Thank you for standing by, and welcome to Telefonica's January, September 2012 Results Conference Call. At this time, all participants are in a listen only mode. Later, we'll conduct a question and answer session. As a reminder today's conference is being recorded. I would now like to turn the call over to Ms.
Maria Garcialegas, Head of Investor Relations. Please go ahead, madam.
Good afternoon, ladies and gentlemen, and welcome to Telefonica conference call to discuss January June 2012 results. Before proceeding, let me mention that this document contains financial information that has been prepared and the International Financial Reporting Standards. Please financial information is unaudited. This presentation may contain announcements and banks that constitute forward looking statements, which are not guarantees of future performance and involve risks and uncertainties. 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 including the page of the presentation, which you could find in our website. We encourage you to review our publicly available disclosure documents with the relevant securities market regulators. If you don't have a copy of the relevant press release and this slide, please contact our Fonika Investor Relations team in Madrid by dialing the following telephone number, 3 4914-8287, double 0. Now let me turn the call to Angelica who will be leading this conference call.
Thank you, Maria. Good afternoon, ladies and gentlemen, and welcome Telefonica's 2012 4 quarter results conference call. It is my pleasure to share this call. Today, I have with me Jose Maria Alvarez Hajde, Chief Operating Officer, Eva Castino, Head of Telefonica, Europe, and Santiago Fernandez Valander Balena, Head of Telefonica Latin America. Also with me are Matthew Key and Guillermo, Head of Telefonica Digital And Telefonica Global Resources.
Interestingly. During the Q And 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 3 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. 2nd, on the financial side, we have significantly improved our financial position. With a net debt reduction of close to 1,000,000,000 since the end of June. On the back of the substantial improvement in free cash flow, and the first execution of asset disposals. We are particularly proud of the successful IP of Telefonica Dutchland, 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 €15,000,000,000 refinance year to date, increasing our total liquidity to €18,000,000,000. And third, we continue making progress in our transformation into digital telco, achieving significant milestones in the quarter. Let me now start with a summary of key financials on slide 4. In the 1st 9 months of both 2012, 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 and L, excluding those nonrecurring effects and non cash impacts. In summary, the September revenue reached over 1,000,000,000. Well, underlying OIBDA total nearly 1,000,000. Net income was over €4,400,000,000 in underlying terms. The good news in the 3rd 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 those are material items such as asset write downs are flowing into the P and L. Data, other transactions that are enhancing our equity, but not flowing through the P and L. For example, the restructuring of the Colombian operations which increased holders equity by 1,000,000. As slide number 5 shows, we continue improving profitability across the group. In absolute terms, underlying OIBDA grew sequentially for the 2nd 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 3rd quarter. Up to 130 basis points in the last 6 months leading to improved year on year trends. 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. In growth trends in OIBDA flow directly to the bottom line, leading to an inflection point in underlying EPS. As you can see on slide number 6, underlying EPS reached €0.36 in the 3rd quarter, with significant improvements since the beginning of the year, both in absolute terms and on a year on year basis.
Underlying EPS in the 9 months to September was close to 1, well above our 2013 dividend commitment, and we still have another quarter to provide support to dividend sustainability. Strong diversification continues to be one of our key strengths. As shown in slide number 7. We would particularly highlight the growing contribution from our Latin American businesses which already account for 49% of consolidated sales for the first time exceed revenue generated in Europe. It is also important to highlight a lower dependence from Spain, which now is just 24% of our sales and 32% of OIBDA.
Turning to Slide number 8. In the 1st 9 months of 2012 on related revenues grew 1.1% year on year, excluding the impact of regulation, driven by solid growth in 2 key strategic areas. First, Latin America. What revenue growth accelerated in the 1st in third quarter to 8% year on year in organic term ex regulation again. And second, mobile data revenues, which continue to enjoy a strong momentum with a 14 percent year on year growth and already account for over 1 third of mobile service revenues.
Please performance is driven by our data monetization strategy focused on increasing smartphone penetration with attractive data propositions by on tier pricing and integrated tariffs. On the efficiency side, on slide number 9, I would like to highlight our ability to deliver cost savings with OpEx down 1% year on year in 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. Telefonica global resources is further exploiting skill 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 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 remains strong, maintaining a clear focus on high value customers. Contract networks were solid, especially in smartphones where we are doubling accesses year on year.
