions regarding the U.K., it is important to say that during the third quarter, we were waiting for the new high-end devices to have the stock and to be positioned in the market. We didn't have all the commercial activity that we normally used to have. The expectation in the fourth quarter is that we will have more activity. We will watch very closely the margins and also the commercial activity. What I want to reinstate is that this is about normal activity.
This is about having the right behavior in the market. As I mentioned earlier, we believe the U.K. market is also showing different behaviors and a more rational approach to handset commercial activity. Next question, please.
Our next question comes from Justin Funnell of Credit Suisse. Please go ahead with your question, sir.
Thanks very much. You mentioned during the call a potential shift in Spain. I think you were mentioning less spend on handset retention. I guess for years you've had this loyalty scheme on people use the phone and build up points and trade them in for new phones. Are you shifting away from that model? You also mentioned moving into handset finance deal. Is that going to be along the lines of perhaps the O2 My Handy model, where you could see actually quite substantial handset deals offered, but done through working capital and factoring? Would that make you more competitive in the handset space? Secondly, on Brazil margins, I guess I've been waiting a few quarters to see if your margins would benefit from the Telefônica Vivo merger. Margins have remained pretty flat.
Is that a trend or should we actually see some margin expansion in the coming 12 months?
Thank you for your question. Within Spain, as you know, Fusión specifically has no subsidies for handsets. That was also part of our commercial strategy set at the beginning of our transformation program. When you ask me about the ways of being more efficient on handset commercial activity, as you know, we have different approaches depending on the countries. In Spain, it is a different system than My Handy in Germany. In Spain, what we have is an agreement with the financial institution. That is working increasingly well. With regard to My Handy, I think it's one of the best financial offerings. It is working well from the beginning to the end of the process. We believe this is a way going forward to make sure that the operations businesses look clean and that we stick to our mainly business operations.
Justin, it's Santiago again. On Brazilian margins, I think there are two forces acting up on them. One is structural that you mentioned. It is the cost reductions as a consequence of the integration of our operations. This is going to have a modest but long-lasting effect on our margins. There is the result of the commercial activity of the quarter, which rarely coincides with the sales. You should expect some stabilization of the structural points going forward. You should also expect us to continue pushing or pulling from the commercial levers depending on what the market is demanding. Right now, as I think I've mentioned throughout this call, we're putting a lot of emphasis on everything fixed and broadband related. We probably should spend a little bit more there.
We're satisfied with the way our commercial measures are acting and the result we're getting on the wireless, especially on the high-end contract and on the smartphone end. We are probably not going to be pushing too hard on that one, but take those two observations as temporary and tactical rather than structural.
Next question, please.
Our next question comes from Frédéric Boulan of Nomura. Please go ahead with your question, sir.
Hi, I've got two questions. Firstly, if we could come back on Spain, you seem to want to focus our attention on sequential improvements. Firstly, in mobile, ARPU has been flat in the last four quarters at around EUR 21.5. Should we expect this level to be sustainable or should we foresee the usual Q4 drop? Similarly, at the EBITDA level, you show sequential improvements in the last two quarters. Is there any message here for us for Q4? Secondly, back to Latin America.
Frédéric, sorry again. We are having some problems with the line. Would it be possible that you repeat your question, please?
Sure. Is it better?
Thank you.
Okay. Firstly, on Spain, you seem to focus our attention on sequential improvements in this business. My question is, in terms of mobile ARPU has been flat in the last four quarters at around EUR 21.5. Do you expect to be able to hold this level going forward, or we should expect the usual drop in Q4? Similarly, at the OIBDA level, you show sequential growth in Q2 and Q3. Is there any message for us for Q4? Secondly, back to Latin America, if you could elaborate on the type of structure you are thinking, in terms of potential IPO, do you plan to use Telefônica Brasil as a platform to drive this consolidation? How do you think about Telefônica Brasil minority shareholders in this process? Thank you.
Thank you, Frédéric. You're right. I think the sequential improvement in OIBDA in the mobile business, it is a reflection of all the measures that we are taking from the very beginning, refreshment of the tariffs to the handset subsidies changes into the higher efficiency programs that we have across the operation. What is that giving us is much better results with the satisfaction of clients, improved qualities, reduction of claims, which at the end is an increase on the average margin per user. What we're working from that moment is to say, okay, the refreshment of tariffs produced a 76% in penetration within our clients, within the mobile business, and there's been a deterioration or an impact on ARPU. The quarter, it is mobile service revenues affected by the ARPU declines as well as interconnection declines.
The slowdown decline that we see in mobile service revenue in the third quarter, there is a positive effect. As you know, there is lower handset upgrades and related impact on the loyalty program. As you know, the contract handset upgrades is -32% lower than year-over-year. The underlying mobile service evolution is as mentioned earlier, worsened in third quarter as the ARPU declined almost 16% year-over-year. What we have in the contract, in the postpaid contract revenues, a very clear seasonality of quarter situation with respect to the connectivity. The seasonality effect seen in 2011 didn't happen this year, due to the high penetration of the flat rates and the lower weight of the big screen to the multi-SIMs or the tablets, et cetera, that we are seeing more recently.
Just to mention again, the continued increased penetration of the new portfolio with 57% residential segment. Anyway, looking into what is happening today, the Fusión strategy, I think it is the best strategy going forward to counter five with some of these trends that we've seen in the third quarter.
With respect to the second question, as I said before, we are still analyzing various alternatives for the potential listing of our Latin American businesses. Different alternatives have different potential implications, both from regulatory, tax, and other implications. None of them are more clear or differential than others. We have not taken a decision, not only with respect to any structure, but with respect to whether the transaction would be performed or not next year. As soon as there is progress on this potential transaction, we would provide further clarity to the market.
Next question, please.
