Good afternoon, ladies and gentlemen, welcome to Telefónica's conference call to discuss January to June 2012 results. I am María García-Legaz, Head of Investor Relations. 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 that constitute forward-looking statements, which are not guarantees of future performance and involve risk and uncertainties, 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 on our website. We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators.
If you don't have a copy of the relevant press release and slides, please contact Telefónica Investor Relations team in Madrid by dialing the following telephone number: 34914828700. Let me turn the call over to our Chairman and CEO, Mr. César Alierta, who will be leading this conference call.
Thank you, María. Good morning to everybody. As you can see, our second quarter results show a significant improvement quarter-on-quarter, with a better performance across all the metrics, from EBITDA to net income in underlying terms. EBITDA in absolute level rose on a quarterly basis, and profitability enhanced sequentially, with quarter-on-quarter growth across the board. These results today show the benefit of our diversification, our key strength to face very different realities. We have posted positive revenue growth on the back of further commercial push and a very solid evolution in Latin America. On top of that, we have undertaken bold actions to improve market dynamics and enhance our business model through efficiency gains, like the removal of handset subsidies in Spain and a gradual reduction in the U.K., and the network sharing agreements reached in the U.K. and in Mexico.
In addition, recent news about regulation in Europe point to a drastic change in the way the telco industry has been regulated in recent years and are very positive signals for the sector as a whole. On the financial side, we have taken decisive actions to improve our balance sheet and defuse potential risk, including an exceptional adjustment of our remuneration policy, which allow us to have a fully refinanced maturities behind the end of 2013. We are managing proactively our portfolio of assets with visible results year to date, and we have decided next actions, including preparation for an IPO of Telefónica Germany in the fourth quarter. We continue making significant progress to enhance our growth profile and capture the significant growth opportunities arising in the digital space.
Let me now review in more detail our first half performance, starting with the summary of the key financials on slide number four. In the first half of both 2012 and 2011, we booked several significant exceptional items. To better understand the underlying performance of the company, we are providing a P&L excluding those non-recurring effects and non-cash impacts. January to June revenue grew 0.3% year-on-year to reach almost EUR 31 billion, while underlying EBITDA topped EUR 10 billion, with a better performance in the second quarter. Once the total CapEx operating cash flow gained close to EUR 7 billion. Underlying net income was over EUR 2.8 billion, and earnings per share stood at EUR 0.62 in the first half. Let me mention that both metrics significantly improved their year-on-year performance in the second quarter. CapEx to sales was 12%.
The major highlight of the second quarter results is the quarter-on-quarter increase in EBITDA across the main regions and key operations, as you can see clearly on slide number five. As a result, the consolidated EBITDA margin stood at 34.6% in the second quarter and expanded 180 basis points sequentially, leaving a significantly lower year-on-year erosion versus the previous quarter. In my opinion, EBITDA reached the bottom in the first quarter of the year, and I want to underline that. It is my total conviction that the EBITDA reached the bottom in the first quarter of this year, and improved trends will consolidate in the second half of the year. I like to highlight the better performance in Spain, where EBITDA was up 3% versus the first quarter of the year. Slide number six outlines how we are further enhancing our geographical diversification.
We have increased our exposure to Latin America significantly in the last 12 months, representing circa 50% of key financial metrics of our results, with significant contribution from individual markets. As you can see, we are not only highly diversified in terms of regions, but also in currency terms, with a risk perception that is totally decoupled with the fundamentals of our business. Our exposure to Southern Europe, or even to the Euro, is well below Exposure of other European players whose headquarters are not in Spain. Importantly, operating cash flow in Spain remains pretty stable quarter-on-quarter. Our revenues, results, and operating cash flow are clearly one of the most spread and diversified of the whole industry, as it is shown very clearly in this slide.
We are not talking only about diversification, but also about transforming our business model from a traditional telco to a digital telco, where growth opportunities are very, very large. The delay in the upcoming transformation of wider parts of the economy, including security, education, public administration, health, financial service, and other areas that represent between 35%-40% of GDP with an addressable market for us of up to 2%, which is nearly double the market today of the telco industry, represents a tremendous opportunity, and I can assure you, Telefónica will not miss this huge opportunity. As you can see on slide number eight, telcos can use the models to capture the value coming from this digitalization wave. As connectivity providers, as an enabler retailer, or as a service provider. Connectivity plays in our strength, infrastructure, spectrum, among others.
We expect this to remain our strongest play for the coming future. Digital services are complements. The more are being used, the better clearly for us. Here we have made already a number of announcements on fiber and LTE deployment, network sharing agreements and tariff initiatives. We see enabling retailer role very important. This is where our asset best complements other players in our ecosystem. This is about creating new markets, not taking markets from someone else. Here again, good progress announcements on many fronts. Digital services, we will need to maintain relationship and customer engagement on few selected services. For example, communications, financial services, and others. We'll be selective and focused on some of those services where we can make a clear difference, with further opportunities to come in the coming future.
It will be about being innovative, develop and sell products behind connectivity to solve social needs, and to be a catalyst for change in business value chains while reinforcing our core business. Our view of digital telco, none of these three models, but it's really one of the combination of those three models, eventually with different access weight depending on the local market conditions. This is the reason why we organize Telefónica the way we do. Different divisions working together towards a common goal with different roles, responsibilities, assets, and skill set. We have done that clearly ahead of our peers. Now let me hand it over to Ángel for a detailed overview of our operating and financial performance.
Thank you, César. Please turn now to slide number nine. In the second quarter of 2012, we continued regaining commercial momentum despite strong competition across countries. Our customer base surpassed the 310 million mark at the end of June, 6% more than a year ago, driven by the growth in key strategic areas. Strong focus on the smartphone adoption fueled a solid 18% growth in mobile net adds versus the first half of 2011. Smartphone net adds grew 40% versus last year's figure, with growth rate reaching 99% in Latin America. In parallel, we're advancing in the transformation of our fixed line businesses with a selective deployment of ultra broadband services in those markets where there is potential demand and appropriate regulation and competition. Approximately 24% of our fixed accesses are currently ready for commercial ultra broadband services, and out of them, around 7% are already connected.
As slide number 10 shows, revenue growth was driven by the robust performance at Telefónica Latinoamérica and mobile data across the group, offsetting headwinds in Europe. Data revenues continue to deliver a sustained ramp-up in their quarterly year-on-year increase and already account for 35% of mobile service revenue on the back of a profitable data monetization, leveraging tier pricing along with integrated tariffs. I would like to stress the marked sequential slowdown in OpEx in the second quarter of 2012, reflecting the continuous focus on efficiency improvements and eased commercial cost growth on the back of the new handset policy in Spain. As a result, consolidated OIBDA improved its year-on-year trend in the second quarter, and OIBDA margin expanded 180 basis points sequentially. Year-on-year margin erosion also improved by almost 100 basis points versus the previous quarter.