It is also remarkable to improve trends in the fixed business, with positive net adds in the traditional business for the first time in 2 years. And higher fixed broadband and pay TV net adds in the quarter. Revenue growth acceleration in Q3 totaled 8% year on year was fueled by improved trends in fixed revenues, robust mobile service revenues, up 13% year on year. The diversification by businesses was coupled with a well balanced contribution by our 3 Latin American regions, with all of them contributing to expense growth. A slide 12 shows The solid revenue performance, this year comes from commercial costs, and ongoing efficiency measures drove financial improvement in OIBDA and margin expansion in the quarter.
OIBDA year on year growth in underlying terms, ramped up to close five percent in the quarter with a significant progression from the beautifully 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 mobile operations followed us to materially widen the gap in customer satisfaction indexes versus our main competitors. That has been a marked turnaround in the fixed business since we launched Vivo as a single brand.
On top of that, when 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 pop ups. Meanwhile, we continue to transfer the fixed business, launching a new 200 megabyte fiber proposition to speed up at that stake. While we are reinforcing our PTV business with a new IPTV business, form already launched.
On the financial side, in the third quarter, Vivo delivered a strong set of results with acceleration in revenue as IMPA growth. Top line rose 5% year on year and 3% quarter on quarter, driven by the sustained outperformance 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 from the year. With Vivo retaining its best in class profitability despite the negative impact from regulation.
As such, OIBDA margin reached 34 point percent in the quarter, both year on year quarter on quarter, excluding specific factors booked in the 2nd quarter. Please turn now to slide number 15. Across the region with a particularly strong performance in Peru, where the robust commercial momentum was coupled with ramp up in revenue and OIBDA growth year on year. The only exception was Argentina who displayed the positive revenue performance High commercial activity tracked to input margin in the quarter. In the northern region, as in the rest of LatAm, will deliver a widespread improvement in revenue and profitability quarter on quarter.
In Mexico, the turnaround process continues, with a strategy focused on quality growth, driving ARPA acceleration, 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, the margin expansion amidst 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 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. Upgrades were down in the quarter. As customers delayed renewal circuit of the launch of new devices, and we practically reduced the base in Spain ahead of the launch of Fusion, our new convergent buffer. Our focus on value customers resulted in higher contract and smartphone penetration across our footprint, with 1 third of our customers already enjoying mobile data plans. Our target reductions on the commercial side, together with a set efficiency measures led Telefonica Europe to consolidate a sequential improvement in OIBDA and profitability with our 30% margin in the quarter.
To Slide 18 to start with our operations in Spain, I would like to highlight that after 1 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 reduction in churn, the cornerstone 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 first step was the implementation of measures in order to increase efficiency, with an aggressive simplification of processes across the company, from workforce to IT and hence the portfolio while increasing quality levels to improve customer satisfaction. All these efforts fled 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 2nd consecutive quarter, with margin higher than a year ago. Let me also stress that the double digit reduction in CapEx is sustainable without jeopardizing or increased fiber rollout efforts. The 4th transformation step in Spain is the launch of Movistar Fusion. This is a key milestone in our strategy to regain commercial leadership in the market.
Movistar Fusion is the best conversion 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 adopt the offer to our customer needs. We aim at increasing the customer base who have other telecommunication services with Telefonica, 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, We start pushing 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 effectiveness of the offer is customer's reaction. Just 1 month after the launch We have already reached 430,000
customers.
Please now to Slide 20 to review our operations in the UK, 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. We retain a benchmark low contract churn levels. Which together with increased gross adds led to solid net adds in the contract segment with smartphone penetration growing 8% 18 percentage points to 44% in September.
Top line pressure continued in Q3 with Moel service revenue reflecting impacts from NTR 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, even in terms of margin, which stood at 25.3% in the third quarter. The lower hybrid activity, together with a positive impact from the ruling on other pricing, through the quarter on quarter margin expansion. Coming to slide 21, The recently listed Telefonica 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.
Trading activity was strong with a consistent momentum in net adds in the quarter. In addition to this, data revenue grew at a faster pace and data traffic with a gap between these two metrics widening year on year. OL Series revenue growth remains strong with stable output trends. As a result, defonica Deutschland is now the number 3 mobile player in the German market life revenues. In addition, EPSA increased 14% year on year, with growth accelerating in the quarter, reaching an OIBA margin of 27.2% in the 3rd quarter, up 2.4 percentage points year on year.
