Good afternoon, ladies and gentlemen, and welcome to Telefonica's conference call to discuss January June 2012 results. I am Maria Garcia Lara 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 risks and uncertainties.
And that Zetta results may differ materially from those in a forward looking statements as a result of various factors. We invite you to read the complete disclaimer included in the first page of the presentation, which you will find in our website We encourage you to review our publicly available disclosure documents filed with the relevant securities market course. If you don't have a copy of the relevant press release and slides, please contact Telefonica Investor Relations team in Madrid by dialing the following telephone number. 3491-48287, double 0. Now, let me turn the call over to our chairman and CEO, Mr.
Pesa Alieta, who will be leading this conference call.
Thank you, Maria. Good morning to everybody. As you can see, our 2nd quarter results show a significant improvement quarter on quarter. With EBITDA performance across all the metrics, from EBITDA to net income in underlying terms. EBITDA in absolute levels rose on a quarterly basis and profitability enhanced sequentially, with quarter on quarter growth across the board.
This result today show the benefits of our diversification or key exchange to face very difficult 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 more actions to improve market dynamics and enhance our business model through efficiency gains. Like the removal of us, handsets, succeed in Spain, and the gradual reduction in the UK. And the network selling agreements, rich in U. K.
And in Mexico. In addition, recent news about regulation in euro point to address a change in the way the PECO industry has been regulated in recent years and are very, very positive signer for the sector as a whole. On the financial side, we have taken decisive actions to improve our balance sheet and diffuse potential risk, including an exceptional adjustment of remuneration policy, which allow us to have a fully refinance majority 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 Telefonica, Germany in the fourth quarter.
And we continue making significant progress to enhance our growth profile and capture the significant growth opportunities are right in the digital space. Fast performance starting with the summary of the key financials on slide number 4. In the 12, 2011, we booked several significant exceptional items. So to better understand the underlying performance of the company, we are providing a P and L, excluding those nonrecurring effects and non cash impacts. January June revenue grew 0.3 year on year to reach almost €71,000,000,000, while underlying EBITDA of $10,000,000,000, with the better performance in the second quarter.
1 D. Doctor. CapEx operating cash flow came close to 7 1,000,000,000. Underlying net income was over 1,000,000,000, and earnings per share stood at EUR 0.62 in the first half. Let me mention that both metrics significantly improved the year on year performance in the second quarter.
CapEx to share was 12%. The immediate highlight of the 2nd quarter results is the quarter on quarter increase in EBITDA across the main regions and key operations, as you can see clearly on the slide number 5. As a result, the consolidated EBITDA margin stood at 34.6 in the second quarter, expanded 180 basis points sequentially, leaving a significant lower year on year erosion versus the previous quarter. In my opinion, EBITDA reached the bottom in the first 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 in proved trends will consolidate in the second half of the year. And I'd like to highlight the better performance in Spain, whatever that was up 3% vessels the first quarter of the year. The slide number 6 outlines how we are further enhancing our geographical diversification. We have increased our exposure Latin America significantly in the last 12 months. We represent silica 50% of key financial measures of our with significant contribution from individual market.
And as you can see, we are not only highly diversified regions, but also in currency terms. With the risk perception, that is totally decoupled with the fundamentals of our business. Our exposure to 1000 euro or even to the euro is well below the exposure of other European players who have helped are not in Spain. And importantly, operating cash flow in Spain remains pretty stable quarter on quarter products. Our revenues, results in operating cash flow are clearly one of the most spread and diversified of the whole industry.
I think some very clearly in this slide. And we are not talking only about the diversification, but also of transforming our business model from an additional telco to a digital telco where growth opportunities are very, very large. The LA in the upcoming transformation of wider parts of the economy, including security, education, public administration, sales, financial service, and other areas that represent between 35% 40% of GDP within other several market to put us or up to 2%, which is nearly double the market market today of the telco industry represents a tremendous opportunity, and I can assure telephonic will not miss this huge opportunity. As you can see on the slide number 8, Telco's use remodels to capture the value coming from this digitalization wave. As connectivity providers, as an provider.
Connectivity plays in a strange infrastructure, spectrum among others. We expect this to remain our strongest play for the coming future. Digital service are complements The more are being used, Debita, clearly, for us. Here we have made already a number of announcements on fiber NLP deployment, network ceiling agreements, and tariff initiatives. We see enabled retail role very important.
This is where our asset base complements all the plays in our ecosystem. This is about creating new market not taking market from someone else. Here again, we'll prove this announcement on many fronts. Digital services We will need to maintain relationship and customer engagement on few selected services, for example, communications, financial services in other. We'll be selective and focused on some of their services where we can make a clear difference with other opportunities to come in the coming future.