Please turn now to slide 11 to start with our Latin American operations, where business fundamentals remain sound. Organic revenue growth rates keep healthy levels, driven by a double-digit growth in mobile, thanks to sustained commercial activity, with gross adds growing above 20% in the first six months. Option continues booming in our base, more than doubling its penetration on the base year-on-year. Mobile revenue growth is fueled by strong mobile service revenues on the back of increased data consumption and growth in voice services. The weaker performance in the fixed business is strongly affected by specific factors in Brazil in the quarter. Increasing mobile traffic is affecting traditional fixed business. However, our exposure to the traditional fixed voice is just 20% of revenues in the region, while the remaining 80% keeps growing almost at double digits. Turning to slide 12.
OIBDA in the second quarter showed a sequential improvement. It was higher than in first quarter in absolute terms, but it also improved both in terms of year-on-year evolution and margins. In such a diversified portfolio, there are, as always, negative and positive impacts affecting quarterly performance with tower sales and some other specific factors in Argentina, Venezuela, and Brazil affecting margin evolution. However, efficiency gains were visible in the quarter, supporting the quarter-on-quarter margin improvement. In terms of year-on-year comparisons, profitability continued to be explained by the increased commercial activity in 2012 and the higher effort in transformation towards mobile data. Year-on-year commercial efforts will be more comparable in the second half of the year, leading to a lower margin erosion. Please turn to slide 13 to review our Brazilian operations. We continue to lead the market, leveraging our differential propositions both in terms of assets and strategy.
Our focus on providing superior service quality is clearly bearing fruits. Telefónica Brazil maintained a strong commercial activity in the quarter, with mobile net additions up by almost 30% year-on-year. Smartphone users multiplied by three times versus June 2011. Vivo is leading mobile broadband adoption in the market on the back of its superior 3G coverage and network quality, which are clearly visible at revenue level. Data already accounts for more than 25% of mobile service revenue, a benchmark in the market. We aim to continue leading quality in the Brazilian market, and for this, we keep investing strongly for the future, as shown by the recent acquisition of Spectrum. In the fixed business, we are accelerating the transformation, speeding up with the broadband connections with increased CapEx in the second half of the year to enhance commercial momentum in the fixed broadband market.
I would also like to highlight the successful rebranding and just one quarter after marketing our fixed business under the Vivo brand, the company is leading customer satisfaction in Brazil. In terms of financials, revenue growth in Brazil continues to be sound, with marked differences between businesses. Mobile service revenues kept growing very nicely at over 13% year-on-year ex regulation, with pretty strong prepaid top-up levels and no signs of slowdown. In terms of fixed to mobile substitution, it should be noted that mobile service revenue expansion is more than 2.5 times the erosion in traditional fixed voice revenues, resulting in the net of both impacts being clearly positive. Fixed revenue performance quarter-on-quarter was impacted by several issues, with two-thirds of the weaker performance explained by non-recurring factors.
These include the full consolidation of TVA from second quarter 2011 retroactively to 1st January of that year, which means that in Q2 2011, we included 6 months of TVA's results instead of just 3 months. They also include the seasonality associated with different execution of projects in the corporate segment. On the other hand, OIBDA improved sequentially, both in absolute terms and in margin. Moving to our operations in the southern region on slide 15. The highlights are that revenue growth remains strong across key countries, mainly fueled by strong commercial activity and solid mobile data revenues. Especially remarkable is the good growth recorded in Peru and Argentina, with topline in Colombia being hit in Q2 by seasonality of IT projects. Chile continued to deliver a steady performance amid increased competition.
At the OIBDA level, as we already explained, there are different specific factors impacting performance in the quarter, especially in Argentina and Peru. On the next slide, number 16, we summarize the results recorded in the northern region. Let me highlight that Mexico is already showing revenue growth in the second quarter, a significant progress from previous quarters and just one year after the introduction of aggressive MTR cuts. In addition, the recently announced agreement with Iusacell and our new commercial proposition will derive further benefits. Let me now review our performance in Europe starting on slide 17. We have regained commercial momentum across our footprint over the second quarter on the back of the good traction of our refreshed tariffs and churn reduction, which led to a strong performance in mobile contact net adds up 22% quarter-on-quarter.
Moreover, focus on expanding smartphones led to a 32% penetration rate. Improved commercial results were compatible with a better OIBDA evolution. OIBDA reached close to EUR 2.7 billion in the second quarter, up 6.3% quarter-on-quarter, leveraging a sharp cut in commercial costs, down close to 7% in the quarter. As a result, margin improved sequentially to 35.5% in the quarter, with further benefits to come from our recent decisions to improve profitability across markets. Topline continued to be impacted by the intense macroeconomic, competitive, and regulatory pressures. Turning to slide 18, to review our operations in Spain, I would like to highlight that our plan to revert the situation is starting to yield positive results.
Our initiatives to recover competitiveness through our proactive migration of customers in the consumer segment to our refreshed tariffs have led to more than two-thirds of fixed broadband customers and over 50% in the mobile contract business already enjoying better propositions. The major benefit from this fast repositioning is the sharp churn reduction across services, which has become more visible in Q2, leading to a much better evolution of net adds quarter-on-quarter, especially in mobile contract segment. Please notice that net adds in contract voice accesses were already positive in May and June. On the other hand, the rapid adoption of the new tariffs is negatively impacting ARPU, though we expect ARPU erosion to ease from Q4 on the anniversary of the new portfolio. The second key lever of our turnaround plan is the implementation of a new industrial model to enhance efficiency.
On this front, results are also evident. Our decision to remove mobile subsidies for new customers from March was followed by some competitors, leading to lower activity volumes in the portability market with a better trend in our net results despite the introduction of the 24-hour portability from June 1st. Subsidies removal is driving significant net savings in commercial costs, which are already flowing into the P&L. Additionally, improved quality has led to a strong reduction in customer claims, driving further cost savings. Efficiencies gains are also coming from the rapid completion of the redundancy program in the fixed line business, positioning us well ahead of our peers to benefit from the sector transformation derived from the new regulatory framework in Europe.
We have already done our homework to adapt the cost structure of the legacy businesses with very material savings in personnel costs, close to EUR 120 million in the first half of the year. The gradual improvement in operating performance and a tight cost management make us comfortable to assess that our Spanish business reached the bottom in the first quarter, with a better financial performance expected for the coming quarters as we fully capture the benefits from the new commercial model and the headcount redundancy plan. This better evolution was already visible in Q2. OIBDA reached over EUR 1.7 billion in the second quarter, increasing sequentially. OIBDA margin also expanded quarter-on-quarter, reaching 45% in the quarter with a very limited year-on-year erosion. This performance was achieved despite increased top-line pressure in the fixed business.
Mobile service revenue remained more resilient in April to June, with a much lower sequential deterioration than in the previous quarter, when we recorded a positive impact from the VBR. This performance is explained by a lower impact from our loyalty programs, which offset the negative drag from the termination of a contract with an MVNO in the quarter. Enhanced quality and lower churn are also driving CapEx efficiencies. Despite a significantly higher budget for fiber investment in 2012, 20% up year-on-year, total CapEx in Spain will be down versus 2011, further supporting an improved operating cash flow year-on-year performance versus 2011 along the year. On top of that, let me stress that the recent news on regulation will be particularly positive for our business in Spain, where unbundled local loop prices are well below the European average.