Operating cash flow was robust, reaching 553,000,000 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 with strengthened through the broadband and BTV offerings. In our enabling Slice 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 Cantu are a great traction with our 3000000 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 a recent approval by U Authorities of our JV, furtherizing and financial services in the UK. The agreement signed with Alaska, the world's leading augmented reality platform, and the success of OIBDA, with our 170 collaboration agreements with startups. Let's now move to the financial side on Slide 23.
Net financial debt has been reduced by 2,300,000,000 Euro in the quarter, mainly due to the significant free cash flow generation since the end of June, coupled with the completion of 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 Telefonica Deutschland and attend risk asset, Roomba and other minority stake disposals. On top of that, the refinancing of the preferred shares currently accounted as said. We reduced that by €800,000,000 through the swap with treasury stock at market
value. All tickets
for Q3 events will contribute to reduced net debt by an additional €3,200,000,000. Let me stress that as of today, we are pointing towards €50,000,000,000 net financial debt by year end. Compared to a dead figure of over 1,000,000,000 at the end of last June. On Slide 24, we detail, we are performing an excellent financing activity so far in the year. So totaling 1,000,000,000.
This compares considerably with last full year financing activity at 11,500,000,000. This has been achieved this a decrease in risk and a hydro financial environment in 2012. Since June, Telefonica has raised over 4 1,000,000,000 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 eleven times in Columbia, Chile 11 and above 9 times in the U. S.
Market. It is to note the broad diversification of our financing activity. Only 15% of total banking financing risk from the year corresponds to Spanish financial entities. While American and European, Texas Spain, have contributed 30 percentage, and Asians remaining 26%. On top of that, 77% of total undrawn represented facilities are signed with non domestic financial entities.
It is also to highlight the ample diversification by funding instrument, proving that Telefonica maintains all markets open Roughly 1 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 from public entities. Slide 25 shows the benefits of our productive financing activity, which has allowed us to build a significant liquidity of 1,000,000,000, up 1,000,000,000 since June. Our cash position, excluding Minifola, stood at 1,000,000,000 at the end of September, while total and wrong credit lines amount to 1,000,000,000 with nearly 90% maturing long term. This places us in a quite comfortable position to manage debt maturities, which are covered beyond 2014.
We 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. And our average debt life is back again of 6 years as per our guidance. To wrap up, let me stress that our strategy is delivering visible results. Sequentially, if the improvement across regions is driving an outstanding improvement in EPS. With 9 months, performance consistent with our full year guidance, which we confirm.
With also increasing materially our financial visibility with a significant step forward in debt reduction in the second half of the year, and I will diversified access to financial markets. With the recent success of the IPO of Telefonica 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 Telefonica.
For a question and 2 to cancel. We'll kindly ask you to ask a maximum of 2 questions per participant. And if possible, we recommend you not to use your cell phone or hands free phone. Our first question comes from Tim Buddy from Goldman Sachs. Please go ahead with your question, sir.
A question about Spain. The obviously in the press, we read about yoga potentially being for sale. Can you remind us what contribution to EBITDA Yoga currently represents in the Spanish business? Secondly, given the very strong momentum you've achieved in deleveraging 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.
Thank you very much. On your first question, as you know, we cannot disclose figure. But as you can imagine, we are following the process very closely, and we are reviewing anything the outcome is known.
With respect to the second question, we continue our internal work of analyzing and assessing, the option with respect to potential IP 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.
Our next question comes from Luis Peralta from Morgan Stanley. Please go ahead with your question, sir.
Yes, thank you. 2 questions also on the Spain. First is regarding the Movistar Fusion and the 430,000 customers you were mentioning, I don't know whether you can give us some light on what percentage of these new customers are coming from your existing customer base and therefore, will give rise to some revenue dilution and whether you expect did 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? And 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, cat and others. And also with a stronger commercial activity in the fourth quarter, whether we should expect margins to drop materially and the 4th quarter margin the 3rd quarter margins to be considered as a kind of one off. Thank you.
I think that we, as you saw, the number that we are releasing is a 430,000 customers year to date. We I won't be able to give you more details, around the mix on on those customers, but have to say that, since the preregistration, that we saw early or late this September today, we are seeing at the right trends, and we are definitely, we will definitely give you more details towards the 4th quarter It is, for sure, the base value offer that there is now in Spain. So as you, you know, we starting to see it in corporate on the right reaction from our current customers. The ones that they were already with us, or in totally. Definitely the ones that are with whom we can up lift and foster new services, with the new customers.