This will be our being innovative. They will open product behind connectivity to solve social needs and to be a catalyst for change in business value chains while reinforcing our core business. Or bill or the official telco, none of these 3 models, but it's, but it's really one of the combination
of those 3
models. Evincially with different assets weighed depending on the local market conditions. This is the reason why we organized Telefonica the way we did. Different divisions working together towards a common goal. With different roles, responsibilities, assets and exclusives.
And we have done that clearly ahead of our peers. And now let me hand it over to Angel for the overview of our operating and financial performance.
Thank you, Cesar. Please turn now to slide number 9. In the second quarter of 2012, we continued regaining commercial momentum despite strong competition across countries. Our customer base surpassed the $310,000,000 mark at the end of June, 6% more than a year ago with driven by the growth in key strategic areas. Strong focus on the smartphone adoption field that solid 18% growth in mobile net adds versus the first half of twenty eleven.
Smartphone net adds grew 40% versus last year figure with growth rate reaching 99% in Latin America. In parallel, we are advancing 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 the slide number 10 shows, Revenue growth was driven by the robust performance at Telefonica Latin America 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 leveraging tier pricing along with integrated tariffs.
I would like to stress the mark sequential slowdown in OpEx in the second quarter of 2012, reflecting the continuous focus on efficiency improvements and ease commercial cost growth on the back of the new handset policy in Spain. As a result, consolidated OIBDA improved its, 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 number 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 growth at growing above 20% in the 1st 6 months.
Smartphones adoption 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 additional fixed voice It's just 20 percent of revenues in the region, while the remaining 80% keeps growing almost at double digit. Turning to slide number 12, OIBDA in the second quarter showed a sequential improvement. It was higher than in first quarter in absolute term 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 where the theorem 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 high 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 read the market. Leveraging our differential propositions, both in terms of assets and strategy.
Our focus on providing superior service quality is clearly bearing fruits. The Defonica Brazil maintained a strong commercial activity in the quarter with mobile net additions up by almost 30% year on year. Smartphone users multiplied by 3 times versus June 2011. Vivo is leading mobile broadband adoption in the market. The back of its superior 3 g coverage and network quality, which are clearly visible at revenue level.
They already accounts for more than 25 percent 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've accelerated the transformation. Speeding outputs and 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, Extrogression, with pretty strong prepaid top up levels and no signs of slowdown. In terms of fixed to mobile substitution, it should be noted mobile service revenue expansion is more than 2.5 times the erosion into additional 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 2 thirds of the weaker performance in explained by nonrecurring factors.
These include the full consolidation of TBA from second quarter 2011, retroactively to 1st January of that year, which means that in Q2 11, we included 6 months of TBA'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 top line in Colombia being hit in Q2 by seasonality of IT projects. Chile continued to deliver a steady performance and meet increased competition. Due to the 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 summarized 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 1 year after the introduction of aggressive MTR cuts. In addition, the recently announced agreement with UCcel and our new commercial proposition will drive 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 refresh tariffs and churn reduction, which led to 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 cross tool 2,700,000,000 in the 2nd quarter, up 6.3% quarter on quarter, leveraging a sharp in commercial costs, down close to 7 5.5% in the quarter, with further benefits to come from our recent decisions to improve profitability across markets. Top line 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 progress through our proactive migration of customers in the consumer segment to our refresh tariffs have led to more than 2 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 especially in mobile contact segment. Please notice that net adds in contact voice accesses were already positive in May 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 and L. Additionally, improved quality has led to 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 adopt the cost structure of the legacy businesses with very material savings in personnel costs close to €120,000,000 in the first of the cost management make us comfortable to assess that our Spanish business reached the autoimmune in the first quarter.
With a better financial performance expected for the coming 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 €1,700,000,000 in the 2nd quarter increasing sequentially. OIBDA margin also expanded quarter on quarter to 45% in the quarter, which are 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 have the negative drag from the termination of a contract with an MVNO in the quarter. Enhance quality and lower churn are also driving CapEx efficiencies. Despite a significant higher budget for fiber investment in 2012, 20 percent 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 will be particularly positive for our business in Spain with abundant local look prices are well below the European average. Please turn now to slide 20 to review your operation in the UK. Telefonica UK consolidated its improved market momentum in the quarter, expanding its mobile base on increasing contract gross adds up 26% year on year in q 2 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 raise. At the same time, OIBDA performance improved, rising quarter on quarter on the back of efficiency measures and contention on commercial expenses, at the company gradually lower handset subsidies and upgrades slow down.
This resulted into a sequential EBITDA margin expansion to reach 20 3.4%. The better trading activity led to a consistent improvement of revenue trends with mobile service revenues, XNTRs, consolidating their stabilization trend. Non SMS data sales growth accelerated to 19.5% in the 2nd quarter on the back of successful data modernization 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 continue to deliver a solid set of results as the slides 202120 2 show.
Our new commercial approach, adapting our contract portfolio with the launch of O2 blue, reinforced value for money propositions. LTA that is recently launched and a regional focus are delivering continuous churn improvement 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, sorry, the strong commercial momentum has led to consistent market share gains, especially among higher value customers reaching 8 19. Excuse me. Sorry.