Please turn now to slide 20 to review our operation in the U.K. Telefónica UK consolidated its improved market momentum in the quarter, expanding its mobile base on increasing contract gross adds, up 26% year-on-year in Q2, and a sustained contract churn improvement. As a result, contract net adds grew sharply, totaling 251,000 in Q2, with further increases in the contract mix to 51% over the total base. At the same time, OIBDA performance improved, rising quarter-on-quarter on the back of efficiency measures and contention on commercial expenses as the company gradually lowered handset subsidies and upgrades slowed down. This resulted in sequentially OIBDA margin expansion to reach 23.4%. The better trading activity led to a consistent improvement of revenue trends, with mobile service revenues ex MTRs consolidating their stabilization trend.
Non-SMS data sales growth accelerated to 19.5% in the second quarter on the back of successful data monetization strategy. We expect to continue strengthening mobile service revenue in the second half of the year, despite competitive pressures in the market. In Germany, our strong franchise continued to deliver a solid set of results as slides 21 and 22 show. Our new commercial approach, adapting our contract portfolio with the launch of O2 Blue, reinforced value for money propositions. LTE tariffs recently launched and a regional focus are delivering continuous churn improvements and a steady mobile base expansion with a better customer mix as contract segment already accounts for 52% of our mobile base. The strong commercial momentum has led to consistent market share gains, especially among higher value customers, reaching 18.
The strong commercial momentum has led to consistent market share gains, especially among higher value customers, reaching a 19% share in the contract segment and reflecting our market lead in smartphone penetration. Additionally, the strong investments in recent years to expand our distribution channels, our solid network, and the spectrum to exploit the mobile data opportunity, leave us in the best position to capture future growth in the attractive German market. We experienced solid trading momentum and ARPU growth year-on-year and sequentially, leverage on better contract mix and higher consumer spend due to successful data monetization. All of this flowing to financials, with mobile revenues growing 11% year-on-year in the second quarter, and total revenues accelerating their growth trend to close to 7%.
OIBDA is up close to 13%, both quarter-on-quarter and in the first half, on the back of strong top-line performance and efficiency measures, driving an OIBDA margin expansion to 25.7% in the second quarter. January to June operating cash flow increased by 13.4% year-on-year, showing the strong acceleration in growth from top line to cash generation. To finalize with the operating performance, let me update you on our guidance for 2012. Last February, we gave a guidance for revenue growth above 1% in current terms at the specific foreign exchange assumptions. However, given weaker than anticipated macroeconomic conditions and a stronger drag from regulation than previously envisaged, we now expect to deliver flat to positive revenue growth by year-end.
We do reiterate our expectation for OIBDA margin erosion in 2012 that will be lower than in 2011, with a better year-on-year evolution in the second half of the year, driven by better year-on-year comparisons in commercial activity, net savings in commercial costs in Spain, and further cost efficiencies across countries. On top of that, operating synergies in Brazil will become visible in the coming months. CapEx to sales guidance remains unchanged at similar levels than in 2011. Let's now move to the financial side on slide number 24. Net financial debt increase in the quarter is mainly related to the timing of the dividend payment and the execution of the share buyback, which coupled with negative FX movements, commitments cancellation, and the impact of telco refinancing, offset positive free cash flow generation and the EUR 1.5 billion debt reduction from the closing of the Colombian restructuring.
Further positive impacts from our asset rationalization strategy will be visible in the short term. We have already got all the necessary regulatory approvals for the partial sale of our stake in China Unicom, which will effectively reduce our debt burden from July 30th. This, coupled with the sale of our stake in Hispasat, will contribute with EUR 1.3 billion cash proceeds. Free cash flow generation will improve in the second half of the year on the back of a better operating performance and the unwinding of the working capital consumption recorded in the first half of the year. Debt reduction will be significantly accelerated by the shareholder remuneration measures announced yesterday that will generate significant cash savings. We maintain a solid liquidity position, with debt maturities covered till the end of 2013.
This comfortable position is driven by our strong activity in the bond and credit markets since the beginning of the year and the recent adjustment of our remuneration policy, which improves liquidity immediately and reduces refinancing risk. We fully refinanced 2012 maturities in the first quarter. We have also reduced 2013 maturities by nearly EUR 1 billion to EUR 6.7 billion. Our cash position, excluding Venezuela, stood at over EUR 5 billion at the end of June, while total undrawn credit lines amount to EUR 8.9 billion, with over 80% maturing long term. It is worth to highlight the geographic diversification of undrawn credit lines, with about one-fourth of them signed with Spanish institutions, while American and Asian banks represent another fourth, and the rest being widely split among diverse other European countries.
Let me say that although credit markets have deteriorated, we have demonstrated our ability to refinance and extend existing credit line maturities for an amount of EUR 2.4 billion in the year. We are also benefiting from our geographic diversification. In the current credit environment, we have recently secured full underwriting of a BRL 2 billion debentures issuance that will be closed in the coming weeks. Effective interest costs have increased in the quarter, though continue to remain at the middle part of our guidance. The acceleration in debt reduction will lead to lower than anticipated financial expenses, affecting positively the P&L. Let me now hand it back to César.
Thank you, Ángel. Let me stress that we are fully committed to enhance our financial flexibility and to deliver our leverage target for year end. In the current extremely challenging economic and financial environment, exogenous factors are creating severe instability. Are exacerbating potential financial risks. Those factors are clearly behind Telefónica control, it is crucial that the company takes definitive steps to effectively diffuse potential risk. In consequence, the board of directors decided yesterday that the criteria of prudent administration, it is in the best interest of Telefónica stakeholders that dividend and share buyback program corresponding to 2012 be canceled as a one-time exceptional measure. The rationale behind this decision are, first, to further strengthen the balance sheet. Second, to substantially accelerate debt reduction in the short term. Third, to decouple from exogenous macro factors affecting our country of domicile.
Fourth, to immunize from debt market liquidity conditions by having refinanced maturity behind the end of 2013. Fifth, to de-risk the execution of the already announced portfolio management. Sixth, to continue investing in profitable growth in our operations. Additionally, we are fully committed with the execution of the already announced portfolio management and asset debasement program, including the sale of Atento and the IPO of Telefónica Germany in the fourth quarter of this year. In the analysis of potential listing alternative for Latin American business. On top of that, we are continually monitoring market conditions to make further a selective asset monetization. All these actions should help to reduce the company risk perception to levels that are aligned with our business fundamentals. To sum up, in second quarter, we have delivered a better performance across metrics from EBITDA to net income in underlying terms.