As you know, our aim is to go both for the the current customers and also for the new ones. With regards to the second questions and regarding the margins per self, We're very pleased with the support, the result on the margin. It's a clear improvement and it's showing that they are a strategy on the formation 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 low in maintaining these high margins, which we believe are sustainable.
And in particular, when you look each of the, the, the, the contribution to, to this, the performance is on the incremental savings and personnel costs throughout the year. As you remember, this happens through every quarter and through next year. So of the cost efficiencies initiatives that are not only removing the subsidies, but also creating new ways of operating within this Spanish operation. I have to highlight that, I've been in in this new role for only 7 weeks, and it is very impressive to see how the Spanish team is leading this commercial strategy. It's a leading forth within the OB and in the Spanish telecoms operations.
They're also taking very seriously the efficiency program, both personnel and the rest of the efficiencies within the network. And we believe this is a continuing program. So we there is room for more efficiencies, and we're working on that very closely. Next question please.
Our next question comes from Matthew 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 reiterated the guidance. So I was wondering where you expect the reacceleration in Q4.
It does seem to me that in LatAm despite the strong growth comps a bit tougher in Q4 and there's no acceleration in the growth when you look the revenues, including, the regulatory impact. So 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? And 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 1,000,000. Previous quarter, I think it was 1,000,000. And before that around 400, 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 our first part of it on revenues and the guidance. Let me first stress that the guidance was given on the system, framework of exchange rates that we encourage to, to check, because those are the this is the framework which you should, review on your projections. And the second part in terms of, on a region by region basis in Europe, we have revenue pressure. It is true that it has 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. And in Latin America, we see revenues accelerating in Q4 due to a very solid customer base growth. I know the evolution in Q4 will be a you need to consider that it was last year, right, ourselves, before excluding tower sales in the second part of, in this last quarter of the year, our EBITDA growth should continue to So basically, we see the trends that we are having that reported being extrapolated to the 4th quarter. And please consider the framework of the change, right, in which we were giving the guidance at
the beginning of the year.
With respect to your second question. In this column of FX, commitments, cancellation, and other, we have, various effects. I think the first one is, the impact of interest accruals, our interest payments, which is basically reversing what we saw to the country in the first quarter of the year. This would be around 355,000,000. Of the total 899 off of this column, then we also have the mark to market of interest rate hedges which is around 1,000,000.
And the rest, FX is around 1,000,000, and the rest is a part of the employee retirement commitments that become due and then, in the year, and they become, they become debt.
Next question please.
Our next question comes from Keval Quiroga of Deutsche Bank. Please go ahead with your question, sir.
And I've got 2 questions, one on Spain and 1 on Brazil. It looks like Vodafone is extending its handset 60s beyond summer. Do you feel a need to respond to this at all? And secondly, on Brazil, your Brazilian fixed line revenues remain read that's still 49% and your KPIs in rating in particular quite poor. And what steps are you taking to improve at the run with the revenue trend in the revenue 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 in within the Spanish strategy not to go back to subsidies, so we don't think it's necessary to, to respond on that front. In fact, our aim is to continue, working on our automation program. And right now, we are in the 4th stage by which the launch of Fusion has already impacted positively, our clients and the reaction is positive.
I think that we show a clone, a very clean business, a very clean operation but 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. Believe is there's not so much using the subsidy, in handsets anymore, but that obviously, you need to analyze. Think that that was the question.
Thank you.
Yes. And this is Satya. On on resilient facing all their situation there is very competitive. There are a number of one offs that you might want to single out before making the in the final comparison. This has a lot to do with improvement that we have 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 launching some OTT products that are going to reinforce the value of our fiber and VDSL product. And the launching of the renewal of the TV satellite TV products. So it's it's not 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.
Our next question
phone on
where
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 your early indications, how you think it will change the competitive landscape and your business and how you look to respond? And secondly, on the pie back, Talaspads introduced, is that more pretty formal, flexibility measure or is it more is it really that you're trying to that over the next year and therefore reducing the minority float off of Thalesp? And secondly, on the 10 asset sales outside of LatAm, are you looking at 1st option of other assets where you could list minorities or sell partial stakes on or, on assets you have
in your portfolio Thank you.
Thank you, Thorsten. 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 measuring it.