The strong commercial momentum have led to consistent market share gains, especially among higher value customers, reaching an 19% share in the contract segment, and reflecting our market update in smartphone penetration. Additionally, the strong investments in recent years to us 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 higher consumer spend due to successful data monetization. All of this flow into financials with mobile revenues growing 11% year on year in the second quarter, and total revenues accelerating the growth trend to close to 7 percent.
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 point 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 guidance for 2012. Last February, we gave a guidance for revenue growth above 1% in current terms at a specific foreign exchange assumption.
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 e/nd. Nevertheless, with expectation for EBITDA 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 the core refinancing, offset positive free cash flow generation and the 1,500,000,000, 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 East Passat will contribute with 1,000,000,000 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, but the shareholder remuneration measures announced yesterday that will generate significant cash savings. We maintain a solid liquidity position. We set maturities covered till beyond the end of 2012, thirteen, till the end of 2014. 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 reduces refinancing risk.
We fully refinanced 2012 maturities in the first quarter, and we have also reduced 2013 maturities by nearly 1,000,000,000 to 1,000,000,000. Our cash position excluding Venezuela stood at over 1,000,000,000 the end of June, while total and drawn credit lines amount to €8,900,000,000, with over 80% maturing long term. It is worth to highlight the geographic diversification of undrawn credit lines with about 1 fourth of them signed with Spanish institutions, while American and Asian banks represent another 4th, and the rest being widely split among the 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 for an amount of 1,000,000 in the year. We are also benefiting from our geographic diversification.
And in the current credit environment, we have recently secured full underwriting of a BRL2 billion debentures issuance that will be closed in the coming weeks. Effective interest costs have increased in the quarter, though continued to remain at the middle part of our guidance. And the acceleration in debt reduction will lead to lower than anticipated financial expenses affecting positively the P and L Let me now hand it back to
our financial Nacell and Villoneman, and so can we factors are creating severe instability, analysis celebrating potential financial risks. Store factors are clearly behind Telefonica 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 Internet of Mr. Lefonica's stakeholders, the dividend, and thereby back prem corresponding to 2012, we canceled.
A one time exceptional measure. The rationale behind these decisions are first to than stressing the balance sheet. 2nd, to substantially accelerate debt reduction in the short term. Sir, to decobron, Froneshovenu's macro factors affecting our country of domicile. 4th, to immunize from debt market liquidity conditions by having refinanced maturity behind 20 of 2013.
5th, to the risk, the execution of the already announced portfolio management, and 6th to continue investing in profitable growth in our operations. Additionally, we are fully committed and the IPO of the basements program, including the sale of Atento and the IPO of Telefonica 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 sections so help to reduce the company risk precision to levers that are aligned with our business fundamentals. To sum up, in court in 2nd quarter, we have delivered a better performance metrics from EBITDA to net income in underlying terms.
Our risk perception is clearly decoupled from business fundamental. Does not reflect our best in class diversification. EBITDA improved materially quarter on quarter, which sequentially increases across operations. In EBITDA margins performance in the first half of the year is consistent with our 2 after improved guidance with the EBITDA evolution expected for the 2nd part of the year. We have taken further initiatives to optimize resources and improve business profitability.
And in the quarter, extremely challenging economic sit and diffuse potential risk. And we are clearly making significant progress in our journey to become a total Thank you very much, and now we are ready to take your questions.
Ladies and gentlemen, I'd like to ask 2. Once again, that's 1 to register a question and 2 to cancel. We will kindly ask you to ask a maximum of two questions per participant. And if possible, we recommend you not to use yourself or hands free phone. There will be a short silence while questions are registered.
Our first question comes from Forrest Ackman from JP Morgan. Please go ahead. Speak the first one is on Spain, while the this business has stabilized on the quarter on quarter basis, wireline seem to have accelerated the downturn. Could you explain what is behind that? And is something which will continue lines in tight to any rating?
Or with other words, could they be cut or pulled? What, if you, if your rating downgraded by 2 more notches in any case?
Taking your question on on the evolution of, of the wireline business, revenues in Spain. Let me, let me say that, this is actually due, to an induced movement that we have been doing actively migrating our most valuable broadband customers to a, to a lower tariff. And therefore, right now, more than twothree of our customers on broadband have already migrated in utilities. And this has created a short term impact on the revenue growth. But at the same time, we have been able to manage, a better margin on average 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 promotion leaving the company for another supplier. Right now, we are able to preserve their customers and that jointly with the fact that we are significantly increasing the quality of our services here in Spain means that churn are at the historical low levels in Spain. So it is true that that has been affected in 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 margin evolution. And on top of that, that is going to have a significant impact on lower CapEx because the preserving those customers in terms of installing or getting more customers from the outside was putting significant pressure on CapEx.