Our risk perception is clearly decoupled from business fundamental and does not reflect our best-in-class diversification. EBITDA improved materially quarter-on-quarter, with sequential increases across operations, EBITDA margins performance in the first half of the year is consistent with 2012 guidance, with EBITDA evolution expected for the second part of the year. We have taken further initiatives to optimize resources and improve business profitability. In the current extremely challenging economic environment, we are undertaking actions to improve balance sheet and diffuse potential risk. We are clearly making significant progress in our journey to become a total digital telecom. Thank you very much. Now we are ready to take your questions.
Ladies and gentlemen, I'd like to ask a question at this time. Please press one on your telephone keypad. To cancel your question, please press two. Once again, that's one to register a question and two to cancel. We will kindly ask you to ask a maximum of two questions per participant. If possible, we recommend you not to use your cell or hands-free phone. There will be a short silence whilst questions are registered. Our first question comes from Torsten Achtmann from JPMorgan. Please go ahead.
Great. The first one is on Spain. While the wireless business has stabilized on a quarter-on-quarter basis, wireline seem to have accelerated the downturn. Could you explain what is behind that? Is that something which will continue throughout the year? Second one would be on the credit lines. Are the credit lines tied to any rating, or with other words, could they be cut or pulled if your rating gets downgraded by two more notches in any case? Thank you.
Taking your question on the evolution of the wireline business revenues in Spain, let me say that this is partially due to an induced movement that we have been doing in actively migrating our most valuable broadband customers to a lower tariff. Right now, more than two-thirds of our customers on broadband have already migrated to new tariffs, and this has created a short-term impact on the revenue growth. At the same time, we have been able to manage a better margin on average margin per user performance. Because churn has been significantly reduced, and before that, we used to have probably 50% of the customers that were stepping out of a promotion leaving the company to another supplier.
Right now, we are able to preserve those customers, and that, joining with the fact that we are significantly increasing the quality of our services here in Spain, means that churn are at historical low levels in Spain. It is true that that has been affecting the short-term additionally to the macroeconomic conditions, revenue performance in Spain, that would stabilize progressively, but we have a much more loyal customer base, much lower churn, much better operational metrics and margin evolution. On top of that is going to have a significant impact on lower CapEx, because the effort of preserving those customers instead of installing or getting more customers from the outside was putting significant pressure on CapEx. Overall, it is true that that has been affecting our revenues in this quarter, and it's probably going to be affecting in the coming months.
The overall equation is positive as it is further contributing to a bigger margin per customer and to a lower intensity of CapEx. By the way, the equation is solely based on the fact that churn is at historically low levels.
Hello, Torsten, this is Ángel. We have no rating triggers in our financing, neither in the credit lines, nor in the bonds, nor in the long-term facilities. No rating triggers in our financing. Also, as you can see on slide number 25, we have a very well-diversified list of origin of counter parties for our credit lines.
Okay, thank you.
Next question, please.
Our next question comes from Luigi Minerva of HSBC, London. Please go ahead.
Yes, good afternoon. I wanted to go back on your positive comments about the European Commission's policy statement on fiber. I wanted to ask you two things. Firstly, how that statement is going to change your fiber strategy, let's say, over the next 12 to 18 months? Secondly, picking on the point that the Commission emphasizes that they endorse a technology-neutral approach, whether this statement will push your network architecture more towards fiber to the node compared to fiber to the premises. Thank you.
This is Julio Linares. Thank you for your question. Our view on the new regulatory policy for Europe is positive, as it is for the investment community. We really believe that there is a significant change in the right direction that is addressing the first priority for the European market, trying to achieve a less regulated policy framework that is the most adequate one in order to push and stimulate investment around next-generation access network. As you know, there are two new recommendations coming with this general policy. The first one for non-discrimination, and the second one around cost methodology to be applied for the determination of the regulated wholesale services. That will take several months, and then it will be very unlikely that we'll have a direct impact in the next six months. Of course, it will be a very positive impact for the next coming months.
Saying that, in addition to this general framework, I think it is very positive to take into account that there are not going to be any pressure on the current unbundled local loop prices. On the other side, taking into account our prices in Spain, we have even an upside possibility here. I think, as you said, that it's very important that this policy is technologically neutral, we don't see any impact on our current strategy regarding the deployment of the different technologies. As you know, we will choose the best mix of the available technologies in each market depending on the current competition and situation of each individual country and market.
Okay, thank you very much.
Next question, please.
Our next question comes from Georgios Ierodiaconou from Citi. Please go ahead.
Yes, good afternoon. I have two questions, please. My first question is on the country of domicile. This was one of the reasons you mentioned drove your decision to cut the dividend. As you highlighted earlier on page six, you are a lot more diversified than some of your peers, yet the headquarters seem to make all the difference. Can you clarify if it would be possible in principle to change domicile, if it's feasible in practice, and whether if you were to make such a move, it would be enough to decouple your rating from that of the sovereign? My second question is on the dividend. Can you please confirm that the EUR 0.75 for 2013 onwards will be all in cash, and whether you will rule out scrip dividends in future? Thank you.
This is José Aguerrea. If you see the evolution of our debt, basically, the evolution of our debt is due to two factors, the buying of O2, and the operation in Vivo. We are being penalized for having invested outside of Spain, which is really, to me, a very clear contradiction. Okay? The increase of our debt is due basically to investing in Europe and in Brazil, investing in some of the biggest growing markets. I see a very clear contradiction that a correlation between the financial risks that are given to Telefónica, which is three or four times more than our peers
Revenues inside Euro and less diversification that help to us. We have the domiciling Madrid, and we will keep the domiciling Madrid because we are in 25 countries, and I think our business will be looked from the cash flow generated in the 25 countries. I remind you that Spain generates 51% of the revenues and are stable. That is very clear. That's the reason that, anyway, taking the present situation, it was clear to the board that we had to take an action to decouple and make the reality be related to the fundamentals of our business, and that's the reason we took this decision on the dividend. Extending the maturity behind 2013, and that means that we will feel very comfortable. We will achieve the leverage ratios.
We said that we will reach at the end of the year, we'll continue on optimizing our asset portfolio on de-leveraging Telefónica while not affecting the growth potential of Telefónica. This is clear, we can do both things. The things we have done in the first seven months of the year are very clear. With the optimization of the portfolio and what we are going to continue to do. We are going to pay EUR 0.75 in cash. I may remind you that EUR 0.75 is less than 50% payout of our free cash flow we expect for the coming years. That is the answer to your question.
Very clear. Thank you.
Next question, please.
Our next question comes from Mathieu Robillard of Exane BNP Paribas . Please go ahead.
Good afternoon, and thank you. First, a question with regards to your revenues. As you've shown that you still have good revenue growth in most of Latin America, yet there's been a slight slowdown when we compare to Q1. There's also some slowdown in some European countries. My question was, how do we reconcile that with the fact that you have continued to invest over the last few quarters? Is that the reason why you changed the revenue guidance because you're seeing a slowdown already in some countries? Related to that, where have you been disappointed? The reason why you downgraded the guidance, is it because of Latin America? Is it because of Spain?