And I think that's the right development because it's going to make adjustments in the future MTRC easier. And as to the pace of decline in MTR SH2 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 to things first that if you have an integrated operation like we have in Sao Paulo, the net effect is likely to be lower than if you're mobile only. And second, that unlike in some of the markets, the Brazilian market is characterized by fuels competition, and very small differences between the market share of the top player, which is us and the bottom player, and then that helps reduce the impact of any MTR end of the day, once the the tariffs are are lowered or are very similar, it's difficult to make a lot of the elasticity from from one network to the next.
Could you please repeat your second question?
2nd one was literally on potential for the asset sales outside of LatAm. So are you looking at any other assets you would 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, we have been delivering. We also said that we would be analyzing the potential IPO of Telefonica the Latin America, which, as I said before, we are still in the process of internal analysis. We do not need them to do that transaction, but we may decide to do it, depending on, on what provides service value for our shareholders. We still maintain a small stake in EPD, which we are monitoring market conditions, to see what is the, the best moment to monetize.
But we received expressions of interest from potentials and interested parties in some of our assets, but we will assess those Always, with the perspective of seeing whatever the provide value for for Telefonica. They would like to stress 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 Telefonica. Of the long term value perspective, perspective for the company.
Our next question comes from Yvonne L'Aal of BBVA. Please go ahead with your question, sir.
Yes. Hello, afternoon everybody. My two questions I was sorry in Spain. The first one seems to launch of most unfortunate at the beginning of October, there are a number of competitors that have already much your offer. So 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?
And the second one, maybe if you could help us how do you expect to compensate the ARPA declines, that I guess you expect to get through 2013. Due to this Moist acquisition. Could you give us a number in terms of what is the market share you need to recent in fixed and mobile in order to compensate that or is the compensation coming from commercial cost reduction?
Thank you, Juan. I think that the since allowance of Fusion at the very beginning of a over, we are seeing the right evolution within our clients, as I mentioned earlier, we are able to give you the number of 430,000 customers year to date as fully foreseeable customers. Can give you another signal of how this is going with regard to the fixed broadband, which we are up to 43,000 so the positioning of of the launch of, Fusion, as I mentioned earlier, is part of the program. Since we launched the program, we knew our competitors would have the capacity to react and some of them have those done so. Analyzing the latest offering the offerings.
Obviously, they were able to replicate to to do the replicability of the of the offer, but we still believe, that Fusion is the best value offering for clients that were already with us and then new clients. Obviously, we cannot give you yet the mix of the clients because it's very early days. But the again to reinstate it. All that I'm seeing is is the right trends. Hopefully, we will be able to give you more details very soon.
When you tell me what, when you ask, what can we do in order to compensate declines or initial ARPU declines. I think that the offer is very well studied. So you go step by step and and to some of the the potential initial decline as we compensate and we have the the mix of clients that we want within our opening, contracting fixed broadband. So the customers who contract a first broadband positive to our mobile services. It's also positive on mobile customers, which contracted broadband binding from the fixed voice service.
It's a positive again in any mobile additional lines. And of course, as you can imagine, any new customers adding to the to be offering. Another very important factor is that the churn continues its trend of going down. The overall, all the the the strategy that we have in mind is provoking a more dynamic market in Spain. We're happy to say that we believe we are leading that new dynamic market with this merchant strategy, which at the moment is leading the offerings in the market.
You're asking that the answer will do better. I'm not missing any. Okay. Thank you. Please go ahead
with your question, ma'am.
Thanks very much. And, just say congratulations because I think I'm breathtaking amount of work went into delivering those results. So two questions, if I may. The first is about Fertz Spain. You're focusing on total telecom offers.
And clearly, these are going to put wireless companies under a lot more pressure wireless on the company.
Please?
Yes. So 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 gonna face the the same headwinds in Germany and Mexico, where, you are the wireless only businesses rather than the total telecom businesses. And separately, with Latin American MTRs falling, longer a lot more longer term pressure on wireless revenues in Latin I'm wondering whether that means you need more CapEx sooner in Latin American wireline to reduce any eventual cannibalization.
Robin, this is Santiago then the Robin, the sum was not too good. So if I understand, if I did 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. Whether or not CapEx would need to be deployed at a faster pace and we've done up until now to compensate for that.
I think you're probably maybe right in terms of the fixed lines, especially in Sao Paulo. I think I mentioned in one of the earlier questions. But I think that what 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 seating, but harvesting some of those CapEx efforts, especially in the markets that you mentioned, namely Mexico, and I can also speak for Europe, but I would assume that my colleagues are are they're going to be on time. So yes, the environment is challenging, but now I don't think we're lagging behind the possible exception of a minor push that we have to do in fixed line Brazil.