So 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. But The overall equation is positive as it is further contributing to a further to a bigger margin per customer and to a lower intensity of CapEx By the way, the equation is sort of the, based on the fact that churn is at a historically low levels.
Hello, Thorsten. This is Angel. We have no rating triggers in our financing, neither in the credit lines nor in the bonds nor in the long term, facilities, so no rating triggers in our, in our financing. And also, as you can see on slide number 25, We have, very well diversified list of origin of counterparties for our credit lines. Okay.
Thank you.
Next question, please.
Our next question comes from Rijeminerva of HSBC London. Please go ahead.
I wanted to go back on your positive comments about the European Commission policy statement on fiber. And 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. And 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 fibers to the premises. Thank you.
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 2 new recommendations coming with this general policy. The first one for non discrimination.
And the second one around cause methodology to reapply for the determination or 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 6 months. But 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 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 but 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 Yordakon 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.
And as you highlighted earlier on Page 6, 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. And my second question is on the dividend. Can you please confirm that the $0.75 for 20 13 onwards will be all in cash or and whether we'll you will roll out scrip dividends in future.
Thank you.
This is. If you see the evolution of our debt, basically, the evolution of our debt is due to 2 factors. The buying of auto and the operation in Vivo. So we are being penalized for having invested a FedEx payment, 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. And investing in some of the biggest growing market. And I see a very clear contradiction that, a correlation is the financial risk that are given to Telefonica, which is, 3 or 4 times more than our peers. We have more revenues in euro, and let diversification that has to us. And, you know, we have the domicillin Madrid, and we will give it domicillin Madrid.
Because we are in identified countries, and I think our business will be looked from the cash flow generated in the 25 countries. And I remind you that Sprint generates 31% of the revenues. And are stable. So that is very clear. And that's the reason that, you know, anyway, clicking the c, click, and the present situation, you clear to the board that we had to take an action to decouple and make the reality and be related to the fundamentals of our business.
And that's the reason we took this decision on the dividend. Extending the majority behind 2013. And, and that means that we, we feel very comfortable. We will, we will achieve the leverage ratios we said that we will reach at the end of the year and we'll continue on optimizing our asset portfolio on deleveraging Telefonica, while not affecting the growth potential of Telefonica. And this is clear, and we can do both things.
And the thing we have done in the 7, in the 7, the 1st 7 months of the year are very clear, you know. With the optimization on the portfolio and then what we are going to continue to do. And we are going to pay $0.75 in, in cash. And I might remind you that $0.75 is less than 50% payout of a free cash flow we expect for the coming years. So that is the answer to your question.
Thank you.
Next question, please.
Our next question comes from Matthew Robilliard of Exane BNP Paribas. Please go ahead.
Good afternoon. And thank you. First, a question with regards to your revenues. Has you shown that you still have good revenue growth in most of Latin America, yet there's been a slight slowdown when we compare it to Q1. There's also some slowdown in some European countries.
And so my question was, how do we reconcile that with the fact that you have continued to invest over the last few quarters? And is that the reason why you changed the revenue guidance because you're seeing a slowdown already in some countries? And 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?
2nd question has to do with financing strategy. And I'm trying to reconcile slides that you put up today. About debt maturities. That's the slide 25 and the equivalent slide you put in the Q1 results. At the time you were talking about 40% of the 2013 maturities being pre finance.
That number doesn't show here this time. Maybe it's just a presentation issue. If you can clarify that. And also I see that undrawn credit lines have declined from the previous quarter. So maybe also you could clarify that.
Thank you.
Regarding your first question, as we see that the Latin America revenues are growing at the they will keep, growing the main reason to change our guidance for revenues It's 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 back from regulation that we are already facing. Sorry. The
the weaker macro, is that only in Europe? Is that also in Latin America?
Basically, in Europe.
Hello, Matija. This is Angel 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. And then, we have, brought them forward. So that's why the figure is lower.
And 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. So we already have even in the absence of divestments and once we have closed the China Unicom, action, we have all debt maturities covered, till beyond the end of 2013. So here, we are in an exercise of expanding our liquidity cushion for for the next, for the next period until until the end of 2013 and beyond.
Sorry if I can clarify that by covered, you mean pre finance as you mentioned in the previous quarter. Is that covered by the free cash flow? Or is that covered by existing lines that are undrawn?
What, with cash that, that we have, the cash that we're going to generate and the facilities that, that we have, we would, be covered till beyond the end of twenty
Thank you very much.
Our next question comes from Tim Body of Coleman Sachs. Please go ahead.
Yes, 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, does this give you, for example, if market conditions become even more challenging it give you flexibility to delay potential IPOs? And I guess related to that, does this change the way that you're thinking about German consolidation your balance sheet is again getting stronger. Thank you.