Second question has to do with your financing strategy, I'm trying to reconcile slides that you put out today, about debt maturities, about slide 25 and the equivalent slide you put in the Q1 result. At the time, you were talking about 40% of the 2013 maturities being pre-financed. That number doesn't show here this time. Maybe it's just a presentation issue. If you can clarify that. Also, I see that the undrawn credit lines have declined from the previous quarter. Maybe also if you could clarify that. Thank you.
Regarding your first question, as we see that Latin America revenues are growing, they will keep growing. The main reason to change our guidance for revenues is basically that we expect weaker macro conditions in some countries, not of course in all of them, but in some countries, and because we took into account as well the stronger drag from regulation that we are already facing.
Sorry, the weaker macro, is that only in Europe? Is that also in Latin America?
Basically in Europe.
Hello, Mathieu, this is Ángel. With respect to maturities of 2013, you are seeing on slide number 25 a lower figure than in the first quarter because we have been extending maturities of some financing beyond. Then we have brought them forward. That's why the figure is lower. Also what we said at the end of first quarter that we had 40% of the maturities covered. Now what we're seeing is that we have 100% of those covered. We already have, even in the absence of divestments, and once we have closed the China Unicom transaction, we have all that maturities covered till beyond the end of 2013. Here we are in an exercise of expanding our liquidity cushion for the next period until the end of 2013 and beyond.
Sorry, if I can clarify that. By covered, you mean pre-financed, as you meant in the previous quarter? Is that covered by the free cash flow? Is that covered by existing lines that are undrawn?
With the cash that we have, the cash that we're going to generate, and the facilities that we have, we would be covered till beyond the end of 2013.
Thank you very much.
Next question, please.
Our next question comes from Tim Boddy of Goldman Sachs. Please go ahead.
Yeah, thanks. I wondered if you could confirm whether you've spoken with the credit rating agencies about this decision, and whether you have some reassurance that this can isolate you from the potential risk of a downgrade to the sovereign rating in Spain, reflecting the diversification you've been discussing. It would also be helpful to understand whether with this stronger balance sheet, you're able to be more price sensitive on any potential asset disposals that you plan. For example, if market conditions become even more challenging, does it give you flexibility to delay potential IPOs? I guess related to that, does this change the way that you're thinking about German consolidation, given your balance sheet is again getting stronger? Thank you.
This is Ángel Vilá again. My first observation about ratings agencies should be one of coherence. All of us have read the latest report from S&P, Moody's, and Fitch, which were issued in May, June, July, respectively. They are public, and they state objective metrics, which would lead to stabilization of our ratings. The results that we're presenting today, where we have a quarter-on-quarter sequential improvement, expected improved performance in the second half, and the dividend action would position us in compliance with those metrics. We would expect rating agencies to be coherent and properly incorporate these facts into their assessments. The second observation is about decoupling from sovereign rating.
As you know, certain agencies have methodologies that link sovereign and corporate rating, a rigid application of such methodologies that would fail to take into account the geographic diversification, the solvency, and liquidity of Telefónica, could create some potential undue damages to Telefónica. Therefore, we would expect that the methodologies that would be applied by rating agencies would be applied in a way that recognize the diversification, solvency, and liquidity of Telefónica. By the way, we have had preliminary conversations with ratings agencies after the announcement that we did yesterday, and they are showing or interpreting this as a very positive movement from Telefónica. With respect to the second part of your question, which relates to the divestment policy, we continue to be committed to the divestments program that we have.
Obviously, since we have all of the maturities covered until beyond 2013, even in the absence of those divestments, this provides us the flexibility with respect to timing, with respect to valuation of those divestments, to which I insist we remain fully committed.
Next question, please.
Our next question comes from Will Milner of Arete Research. Please go ahead.
Thank you. First question, actually, just following on from the last one on the need for an IPO in Germany. Given the cancellation of the 2012 dividend certainly doesn't seem to have led to a sharp move in the share price. I just want to understand why you're still committed to IPO-ing the best European asset, why would you not potentially also delay restarting dividends in 2013 to prevent you from having to IPO Germany? The second question is actually on Brazil. Quite a bit more evidence, I think, in the quarter of tougher competition, especially on wireline. I think certainly adjusted for a big provision reversal and some tower sales, the EBITDA is falling high single digits in BRL.
I just wonder if you can talk a bit more about the prospect for being able to generate consistent underlying EBITDA growth, given the commentary you made about operational synergies being noticeable or coming through in the next couple of quarters. Thanks.
Hello, this is Ángel Vilá. Regarding the first question, we have not contemplated cutting the dividend beyond the one-time exceptional cut of 2012 because, as we have reiteratively expressed in the past, it's in Telefónica's DNA to have an attractive and compelling dividend to its shareholders. With the financial projections that we are having with the operation of the business, the different measures that we're taking, we can be comfortably covering such a dividend. With respect to the German IPO, that's a project that provides not only a potential source of liquidity and debt reduction, it's a project that provides a platform in Europe that can allow us to highlight the value of such an asset, that can provide us a platform for capital raising in case there were continued financial volatility in Europe, it provides us with a platform for further development.
It's a very attractive asset, which we have been highlighting that is growing in all its metrics, from revenue to EBITDA to operating cash flow, has a very effective cash generation even after taxes because of its tax position. We believe that it should be very attractive for potential investors.
Let me highlight one thing. Clearly, we want to highlight the value of the group, the IPO of Germany, one of the reasons in which when you look at the sum of the parts, they clearly discount. We are having on the value of Telefónica because of having the domicile in Spain, we want to highlight the value of the group. I want to reiterate you one thing. For Telefónica, the domicile is the 25 countries in which we are. That is our domicile, okay?
Yes, this is Santiago. Let me try and answer your question about Brazil. Well, number 1, I appreciate that Qs 1 and 2 have been quite busy in one-offs. I will not go into detail, but I'm more than willing to spend time on those. The one thing I can say is that two of those, the brand launch that was expensive but successful with Vivo now encompassing both fixed and mobile products, is clearly a one-off event, and it will not happen again in the second half of the year. That the restructuring coming from the putting together of the fixed and mobile businesses is also behind us. Clearly on those two fronts, the second half should be better. You are right to point out that the weakness lies exclusively on the fixed end of our businesses, and there in particular on voice.
We have two observations there. One is that broadband continues to expand, and we continue to have an active presence in that market. Second, we are ready to launch around October our new IPTV product, which we think is going to help us sell more to the upper echelons of the market and will show that although we may be coming a bit late into the growth of that particular segment, we are going to make a lot of noise.
Next question, please.
Our next question comes from Sean Johnston of Bank of America. Please go ahead.
Hi, good afternoon. When I look at your statement on net debt
Hello?
Our next question comes from Paul Marsh from Berenberg Bank. Please go ahead.