And going back to the European question, starting with Germany, as mentioned earlier, and yesterday in the conference we've seen a solid trading momentum in the quarter and the sustained low contract churn with regards to the NTR questions, as you know, in Germany, we're not expecting them until December, different to the other markets. And what we believe as a whole within in Germany is that we need to speak to a balance in between grow and the profitability of the operation. With regard to the CapEx, as you know, in the third quarter is in an increase of 40% year over year. As a signal, we don't expect similar increase in the fourth quarter, although I have to range state that is a continued investment process into our 3 g network. So we want to ensure the stability and the quality of our network.
As well as accelerating the LTA deployment in the country. I think that we having, I don't know, you've seen the results coming from the Connect, this publication is already giving us a very important results of our German operation. And I encourage you to look at them because they reinstate quality and investment is a proven, a very good one.
Our next question comes from Paul Marsh of Berenberg.
Think Fusion, the Fusion tariff in Spain to lead to a higher level of handset upgrades. And 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?
Talking with the Fusion with the Fusion question, I think that just to, remind that the Fusion does not have subsidies within the offer as, actually, we started with that policy at the beginning midyear. And, the second question regarding Fusion affiliates on upgrades, so we're not expecting to happen, and and it's not within the Fusion.
Yes. Policy, since I regain on an it on Peru, not too much really to update you on. We do expect that the license renewal process that has gone through a rather long and comfortable administrative path is coming to an end. This, in the end of May, very well be satisfactorily. And I think some of the public statements by the ministers improbable point into that direction.
Nothing finalized and nothing is done until it's completed. But certainly, we do think that it's very likely that before the end of the year, the process of renewal, her license role will find a satisfactory completion, on on both grounds. And on the tax side, they're releasing much to, to talk 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, you know, very long and protracted. It might become complicated from the technical side. What I think is a welcome development is that this is no longer a media issue. This is all has been and will continue to be at related issue with us and the courts and we will make some progress as time proceeds, you know, that we did a lot of money at the beginning of the year paying down, the partial, the the, payment, but then no further payments have been done since then. No significant, decision has been taken by any of the courts where we have this, this trip.
Let me remind that, this started almost 10 years. You've got to allow us a consequence of 2 things, which we feel very we're about, and that's what we've been challenging the, the tax administration's view. And those are related to whether or not we can take off from our income the the revenues that our customers cannot pay to us, and, the deductibility or idea of of, interest when it is a debottlenecking And those two items are, we think, encouraged to clear any other, constituents in the world with that system as tax deductible. And then the 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 not because the number itself was, was very nice. My colleague's point to me that we did spend 134,000,000 solace.
That's about the €35,000,000 at the time.
Next question please.
Our next question comes from James McKinsey from Fedentes. Please go ahead with your question, sir.
Hi. Two quick questions on, on Europe. Firstly, on Spain, your fixed ban or fixed broadband churn has ticked up quarter on quarter, and 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, in, I think, other operators? And then secondly, lack of handset upgrades in the UK, does that bode badly
for 4th quarter margins, when
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 line of fixed revenues evolution on the 9 months is that the first of all, we believe that the 11 percent sequential movement is broadly stable. And the reality is we have seen accessories and voice decline, driven by both a bit of a lower access base and a higher weight of flat rate unbundled it coming in competition. With regard with specifically fixed broadband revenues, as you know, they were affected repositioning of the new tariff portfolio, and I can give you, numbers up to date, the number or the take lines that have moved to the new portfolios reaching 76% of residential fixed broadband December 9 by 2012. So that's why the year of year evolution in the quarter has worsened a bit.
However, in September, we have started to see a revamp in that evolution, and we, we have started to reposition, in, in the to last year. It is important to mention the churn, which is much lower, is minus 0.4 percentage points, year over year, and I think that's, the best number, which, you know, finish it at 1.9%. The rest of the the questions regarding the UK, it is important to say that quarter, we were awaiting for the new high end devices to be, to have the stock and to be positioned in the market. So we didn't all the commercial activity that we normally use to have. The the expectation in the fourth quarter is that we will more activity, more we will watch pretty closely the margins and also the commercial activity.