This is Angel Villa again. My first observation about, ratings agencies should be one of of coherence. All of us have read the latest report from SMP Moody's and feed which were issued in, in May, June, July, respectively. They are public, and they state, object metrics, which could lead to stabilization of our ratings. The result that we're presenting today, where we have a quarter on quarter sequential improvement the expected improved performance in the 2nd half, and the dividend action would position us in compliance with those metrics So we would expect, rating agencies to be coherent and properly incorporate these facts into their assessments.
The second observation is about the decoupling from sovereign rating. As you know, certain agencies have method methodologies that links a grain and corporate rating and a rigid application of such methodologies that, would fail to take into account the geographic diversification, the solvency and liquidity of of Telefonica, could create some potential, undue damages, telephonic. Therefore, we would expect that the methodologies that would be applied by rating agencies, would be applied in a way that recognize the diversity communication, solvency, and liquidity of Telefonica. With respect to the second part of your questions, which is, and by the way, we have had preliminary conversations with ratings agencies after the announcement that we did yesterday. And, they are showing or interpreting these has a very positive movement from Telefonica.
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, but obviously, since we have, all other maturities covered, until beyond 2013, even in the absence of those this provides us the flexibility with respect to timing with respect to evaluation of those divestments to which I insist will remain, fully committed.
Our next question comes from Will Milner of Arete Research. Please go ahead.
Thank you. The first question, actually, just following on from the last one on the need for an IPO in Germany. I mean, given the, the cancellation of the 2012 dividend certainly doesn't seem to have led to a, a sharp move in the share price. I just wanna understand why you're still committed. To IPO ing the best European assets?
And why would you not potentially also delay restarting dividends in 2013 to prevent you from having to IPO Germany? And the second question is actually on Brazil, quite a bit more evidence. I think in the quarter of tougher competition, especially wireline. And I think certainly adjusted for a big provision reversal and some tower sales, the EBITDA is falling high single digits, in real 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?
Question, we have not contemplated cutting the dividend beyond, the one time exceptional cut of 2012. Because, as we have treated, typically expressed in the past, it's in telephonic SG and A to to have an effective and compelling dividend, to its shareholders and with the financial projections that, we are having with the operation of the business, and and the different measures that we're taking, we can be comfortably covering such a such a dividend. With respect to the German IPO, it provides an a that's a project that provides not only a potential source of liquidity and the 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. And 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 EBITDA to operating cash flow has a very effective, cash generation even after tax because of its tax position. And, we believe that it, should be very attractive for potential investors.
Let me highlight one thing. You know, clearly, we want to highlight the value of the group. And the IPO of Germany, one of the solutions in which, when you look at the sum of the parts, the pre hungry discount, we are having on the values to the phoneword because of having a dummy seal in the pain, we want to highlight the value of the group. And I want to, to reiterate you one thing. For Telefonica, the domicile is the 25 countries in which we are.
That is let me see. Okay.
Yes, Neil. This is Santiago. Let me try and answer your question about Brazil. Well, number 1, I appreciate that, Qs 12 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 2 of those, the brand launch that was expensive, but successful with Evo now encompassing both fixed and mobile products is clearly one off event and we do it will not happen again in the second half of the year and that the restructuring coming from the putting together the fixed and mobile businesses is also behind us. So clearly on those two fronts, the second half should be better you were right to point out that the weakness lies exclusively on the fixed end of our businesses, and they are in particular on voice. And, we have 2 observations there. 1 is that broadband continues to expand, and we continue to, to have an active, presence in that market. And 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 ish loans of the market, and we'll 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.
Our next question comes from Sean Johnston of Bank of America. Please go ahead.
Hi. Good afternoon. I wanna 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 2 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. And maybe one way of answering it is, is could you perhaps give us your view of what that liquidity chart, the cash and 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? And then secondly, I question on Germany again. Clearly, it's been widely reported that you were close to a deal with with KPN on E Plus, but couldn't get credit agency backing. Are you still working on resolving those credit agency concern And is it still an option in your plan to revisit that opportunity if credit agencies can be pacified?
And with regard to your this is just a hard time, with regards to your European question, I mean, it's very, very clear that there were substantial synergies in the market consolidation in Germany. But we say very clearly that the priority for Telefonica is de leveraging and to improve our financial flexibility. And that's the reason that this deal has not been done.
This is actually with regards to to the first question. We will not give guidance on what would be the cash position at the end of the year, clearly, this will be influenced by by the position that we have now. By the guys that we're going to be generating in the second half of the year, that will be substantially higher than the one we have generated in, in the first half, and also on the financing exercises that we can execute in this, second part of the year. With respect to the evolution of of 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.
So the second quarter has already been better than the first quarter. The second half will be better than the have. And you should see a better evolution of operating cash flow. Also, the working capital consumption, which, which you can see on on slide, number 24. It's, cumulative close to 1,000,000,000 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, and this will more than reverse. 3rd on interest expense, we are having a higher interest expense because we have higher debt and 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, about over 1,000,000 of nonrecurring items. This, financial expense in the second half would also go down because the debt will will go down.