Our next question comes from Guy Peddy from Macquarie. Please go ahead with your question, sir.
Yeah. Good morning. Good afternoon, everyone. Just a couple of clarification questions, please. In your net debt calculation, you use a number of non-current financial assets and investments at just over EUR 5 billion, but in the balance sheet, you have a number of over EUR 12 billion. I was just intrigued to know what is the difference? And of your total debt, could you tell us how much of that is raised through Spain or through your Dutch debt vehicle? Thank you.
Hello, Guy. This is Miguel Escrig. Regarding your question, we have in the balance sheet EUR 12.1 billion of assets. We are including the fair value, the value in some of our associate corporate stakes. We just take
What is really interest bearing, which are essentially the mark to market of the Euro tips for close to EUR 5 billion and some other long-term deposits. That's it, the rest is excluded from that EUR 12 billion.
With respect to the second question, 90% of corporate net debt is held at the holding level, be it at Telefónica parent or through the subsidiaries that we have to issue debt.
Next question, please.
Our next question comes from James Ratzer of New Street Research. Please go ahead with your question, sir.
Yes, thanks very much. I have two questions, please. The first one is just regarding your group-wide commercial costs. I think at the Q2 conference call, you talked about those coming down year-over-year in the whole of the second half, and it's very clear that's happened in the third quarter. If I look forward to the fourth quarter, you obviously have the launch of Fusión in Spain. You've got the TV relaunch in Brazil. There are going to be costs related to the iPhone 5. Is it fair to say that commercial costs in Q4 group-wide can be lower than Q4 last year as well? The second question I have was just regarding Mexico. AMX in Mexico continue to be a very strong competitor. They continue to outperform you on service revenue growth.
This last quarter, they saw a stronger pickup in their service revenue growth ex MTR. What do you think you need to do to start turning that around? Do you need to rely on the current regulatory review to help you? Do you think that's necessary, or are there other commercial actions you can take to improve the revenue growth, and if so, by how much? Thank you.
Thanks for your question on the commercial cost trend and the potential outlook for the fourth quarter. Let me tell you that we are anticipating a similar trend that in the third quarter. Some of the trends that we have been observing in the group, namely in the case of Spain, as Eva Castillo was mentioning, are here to stay, are very sustainable, because we have radically changed the structure of the offer, and therefore we have already been somehow educating the market. On top of that, we have been working very intensively on the quality side of our business, and therefore we have been significantly and structurally changing the number of calls that we get and the claims. We have reduced by half the number of claims in Spain.
The situation is pretty similar in other European countries like Germany or the Czech Republic, with the simplification processes playing out significantly. The only uptick that we might get is from the iPhone 5 activity in the U.K., which might tick up a little bit in the fourth quarter. Overall, in Europe, we see similar trends. In Latin America, we see similar trends as Santiago Fernández Valbuena was mentioning as well, because we will have high commercial activity, but we have been having significantly high commercial activity as well during this year. The outlook that we have for the fourth quarter in terms of commercial cost overall at the group level is pretty similar at the third quarter. We are working even intensively to expand the model that we are trying to create here in Spain to other regions.
Namely in terms of subsidies, we are basically out of subsidies in Germany, the Czech Republic, and here in Spain. It has not been affecting our contract commercial activity. We think that we have a lot of room to improve, to go even more ambitious. For the fourth quarter, we are contemplating similar trends that in the third quarter of this year.
Hi, James. Santiago again. On Mexico, we're pretty happy with the progress we're making. It may not look like a lot from the outside. We're making progress on quality perception, on coverage, on reliability, and on the most preferred tariffs for the customers. We've changed the game. What we're trying to do is make customers alert that we have not only a viable but a good product. Our tariffs are very difficult to beat by anybody else on the market. This is not going to be a one-off event. This is going to be a trickle-down phenomenon. We're quite happy the way all these things are progressing. We are not going to put the blame of our possible shortcomings on the regulation.
Certainly, a more level playing field would be beneficial in that market as it might be in any other market where the distance between the first and the second player is so large as to be nothing short of astounding.
Time for the last question, please.
Our last question comes from Luigi Minerva of HSBC. Please go ahead with your question, sir.
Yes, good afternoon. My questions are on the fiber strategy in Spain. I was wondering if you can tell us of the 2 million that you cover, how many of those are with fiber to the premises, and how much is fiber to the street cabinet? Also, I wanted to hear if you expect any other operators to join the co-investment agreement on the verticals that you have signed with Jazztel. Lastly, whether you would consider a co-investment agreement for the horizontal infrastructures. Thank you.
I think on the first question is just to confirm it's 100% to the premises. With regards to the agreement with Jazztel, as you know, this is agreement that is part of our strategy of seeking for network sharing agreements. This potential agreement or this agreement is with Jazztel as it was the first comer to sign the agreement. It is, as you can imagine and you know, efficient on CapEx versus being standalone and permit us to access We already have deployed 1.5 million of the fiber to the homes, and the other 1.5 million, Jazztel will do the in-building development, and it will be up to 3 million customers. We start in March. As you know, this agreement is open for other competitors in case they are prepared to join us.
It is also following regulatory requirements. We feel this strategy is similar to the one we have in other European countries and across the firm globally.
Well, before concluding this call, I would like to make an announcement regarding the position of Head of Investor Relations. After several years of very successfully leading IR, Mrs. María García-Legaz, is being promoted to run the offices of the Executive Chairman and of the COO. I want to expressly thank María for the excellent work done heading the IR team that has won numerous industry awards. The position of Head of Investor Relations will be occupied by Mr. Pablo Girón, and I wish both María and Pablo success in their new roles. Thank you, ladies and gentlemen, for attending this call, and look forward to seeing many of you in Barcelona next week.
Telefónica's January, September 2012 result