Want to reinstate is that the this is about, normal activity. This is about having the right behavior in the market. And as I mentioned earlier, we believe the UK market is also showing different behaviors and a more approach to
Our next question comes from Justin Funnel of Great Suisse. Please go ahead with your question, sir.
Thanks very much. You mentioned during the the call, potential shifts in Spain. I think you're 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 into new phones. Are you shifting away from that model?
And you also mentioned moving into handset finance still. I mean, 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? And then secondly, on Brazil margins, I guess I've been waiting a few quarters to see if your margins would benefit from the Teleskvivo merger and 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, from Cionne specifically, how no subsidies for handsets and the patent was also part of our commercial strategy set at the beginning of our formation program. When you ask me about the voice of being more efficient on handsets, Commerce activity. As you know, we have different approaches, depending on the countries. But in Spain, it is a different, system that the my handy in in Germany.
In Spain, what we have is an agreement with the financial institution. The that is working increasingly well. With regard to my handy, I think it's one of the best financial offerings is working well from the beginning to the end of the of the process. So, we believe this is a way going work to make sure that the operations businesses look clean and that we stick to our our mainly business operations.
Good job. It's entire again. And on Brazilian margins, and I think there are 2 forces acting up on them. What is structural that you mentioned? And 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 margins. And then there is the result of the commercial activity of the quarter, which rarely coincides with the sales. So you should expect some stabilization of the structural points going forward, but you should also expect us to continue pushing or pulling from the commercial levers depending on what the market is demanding right now. But as I've, I think, mentioned throughout this, this call, we're putting a lot of emphasis on everything fixed and broadband related. We probably should spend a little bit more there and we're satisfied with the way our commercial measures are acting and the result we're in on the wireless, especially on the high end contract and on the, smartphone end.
So we are probably not going to be pushing too hard on that one. Take those, to, observations as temporary and practical logos as structural.
Next question please.
Our next question comes from Frederic 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 tension on sequential improvements. So firstly in mobile, ARPU has been flat in the last four quarters at around Should we expect this level to be sustainable or should we foresee the usual Q4 drop? And similarly at the EBITDA level, you show sequential improvements in the last two quarters. Is there any message here for us for Q4?
And secondly, back to what's in America.
Sure. Is it better?
Sure. Thank you.
Okay. So firstly on Spain, you seem to, to focus our attention sequential improvements in this business. So my question is in terms of mobile ARPU, ARPU has been flat in the last four quarters at around to do you expect to be able to hold this level going forward or we should expect the usual drop in Q4? And similarly, at the OIBDA level, you showed sequential growth in Q2 and Q3. Is there any message for us for Q4?
And 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 telefonica Brazil as a platform to drive this consolidation? And how do you think tevbrasim minority shareholders in this process? Thank you.
Thank you, Frederic. You're right. I think the sequential improvement in EBITDA 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 and to the the higher efficiency programs that we have across the operation. What is that giving us is much better results with satisfaction of client, with sense improved quality, 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 refreshment of tariffs produced a 70s as produced a 86% in generation within our clients within the mobile business and there's been a deterioration or an impact on ARPU.
So the quarter, it is a mobile service revenues affected by the RV declines. Well as interconnection declines, the slowdown decline that we see in mobile service revenue in the third quarter, there is positive effects. As you know, there is over handset upgrades and related impact on the loyalty program. Week, as you know, the contract handset upgrades is 62% is minus 32% lower than year over year. The underlying mobile service evolution is, as mentioned earlier, were sent in the quarter as the ARPU declined almost 16% year over year.
What we have in the contract, in the postpaid contract revenues, very clear, seasonality of the 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 the big screen to the multi issues for the tablets, etcetera, that we are seeing more recently. And just to mention again the continued increased penetration of the new portfolio with 57% residential segment. Anyway, looking into what is happening today, the Repucion strategy, I think it is a TriNet strategy going forward to counter fight with some of these 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 Latin American businesses. Different alternatives have different potential implications, both for regulatory tax and other implications, and 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 on this potential transaction, we would provide further clarity to the market.
Next question, please.
Our next question comes from Guy Petty from Macquarie. Please go ahead with your questions.
Calculation. You use a number of noncurrent financial assets and investments, so just over 5,000,000,000. But in the balance sheet, you have a number of over 12,000,000,000. Just intrigued to know what is the difference. And of your total debt, could you tell us how much of that is raised or through your Dutch, the Dutchware debt vehicle.