And, we are saving on so far compensating the increases that we see in Spain with, savings that we're getting in other jurisdictions. So you should be expecting a much better free cash flow generation in the second half of the year, which coupled with financing, with financing activity, will, result in in 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. I mean, obviously, widely publicized your both changed your subsidy policies.
But 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, of interest and get your thoughts on that?
So you should be expecting a much better, free cash flow generation in the second half of the year, which coupled with financing, with financing activity will, result in, in, in the position that we will have in cash and and under own lines by the end of the year.
Our next
question comes from James Ratzer of New Street Research. Please go ahead.
So you should be expecting a much better, free cash flow generation in the on half of the year, which coupled with, financing, with financing activity will result in the position that we will have in cash and under own lines by the end of the year.
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 is just regarding wireless in Spain comparing your performance with that of, Vodafone. I mean, obviously, widely publicized, you both changed your sub policies.
But 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, of interest and get your thoughts on that? And secondly, I had another question with regards to Brazil. It's now coming up for almost 2 years.
Since the deal completed. I was wondering if you could just give us any of what's going on behind the scenes on the synergy process. Why is it now 2 years on that you feel confident that synergy is going to come through in this second half and why haven't we been able to see them in the 1st 2 years since the deal completed?
Spain, namely on the comparison that you're making against, Vodafone. We don't, we don't see those differences. And in fact, in the, in market trends on average entry points, we think that we have become highly competitive. So it's probably due to some of the bundles assignment that we have. So, I would invite you to check that on this with our team.
I'm more than happy to go through those because we don't really feel that difference. And in fact, the market trends are very positive on our side on this, on this, on this part of the business. So, it might be some bundle assignment, but, on effective price per we are very competitive, and we have been very competitive both in, contract and progressively in prepaid. And 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.
So, we don't experience that difference. Please check those numbers with our team, or I'm happy to go to 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 been kind of competitive, as I was saying, the ARPU if you've measured that in terms of mobile service revenues in Spain, it has been stabilizing on how we hope we have been migrating already 52% of our total customer to a lower tariff. This difference of studies is roughly €6, and the main comparison that you should drive is what if we would not have done this we are already passing to the point in which our revenues are already stronger today than if we will not have done that because the churn levels that we were having before and the customers about 1,000,000 were roughly 6%. And now we have a historical low levels of churn. So thanks to that, the average margin per user is higher today than it was before. And in fact, the revenue trend compared to the one that could happen if we were not have moved over entry points is today starting to be better.
So I think that now is not just our subsidies is how the entry points, it's about the quality of services is about the fact that the number of calls that we are getting to the call center has basically halved. And therefore, the OEDA margin trend is much more sustainable than before.
Yes, sir. This is Santiago again, and in terms of when the Brazilian synergies will show up. Let me just make two, comments. 1 is that it is almost 2 years it to the date that we signed the deal, with PT on Vivo in the second half of rational cell to be precise. But it's only a year and a half or slightly less and since the deal closed, and it's only been 6 months since the two companies finally integrated in, obviously, a lot of the synergies are going to show on the negative side and that just mentioned in terms of integration costs.
And from now on, I would commit to say that, through the end of this year, 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.
Please.
Our next question comes from James Mackenzie of Fidenti. Please go ahead.
I've got a couple of questions. Firstly, thankfully, we're talking about, sir, the interest expense. In 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 that situation's turned around. I was wondering, could you give us some idea of what your what expecting for for H2.
And then on, the Spanish business, when I look at the churn, churn's obviously down to very low levels. Could you give us an idea of, for the new plans if the the churn is significantly below the average churn you're you're showing in these, in in these charts?
Hello, James. This is Angel in in the 1st part of the year. We have recorded, some non recurrent, interest expenses to that, you know, of of 200 1,000,000. Part of this had to do, with, Colombia one off before we, we took all the debt reduction there was one monthly payment that had, to be put into into the financial expenses that went into the first quarter. We also had some one times, related to Peru and so on.
Also, the compayments. There is, concentration of coupon payments in the, in the 1st part of the year that also make a distortion of that. So, this is basically the either a seasonal or nonrecurring items that were in the 1st part of the year. From here, you should expect, debt reduction as a said before, next Monday on July 30th, we are, we are closing the transaction, in China Unicom that will provide an immediate, debt relief in excess of 1,100,000,000. And we continue we continue with our efforts to divest assets.
And, the cancellation of of the share buyback will, result in us having, the shares, in our treasury stock, they will not be canceled. And, we have flexibility with respect to those. So obviously, we would not, contemplate divesting their main in this price because it's, it's, it's not reflecting Telefonica's value. And then the saving of the November, the 40¢ in November, that's, that's around 1.8 1,000,000,000 also saving. All of these will result in, in, in reduction in the interest expense.
Sure. Any any guidance with respect, specifically to payments versus a, versus a crude interest? Either cash flow interest rather than a P and L interest?