Hi. Thank you. I have two questions. On page 25, first, it sounds like I'm not the only one who's a little bit confused by how your liquidity situation stacks up. Maybe one way of answering it is, could you perhaps give us your view of what that liquidity chart, the cash and equivalents plus the undrawn credit facilities, would look like if you hit your guidance for the full year? What would that look like at the end of the year? Secondly, a question on Germany again. Clearly, it's been widely reported that you were close to a deal with KPN on E-Plus, but couldn't get credit agency backing. Are you still working on resolving those credit agency concerns? Is it still an option in your plan to revisit that opportunity if credit agencies can be pacified?
This is César Alierta. With regards to your KPN question, it's very, very clear that there were substantial changes in the market consolidation in Germany. We say very clearly that the priority for Telefónica is de-leveraging and to improve our financial flexibility. That's the reason that this deal has not been done.
This is Ángel Vilá. With regards to the first question, we do not give guidance on what would be the cash position at the end of the year. Clearly, this will be influenced by the position that we have now, by the cash that we're going to be generating in the second half of the year that will be substantially higher than the one that we have generated in the first half, also on the financing exercises that we can execute in this second part of the year. With respect to the evolution of cash between now and the second half of the year, the operating cash flow decline that you have seen in the first half will be lower. The second quarter has already been better than the first quarter.
The second half will be better than the first half. You should see a better evolution of operating cash flow. Also, the working capital consumption, which you can see on slide 24, it's cumulative close to EUR 2 billion in the first half of the year. It will more than fully reverse in the second half. Working capital, as you can see in every single one of the last years, is highly cyclical. This will more than reverse. Third, on interest expense, we are having a higher interest expense because we have higher debt. We have higher interest cost also in the interest expense and payments that we've had in the first half of the year. We had over EUR 200 million of non-recurring items.
This financial expense in the second half would also go down because the debt will go down. We are saving on taxes so far, compensating the increases that we see in Spain with savings that we are getting in other jurisdictions. You should be expecting a much better free cash flow generation in the second half of the year, which coupled with financing activity, will result in the position that we will have in cash and undrawn lines by the end of the year.
Thank you.
Next question, please.
Our next question comes from James Ratzer of New Street Research. Please go ahead.
Yes, thank you very much. I had two questions, please. The first one was just regarding wireless in Spain, comparing your performance with that of Vodafone. Obviously, it's been widely publicized, you both changed your subsidy policies. If I look at your average pricing per minute, Vodafone decided to give some of that value back to customers by cutting its voice pricing sequentially. Whereas your average price per minute seems to have actually gone up sequentially from Q1. Do you think that differential in pricing trends is sustainable? Please, it would be interesting to get your thoughts on that.
Expecting a much better free cash flow generation in the second half of the year, which coupled with financing activity, will result in the position that we will have in cash and undrawn lines by the end of the year.
Thank you.
Next question, please.
Our next question comes from James Ratzer of New Street Research. Please go ahead.
You should be expecting a much better free cash flow generation in the second half of the year, which coupled with financing activity, will result in the position that we will have in cash and under own lines by the end of the year.
Thank you.
Next question, please.
Our next question comes from James Ratzer of New Street Research. Please go ahead.
Yes. Thank you very much. I had two questions, please. The first one was just regarding wireless in Spain, comparing your performance with that of Vodafone. Obviously, it's been widely publicized, you both changed your subsidy policies. If I look at your average pricing per minute, Vodafone decided to give some of that value back to customers by cutting its voice pricing sequentially, whereas your average price per minute seems to have actually gone up sequentially from Q1. Do you think that differential in pricing trends is sustainable? Please, it would be interesting to get your thoughts on that. Secondly, had another question with regards to Brazil. It's now coming up for almost two years since the deal completed. I was wondering if you could just give us a feeling of what's going on behind the scenes on the synergy process.
Why is it now, two years on, that you feel confident the synergy is going to come through in this second half? Why haven't we been able to see them in the first two years since the deal completed? Thank you.
Taking your question on wireless in Spain, namely on the comparison that you're making against Vodafone. We don't see those differences. In fact, in market trends and in average entry points, we think that we have become highly competitive. It's probably due to some of the bundles assignment that we have. I would invite you to check that numbers with our team. I'm more than happy to go through those because we don't really feel that difference. In fact, the market trends are very positive on our side on this part of the business. It might be some bundle assignment, but on effective price per minute, we are very competitive, and we have been very competitive both in contract and progressively in prepaid.
Thanks to that, we have been able to show a significant improvement in churn, and we have been back to positive market gain, market net adds in contract namely. We do not experience that difference. Please check those numbers with our team. More than happy to go through them because those doesn't account for market reality today.
Do you think your price per minute here could stabilize?
Well, in fact, what we see is that we have become competitive, as I was saying. The ARPU, if you measure that in terms of mobile service revenues in Spain, it has been stabilizing somehow because we have been migrating already 52% of our total contract customer to a lower tariff. The difference of tariff is roughly EUR 6. The main comparison that you should drive is, what if we would not have done this? We are already passing through the point in which our revenues are already stronger today than if we would not have done that, because the churn levels that we were having before in the customers above EUR 60 were roughly 6%. Now we have historical low levels of churn. Thanks to that, the average margin per user is higher today than it was before.
In fact, the revenue trends compared to the one that would have been if we would not have moved our entry points is today starting to be better. I think that now it's not just about subsidies, it's about the entry points, it's about the quality of services. It's about the fact that the number of calls that we are getting to the call centers has basically halved, and therefore the OIBDA margin trend is much more sustainable than before.
Yes, this is Santiago again. In terms of when the Brazilian synergies will show up, let me just make 2 comments. One is that it is almost 2 years exactly to the date that we signed the deal with PT on Vivo, in the second half of Brasilcel, to be precise. It's only 1 and a half years or slightly less than since the deal closed, and it's only been 6 months since the 2 companies finally integrated. Obviously, a lot of the synergies are going to show on the negative side that I just mentioned in terms of integration costs. From now on, I would commit to say that through the end of this year, we should be more specific about what those synergies have actually turned up being.
That should also include the tax synergies, which are not insignificant as a result of this merger, which only happened in February.
Okay. Thank you very much.
Next question, please.
Our next question comes from James McKenzie of Fidentiis. Please go ahead.
I've got a couple of questions. Firstly, for Ángel, you were talking about the interest expense. In the last couple of years, we've become used to interest payments being well below accrued interest costs, and yet in this first half of the year, that situation's turned around. I was wondering, could you give us some idea of what you're expecting for H2? On the Spanish business, when I look at the churn's obviously come down to very low levels. Could you give us an idea of, for the new plans, if the churn is significantly below the average churn you're showing in these charts?
Hello, James, this is Ángel. In the first part of the year, we have recorded some non-recurrent interest expenses to the tune of EUR 200 million.
Part of this had to do with Colombia. Before we took all the debt reduction, there was one monthly payment that had to be put into the financial expenses that went into the first quarter. We also had some one-times related to Peru and so on. Also, there is seasonality in the coupon payments. There is a concentration of coupon payments in the first part of the year that also make a distortion of that. This is basically either a seasonal or non-recurrent items that were in the first part of the year. From here, you should expect debt reduction. As I said before, next Monday on July 30th, we are closing the transaction regarding China Unicom. That will provide an immediate debt relief in excess of EUR 1.1 billion.