Thank you. Hello, buddy. This is
Miguel. It's great to regarding your on, we have in the balance sheet 1,000,000,000 of assets. We are in the offer value and the value in some of our associates corporation stakes. So we just take from that, what is, really interest bearing, which are essentially the mark to market of the UAT dips, for close to €5,000,000,000 and some other long term deposits. That's it.
And the rest is excluded from that €12,000,000,000.
And with respect to the second question, 90% of of, corporate net debt is held at the holding level. Be it a telephonic apparent or through the subsidiaries that we have, to issue to issue
that. Yes, question please.
Our next question comes from James Ratzer of New Street Research. Please go ahead with your question, sir.
Yes, thank you I have two questions, please. First one is just regarding your group wide commercial costs. I think at the Q2 conference call, you talked about those coming down year on year in the whole of the second half. And very clear that's happened in the 3rd quarter. I mean, if I look forward to the 4th quarter, You also have the launch of Fusion in Spain.
You've got the TV relaunch in Brazil. They're 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? And then the second question I had was just regarding Mexico. I mean, AMX in Mexico continue to be very strong competitor.
They continue to outperform you on service revenue growth. And again, this last quarter, they saw a stronger pickup in their service revenue growth ex MTR? I mean, 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, I mean, do you think that's necessary or are there other commercial actions you can take to improve the revenue growth.
Thanks for your question on the commercial cost trend and the, potential outlook for the fourth quarter. Let me tell you that we, we are anticipating a similar trend that in the third quarter. Some of the trends that we have in, of serving in the group, namely in the case of the Spain, as Eva was mentioning, argued 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've been working very intensively on the quality side of our business.
And therefore, we have been significantly against very changing the number of calls that we get and the claims. We have produced by half a number of claims in Spain the situation is pretty similar in other Asian European countries like Germany or the Czech Republic and with the simplification processes Spain on significantly. The only uptick that we might get is from the iPhone 5 activity in the UK, which might take up a little bit in full quarter, but overall in Europe, we see the similar trends. And in Latin America, we see similar trends as Javier was mentioning as well. Because we have a high commercial activity, but we have significantly high commercial activity as well during this year.
So the other we have for the fourth quarter in terms of commercial cost overall, the group level is pretty similar in the 3rd quarter. And we are working intensively, to the model that we have been able to that we are trying to create in Spain to other regions, namely in terms of subsidies. We are basically out of cities in Germany, the Czech Republic got here in Spain, and it has not been affecting our contract, commercial activity. So we think that we have a lot of room to, to improve, to go in more ambitious. However, the 4th quarter can we are contemplating similar trends in the third quarter of this year.
Hi, Joseph. Again, on Mexico, we're pretty happy with the with the progress we're making. It may not look like a lot from the outside, but we're making progress on quality perception, on coverage, on reliability and on on the tariffs, most preferred tariffs for the customers. So we'll change the game. What we try to do is make people make customers alert that we have not only viable, but a good product our targets 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, but we're happy the way all these things are progressing. We are not going to put the blame of, our possible shortcomings on the regulation But certainly the 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 far it has to be nothing short of our sound.
The last question comes from Mujeminanda of HSBC. Please go ahead with your question, sir.
Yes, good afternoon. My questions are on the fiber strategy in Spain. Was wondering if you can tell us of the 2,000,000 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 diverse structures? Thank you.
Is just to confirm, it's 100% to the premises with regards to the agreement with still. As you know, this is an agreement that is part of our strategy of seeking for network sharing agreements. This, potential agreement or this agreement is with Jazz Stella as it was a the first, come to, to sign the agreement. It is, as you can imagine, and, you know, efficient on CapEx versus being a stand alone and permit us to access the we already have deployed 1,500,000 of the fiber to the homes and the other 1,500,000 hotel will do the in building development
it will
be up to 3,000,000 customers. We start in March. And as you know, this agreement is open for all the it does in case they are prepared to join us. It is also following regulatory requirements, and we see 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 relations. After several years of very successfully leading IR, Mrs. Maria Garcialegas, is being promoted to run the offices of the executive chairman and of the COO. I want to express this in Maria for the excellent work then adding the IR team that has won numerous industry awards. The position of head of investor relations will be occupied by Mr.
Pablo Gideon, and I wish both Maria and Paula success in the new roles. Thank you, ladies and gentlemen, for attending this call, and look forward to assisting many of you in Barcelona next week.
Telefonica's January,