I can say that payment will be lower than agreed in the second half. Thank
you. Taking your question on the on the Spanish business and Chang Loaf, 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 that the churn levels that you have you are seeing on the slides on the on the voice part of the business. We are still suffering from some dongles impact coming from previous year on previous campaigns that are still affecting our churn levels. But if you ask me about the customers responding to the new policy, yes, the churn is even lower than the level that you have seen there.
And that's why we think it is a a sustainable trend. As you might imagine, we are monitoring that because that is the compensating factor of the fact that we have reducing the entry points, the prices. And that's why this equation is working in terms of average margin per user. 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, significant cost reduction, the overall equation is becoming very positive.
Right. And you mentioned voice, what would that include which include fixed broadband in your churn calculations?
We are talking about voice plus smartphones. I'm just the, the dongles, I mean, because it was a specific one off.
Is the fixed broadband churn also well below what you're reporting for as an average churn for broadband?
No, on fixed broadband is in average similar. But again, remember that we were losing the most valuable customers in both sides of the business, while and on wireless, the effective result of the strategies that we have been stopped exporting high valuable customers to the portability market. And 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
Our next question comes from Sproda 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 them to customers at least for a mobile contract and fixed broadband or you are planning absorb VAT within your margin? And the second question is on Brazil. We've seen recently some regulatory action from an nuts Health, 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 telephonic 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, as 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. So we do not expect to change that strategy. And,
from 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, you know, what the regulatory actions are. Anatol 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 to manage so that, regulatory, hurdles are not, 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 pre 8 customers VAT. So 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. I mean, customers are used to, to top up a specific amount of money. And therefore, effectively, they will have either a less minute for the same price. So the answer is just how this is going to be affecting elasticity still and here, but, we will, we will keep you posted.
Thank you.
Next question please.
Our next question comes from Frederic Boulan of Nomura. Please go ahead.
Hi, good afternoon. 2 questions, M and A. First of all, to follow-up on the question on E Plus. So I guess the market can appreciate that acquiring assets is difficult in the current credit environment. But would you consider reopening discussions with them based different structure around the merger or JV, for instance.
You mentioned Germany as a
kind of platform
for further operations in Europe, would you consider Brazil as a similar vehicle for Latin America IPO, or would you plan to work on a 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, other alternatives, fast pros, and and we're still in the internal disease phase of, of, the course of action.
And in the case of KPN, I was very clear, for Telefonica is to deliver it and get the goals and that are our priority. And, and as I said in my previous comment, I mean, Nachizha very clear, but, we had to opt them. We opted for the priority, which is the the delivery chain of Telefonica.
Yes. Next question, please.
Our next question comes from Jonathan Dan of Barclays. Please go ahead.
Hi, there. Two questions. The first relates to, I guess, if you have you spoke the rating agencies about, I guess if you raise debt at any of the subsidiaries or, I mean, are they still worried about subordination, as a negative credit event. And then, and as part of that, if you could remind us where you are on cash repatriation from Latin And then my second question, historically, a strong part of Telefonica'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 we have, got a positive informal responses from rating agencies to the move, that, that we announced yesterday. With respect to LatAm Pri repatriation, we have been repatriating in the first half of the year over €600,000,000. And with respect to the share ownership, question, Okay.
Mean, I think Maraca Manu of Telefonica is heavily invested in Telefonica sales. And the reason we are heavily invested in Telefonica sales, we believe, Telefonica value are much more higher at, that is today. We know, we know the fundamentals. And I think, we don't look at additional factors are there, but 100 factors, at the end of the day, the important thing is the fundamentals and fully committed. And we are very happy with the purchases of sales we made.
And, I cannot say any more on that that we believe, and I will and I want to stress this that original value of telephony gets much more higher than today. It, and we know the cash flows. And, you know, it's easy to meet the numbers.
Sorry. I just realized this is something that my response previously was was incomplete. We have room for that in subsidiaries at this stage, about 15% of our total gross debt is sitting in 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 rating agencies may have regarding Stupelo's subordination.
Thank you very much.
Our next question comes from Stanley Martinez of Legal And 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. And Jose Maria, would you characterize your strategic repricing to new EADSL tariffs as substantially complete because it appears that your realized average broadband ARPU in H1 is now broadly level. About €38 per sub per month with JazzTel and Ono, much as the domestic mobile realized ARPU is now lower at at at €20 across the the piece for all major carriers. So my question is do you feel that the new tariff in domestic broadband is now broadly affordable, for market conditions, or does the price value equilibrium for Telefonica 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 39.9 to, 19.9 the basic offer and 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 24.9 offer. And that means that, we have become competitive.
If you add to that fact, to that, 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. And when we will be massively, as we are massively deploying the fiber today in Babylon and in Madrid, we'll give you posted about this enterprise, but today we feel competitive The next step for that is slowly going farther 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 is the perceived value for money for the customers. So the answer is yes, we feel we are competitive. We think that the commercial fuels that we are getting and the traction that we are getting for that assessment.