We continue with our efforts to divest assets, and the cancellation of the share buyback will result in us having the shares in our treasury stock. They will not be canceled. We have full flexibility with respect to those. Obviously, we would not contemplate divesting them in this price because it's not reflecting Telefónica's value. The saving of the EUR 0.40 in November, that's around EUR 1.8 billion also saving. All of these will result in reduction in the interest expense.
Sure. Any guidance with respect specifically to payments versus accrued interest, either cash flow interest rather than P&L interest?
I can say that payment will be lower than accrued in the second half.
Okay. Thank you.
Taking your question on the Spanish business and churn levels. The answer is yes, on the customers that we are retaining on what we call the evaporation rate, which is the early signs of churn of the customers that we are acquiring and the ones that we are retaining on voice. Which means that we are effectively having a better performance at the churn levels that you are seeing on the slides on the voice part of the business. We are still suffering from some dongles impact coming from previous year, from previous campaigns that are still affecting our churn levels. If you ask me about the customers responding to the new policy, yes, the churn is even lower than the levels that you are seeing there. That's why we think it is a sustainable trend.
As you might imagine, we are monitoring that because that is the compensating factor of the fact that we have been reducing the entry points, the prices, and that's why this equation is working in terms of average margin per user. If you include on top of that, the fact that the quality increase is having as a result, a much less intense call center activity and therefore a significant cost reduction. The overall equation is becoming very positive.
Right. You mentioned voice. Would you include fixed broadband in your churn calculations?
No, we are talking about voice plus smartphones. I'm just excluding the dongles, because it's a specific one-off.
Is the fixed broadband churn also well below what you're reporting as an average churn for broadband?
No, on fixed broadband it's an average similar. Again, remember that we were losing the most valuable customers in both sides of the business, wireline and wireless. The effective result of the strategy is that we have been stop exporting high valuable customers to the portability market. That means that the portability market has been significantly reduced, and in fact, it has been focused on the less valuable customers because we have been preserving the most valuable ones.
Right. Okay.
Next question, please.
Our next question comes from Luis Prota of Morgan Stanley. Please go ahead.
Yes, thank you. Two questions, please. First, on Spain. The question is on the VAT increase we are going to have in Spain in September, whether you are planning to pass on to customers at least for mobile contract and fixed broadband, or you are planning to absorb VAT within your margin. The second question is on Brazil. We've seen recently some regulatory action from Anatel, which was leaving Vivo in a very good position relative to peers. The question is whether you think that this is suggesting that the regulator is more vigilant now and could take action in other areas, maybe forcing Telefónica to invest further and increase CapEx maybe in fiber or any other area? Thank you.
Thanks, Luis. Taking your question on the VAT in Spain. Our prices, the market prices in Spain is always before VAT, and therefore I think that the market prices will keep the same structure, and therefore VAT will be passed through to the customers. We do not expect to change that strategy.
On the Brazilian regulatory action, I think the only thing I can say is that we're happy not to have been included on that list, but we don't have any further comments on what the regulatory actions are. Anatel has always been a very demanding and very vigilant, as you said, regulator, and we don't expect that to change. However, I think it proves that over the past couple of years, we've been investing just about right, in order to prevent these things from happening. Although we will continue to monitor all the quality indicators that are numerous and not always easy to manage, so that regulatory hurdles are not an obstacle.
Sorry, if I can follow up on the VAT question, and thank you for your answers. Obviously, it's quite difficult to pass on to prepaid customers VAT, I presume that you will be giving less minutes for the same price. Are you expecting a very direct relation between VAT increase and reduction in prepaid ARPU?
Well, you're right. Customers are used to top up a specific amount of money. Therefore, effectively, they will have either less minutes for the same price or the answer is yes. How this is going to be affecting elasticity is still unclear, we will keep you posted.
Okay, thank you.
Next question, please.
Our next question comes from Frederic Boulan of Nomura. Please go ahead.
Hi, good afternoon. Two questions, M&A. First of all, to follow up on the question on E-Plus. I guess the market can appreciate that acquiring assets is difficult in the current credit environment. Would you consider reopening discussions with them based on different structure around the merger or JV, for instance? Secondly, on Latin America, you mentioned Germany as a kind of platform for further operations in Europe. Would you consider Brazil as a similar vehicle for Latin America IPOs, or would you plan to work on an individual asset basis? Thank you very much.
Regarding Latin America, we are still in the internal phase of analysis of several alternatives. Clearly, we have a very good collection of assets in the region, second to none, and there are very different possibilities on how to structure it, be it country-by-country basis, regional or semi-regional. All the alternatives have pros and cons, and we are still in the internal analysis phase of the course of action.
In the case of KPN, it was very clear. The priority for Telefónica is to de-leverage and get the goals, and they are our priority. As I said in my previous comment, the synergies are very clear, but we have to opt, and we opted for the priority, which is the de-leveraging of Telefónica.
Okay, thank you.
Next question, please.
Our next question comes from Jonathan Dann of Barclays. Please go ahead.
Hi there. Two questions. The first relates to, have you spoken to the rating agencies about, if you raise debt at any of the subsidiaries? Are they still worried about subordination as a negative credit event? As part of that, if you could remind us where you are on cash repatriation from Latin America? My second question, historically, a strong part of Telefónica's DNA has been management's commitment to share ownership. You mentioned there were treasury shares. Will management be acquiring more shares?
Okay, on the first question, we have got positive informal responses from rating agencies to the move that we announced yesterday. With respect to LatAm repatriation, we have been repatriating in the first half of the year over EUR 600 million. With respect to the share ownership question, I pass to César.
Okay. Management of Telefónica is heavily invested in Telefónica shares. The reason we are heavily invested in Telefónica shares is we believe Telefónica value is much more higher than it is today. We know the fundamentals. I don't think we're going to look at exogenous factors are there, but exogenous factors at the end of the day, the important thing is the fundamentals, fully committed, and we are very happy with the purchases of shares we made. I cannot say any more on that we believe, I want to stress this, that the real value of Telefónica is much more higher than today. We know the cash flows, and you know, it's very easy to meet the numbers.
Sorry, I just realized, this is Ángel, that my response previously was incomplete. We have room for debt in subsidiaries. At this stage, about 15% of our total gross debt is sitting in subsidiaries. We still have room to increase the debt that we have in those subsidiaries, even up to around 10% before we hit any concern that ratings agencies may have regarding structural subordination.
Thank you very much.
Next question, please.
Our next question comes from Stanley Martinez of Legal & General Investment Management. Please go ahead.
Good afternoon to everyone, and thank you for taking my call. My first question returns to the Spanish fixed broadband business. José María, would you characterize your strategic repricing to new ADSL tariffs as substantially complete? Because it appears that your realized average broadband ARPU in H1 is now broadly level at about EUR 38 per sub per month with Jazztel and Ono, much as your domestic mobile realized ARPU is now lower at EUR 20 across the piece for all major carriers. My question is, do you feel that the new tariff in domestic broadband is now broadly affordable for current market conditions, or does the price value equilibrium for Telefónica and the whole Spanish broadband market still need to reprice lower over several more quarters?