The fiber is the next step, and you should spectrum mass, totalization, strategy to increase our competitiveness and the attraction of our or over prices.
That's very encouraging. If, if Mario, this is a blocking me one other question, if I may, to help on the, on 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 the trough in European EBITDA here in H1
Well, it was somebody asked to transfer that transfer that question. I mean, I'm more than happy to go through it. At any point. I mean, in terms of unbundling, we feel comfortable with the current prices. Remember that the prices today in Spain is below the €9 that has been established by the regular by the European threshold.
So we'll keep you posted on that potential upside at any point. And on network sharing, we have done a very aggressive, negotiating, aggressive, meaning that very ambitious, active and passive negotiating agreement with Vodafone in the UK, that is gonna help to do 2 things at the same time. First, to catch up with the best network in the UK in a shorter period of time and to do it in a much more efficient manner. We think this is a very valuable, agreement, and we intend to extend that to whatever. We can do it in Europe.
We think it's the most, sensitive way of deploying the new, the next generation networks. And I think that Europe doesn't have room for too many networks in Europe today. So we need to work very intensive for those elements because it provides time to mark and significant amount of synergies and therefore a huge amount of value for the customers.
Next question, please.
Our next question comes from Jerry Dulles 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 was the new subsidy model. Was that they found that gross adds coming under heavy pressure.
And they said on the 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 And then in Germany, your recent margin growth momentum is obviously very strong service margins almost back at 30% now. Do you believe that margin expansion the euro flat rates? Thank you.
Thanks for your question. In terms of the overall market in Spain and without, willing to comment or want my video intentions of one specific competitors, I think that, this is the the model is starting to work. And what then I'm saying that, because in fact, remember that, Folafone started this, thing, 1 month later than we did. And therefore, the benefits of churn reduction would take a little bit more to flow through their own accounts. But basically, the goodness of the model is not just on the subsidies.
For us, the attraction of the model, the subsidies, one part of that equation but the lowering of the entry prices, the lowering of the entry points, returning the most valuable customers, getting the kind of churn levels that we are getting, getting the number of calls that we are getting, which are significantly reduced, basically half in 6 months. We are entering into kind of virtual cycle in terms of, and the subsidies as one component of that. So we will monitor permanently, the situation, but if the portability market might be one proxy of, the short term impact of any of our those strategies, we have become pretty, attractive on the we have improved significantly over portability metrics And on top of that, we have been able to significantly dry up that market. So we'll keep you posted, but it a subsidies is just one part of the equation. I mean, the sustainability of our market is not based on that.
Remember that this is not just effective 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 significant less CapEx intensity in terms of, routers in the the houses of new customers. So it's starting to have a significant impact on capital allocation. We will keep you posted.
We will monitor that significantly. But for the time being, it is starting to, to get traction. And in terms of Germany, we think it is sustainable. We even a little bit more. We have changed the model in Germany as well.
Remember that we are not subsidizing handsets in Germany that we have this the 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 we are getting traction on our customer base namely on postpaid. And therefore, it will have the commodity benefits of the revenues. And on top of that, we have learned that it is very valuable to churn or to change our strategy and to become much more regional. It 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 the GMO market.
So we have several levers that we are, tracking and monitoring. We are learning a lot on that market. Churn is coming down significantly again. So yes, we ambition to have, to preserve those levels of margins in Germany.
Thank you for the last question, please.
Our last question comes from Simon Duff of MNG. Please go ahead.
Hi. I've got you questions. 1 on liquidity and 1 on cash repatriation. On the liquidity, can we get further clarification on this 1,000,000,000 cash and equivalents ex Venezuela because on struggling slightly with that on the basis that the consolidated balance sheet only shows 1,000,000,000 cash and equivalents. So just the 1,000,000,000 includes some of the billion that's included in your net debt definition?
And if so, can you just give us some idea of what the 1,000,000,000 consists of if it's not normal cash and equivalents? And what is the true, cash and equivalents position ex Venezuela as per balance sheet definition because clearly it's lower than the the 5.1, that's in slide 25. And then the second question on the repatriation. I think did I catch you earlier in saying it was 1,000,000 to date? So I think last year you did 1,000,000,000.
You're expecting an acceleration in the 2nd 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, a slightly above 1,000,000 in the in the first half. We're expecting this to 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 about 3,300,000,000, but, we should be close to €3,000,000,000 for the whole of the year. With respect to the second term that that you're asking, I can only say at this stage that the 1,000,000,000 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. And we would encourage you to, get in touch with our IR department so they can give you all the details on the reconciliation.
Okay. Appreciate that. Thank you.
Okay. This is Richarda, and Michasco, from my colleagues of the X Safety Committee. I want to thank you all of you for attending our SECO the results, you know, your question, and this Thursday, but I will you, I will again. Thank you very much.