Okay, thanks for your question. Well, the answer is that, remember that we have been taking the entry point down from EUR 39.9 to EUR 19.9, the basic offer, and EUR 24.9, the basic offer plus value-added services. Today, the take-up of customers is that the vast majority of them, the vast majority being more than 70% of them, are going to the EUR 24.9 offer, and that means that we have become competitive. If you add to the fact that we have been turning positive in net gain in this quarter, that means that we are back on track being competitive. We are commercializing the fiber at a higher entry point. As we are massively deploying the fiber today in Barcelona and in Madrid, we'll keep you posted about this enterprise, but today we feel competitive.
The next step for that is probably going further into what we call the totalization, which means that bundling further the broadband products with voice and with wireless and potentially with TV and having a single approach to the customer would help us to become even more competitive and to increase the perceived value for money for the customers. The answer is, yes, we feel we are competitive. We think that the commercial views that we are getting and the traction that we are getting support that assessment. The fiber is the next step. You should expect from us a totalization strategy to increase our competitiveness and the traction of our prices.
Well, that's very encouraging. If María would just allow me one other question, if I may, to Ángel on the financial model. I just wondered whether you could provide me and other investors with some realizable upside, potentially from higher ULL pricing, and also quantify some benefits that we may have from the various active network sharing arrangements that would support the chairman's viewpoint that we have reached a trough in European EBITDA here in H1.
Well, if it was María, Ángel transferred that question. I'm more than happy to go through it at any point. In terms of unbundling, we feel comfortable with the current prices. Remember that the prices today in Spain is below the EUR 9 that has been established by the European threshold. We'll keep you posted on that potential upside at any point. On network sharing, we have done a very aggressive network sharing, aggressive meaning that very ambitious, active, and passive network sharing agreement with Vodafone in the U.K. That is going to help us to do two things at the same time. First, to catch up with the best network in the U.K. in a shorter period of time and to do it in a much more efficient manner.
We think this is a very valuable agreement. We intend to extend that to wherever we can do it in Europe, because we think it's the most sensitive way of deploying the next generation networks. I think that Europe doesn't have room for too many. There are too many networks in Europe today. We need to work very intensively for those agreements because it provides time to market and significant amount of synergies, and therefore a huge amount of value for the customers.
Right. Very good. Thank you very much indeed.
Next question, please.
Our next question comes from Jerry Dellis of Jefferies. Please go ahead.
Yes, good afternoon. I've got two questions, please. Firstly, in Spain, Vodafone said that a side effect for them of the new subsidy model was that they found their gross adds coming under heavy pressure, and they said on their conference call the other day that they may have to take a few measures to regain commercial traction in the weeks and months ahead. If Vodafone were to increase subsidies, how would you potentially react to that? In Germany, your recent margin growth momentum is obviously very strong. Service margin's almost back at 30% now. Do you believe that margin expansion is sustainable, bearing in mind the repricing that's really hitting the market from a number of your competitors, particularly EUR 20 flat rates? Thank you.
Thanks for your question. In terms of the overall market in Spain, without willing to comment on what might be the intentions of one specific competitor, I think that the model is starting to work. What am I saying that because, in fact, remember that Vodafone started this thing one month later than we did, therefore, the benefits of churn reduction will take a little bit more to flow through their own accounts. Basically, the goodness of the model is not just on the subsidies. For us, the attraction of the model, the subsidy is one part of that equation, but the lowering of the entry prices, the lowering of the entry points, retaining the most valuable customers, getting the kind of churn levels that we are getting the number of calls that we are getting, which are significantly reduced, basically half in six months.
We are entering into a virtuous cycle, the subsidy is just one component of that. We will monitor permanently the situation, if the portability market might be one proxy of the short-term impact of any of those strategies, we have become pretty attractive. We have improved significantly our portability metrics. On top of that We have been able to significantly drive up that market. We'll keep you posted, subsidies is just one part of the equation. I mean, the sustainability for our market is not based on that. Remember that this is not just affecting margin, it is also positively affecting CapEx in Spain, because the fact that we are having a much lower level of churn means that we can do the same kind of market share with a significantly less CapEx intensity in terms of routers in the homes of new customers.
It's starting to have a significant impact on capital allocation. We will keep you posted. We will monitor that significantly. For the time being, it is starting to get traction. In terms of Germany, we think it is sustainable. We even ambition a little bit more. We have changed the model in Germany as well. Remember that we are not subsidizing handset in Germany, that we have this MyHandy instrument, which is a factoring instrument that the customer decides how they want to finance their own handset. We have been changing significantly the approach to market. We are getting traction on our customer base, namely on postpaid, therefore it will have the cumulative benefits of the recurrent revenues. On top of that, we have learned that it is very valuable to change our strategy and to become much more regional.
Being more regional because of the tariff structure in Germany means that we can enjoy a better margin on the on-net traffic, even on the off-net traffic in the German market. We have several levers that we are tracking and monitoring. We are learning a lot on that market. Churn is coming down significantly again. Yes, we ambition to preserve those levels of margins in Germany.
Thank you.
We have time for the last question, please.
Our last question comes from Simon Dodd of M&G. Please go ahead.
Hi, I've got two questions, one on liquidity and one on cash repatriation. On the liquidity, can we get further clarification on this 5.1 billion cash and equivalents ex Venezuela, because I'm struggling slightly with that on the basis that the consolidated balance sheet only shows 4 billion cash and equivalents. Does the 5.1 billion include some of the 8 billion that's included in your net debt definition? If so, can you just give us some idea of what the 8.3 billion consists of, if it's not normal cash and equivalents? What is the true cash and equivalents position ex Venezuela as per the balance sheet definition? Clearly it's lower than the 5.1 that's in slide 25. The second question on the repatriation, did I catch you earlier in saying it was EUR 600 million to date?
I think last year you did EUR 3.3 billion. Are you expecting an acceleration in the second half, or can you give us a feel therefore of what the full year expectation for repatriation from LATAM is?
With respect to the second question, yes, we have repatriated slightly above EUR 600 million in the first half. We're expecting this to significantly improve in the second half of the year. We do not expect to hit the repatriation figure that we had last year of above EUR 3.3 billion, but we should be close to EUR 3 billion for the whole of the year. With respect to the second question that you're asking, I can only say at this stage that the EUR 5.1 billion cash and cash equivalents excluding Venezuela has been calculated in a consistent manner with the way that we have been presenting this information every quarterly presentation. We would encourage you to get in touch with our IR department so that they can give you all the details on the reconciliation.
Appreciate that. Thank you.
This is José Alberto. In behalf of all my colleagues of the executive committee, I want to thank you all of you for attending our second quarter results and all your questions. It is Thursday, but I wish you a good weekend. Thank you very much.