Telefônica Brasil S.A. (VIV) Q4 2014 Earnings Report, Transcript and Summary

Ladies and gentlemen, thank you for standing by, and welcome to Telefonica's January to December 2014 Results Conference Call. [Operator Instructions] As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Pablo Eguirón, Head of Investor Relations. Please go ahead, sir. Pablo Eguirón: Good morning, ladies and gentlemen, and welcome to Telefónica's conference call to discuss January-December 2014 results. I am Pablo Eguirón, 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 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 releases and the slides, please contact Telefónica's Investor Relations team in Madrid by dialing the following telephone number, 34-91-482-8700. Now let me turn the call over to our Chairman and CEO, Mr. César Alierta, who will be leading this conference call. César Alierta: Thank you, Pablo. Good morning and welcome to Telefónica’s 2014 results conference call. Today with me is José María Álvarez-Pallete, Chief Operating Officer, and Ángel Vilá, Chief Financial and Corporate Development Officer. So during the question-and-answer session you will have the opportunity to address to us any questions that you may have. Before starting, let me briefly explain to you the agenda for this conference call. I will first explain the milestones achieved in our transformation journey to a digital Telco in 2014 and the expectations that we have for the next two years. Ángel will explain the 2014 results in detail and José María will provide details on the strategy and outlook in 2016. Please turn to Slide Number 2 to start reviewing the business deep transformation carried out in the 2012-2014 period, which allows us to look on the next two years with great confidence that we'll be back and we will be back to sustainable profitable growth. During the past two years, we have made significant advances. We invested in capturing growth opportunities in mobile data and digital services, took initiatives to improve efficiency through our simplification and reinforced our asset portfolio and de-risked our balance sheet. As a result of this, we have built a solid platform and we have clear proof points of this transformation, which allows us to upgrade our ambitions for the 2015-2016 period. We will accelerate growth and investments, building stronger networks and monetizing the data explosion coupled with increasing efficiency levels, in addition to the synergies from Brazil and Germany acquisitions. At the same time, maintaining financial flexibility will be key for delivering growth. Finally, let me stress our intention to increase the cash dividend after the execution of the proposed O2 UK disposal. Some of the indicators of our progress are explained on Slide Number 3. The average revenue per access returned to growth for the first time in many years, demonstrating the demand for high-quality services and high-speed connectivity. In digital services, we saw exponential growth in revenues, setting the basis for their increased uptake in the future. We are proud to note the investments we made in expanding the reach of both fiber and LTE, doubling figures in just one year. We generated a run rate of EUR300 million of gross savings in 2014 derived from a leaner operating model, reducing complexity and paving the way for further savings. In Spain, we recorded a significant improvement in the year-on-year trends throughout the year and we are well on our way to return to growth in 2015. In terms of our balance sheet, we recovered robustness post-Venezuela adjustment and proposed O2 UK sale. Turning to Slide Number 4, we can see the consistent improvement in our top-line growth, with all the signs that this trend is set to continue. Fourth quarter was particularly strong, as revenues grew by 5% year on year in organic terms, underpinned by the steady increase in accesses and the better return per access. As you can see from the graph on the left, the trend since 2012 is one of sequential growth, with a 2.6% year-on-year organic for the full year 2014. On Slide Number 5, we continue to demonstrate how our fundamentals are steadily improving, as shown by our EBITDA and underlying earnings per share increase. In organic terms, EBITDA returned to growth in the full year 2014, showing a 0.2% increase year on year, despite a more intense commercial activity aimed at high-value customers. Underlying earnings per share reached encouraging results for the full year at EUR0.93 per share, improving solidly in the fourth quarter. And I want to remark that underlying net profit reached EUR4.5 billion in 2014, EUR4.5 billion for the year. Slide Number 6 reviews how Telefónica fulfilled guidance given for 2014. We have delivered on our operating outlook for 2014, leveraging on strong execution skills. Net debt stood above our full-year target, but let me stress that, including the proposed O2 UK sale, we would have reduced it to EUR31.7 billion, demonstrating our commitment to financial flexibility. In addition, the high take-up ratio of scrip dividend translated into a cash dividend payout of just 55% of the free cash flow. Looking ahead to 2015 and beyond, on Slide Number 7, we are well-positioned for further growth acceleration. In Spain, one of our largest markets, macro and market trends look positive, increasing the appetite for higher value services. Also, our infrastructure and assets in fiber, pay TV and LTE will continue to increase our differentiation. At a Group level, we will be driving data monetization by expanding a differential LTE experience across our markets and by designing propositions that lead to higher data adoption, including a push in prepaid smartphone penetration in Latin America. Also, we will leverage network and IT upgrades to enhance customer insights. Our focused portfolio management will create significant synergies in Brazil and Germany and it means we can upsell our customers to higher value and quality bundles, thus creating additional revenue streams. We will also be concentrating on savings over the coming years and we will be delivering more than EUR1.8 billion synergy plan. Turning to Slide Number 8, we will now touch on how external factors have turned from negative to positive for us. In terms of regulation, we have been very active in voicing our opinions on regulation. As we have pointed out several times, we are in favor of in-market consolidation and precedent-setting examples in Germany, and other countries are very encouraging. Continuing with Europe, current fixed regulation gives us certainty until 2020, while the digital agenda appears to be favoring investments. In LatAm, there have been also positive rulings by regulators in Mexico and Colombia to foster the sector development. On the macro side, the economy in some of our key markets is steadily improving, as in the case of GDP growth in Spain and Germany, and both are based on stronger consumption fundamentals. In addition, financial markets are now back to normalized risk levels and rates have come down again. Finally, the market structure in some key markets has evolved, which should allow us to move from a price deflationary competitive model to a quality of service model where differential infrastructure and therefore the investments made by telcos, are the key drivers in gaining more loyal and higher-value customers. Turning to Slide Number 9, we at Telefonica have been working to drive a fair policy framework at the digital ecosystem. Level playing field should be a priority for policymakers and regulators. The current situation is not sustainable today where media, connectivity and internet services are converging. Telco operators need a balanced scenario with other players in the digital ecosystem, especially with internet companies. And our customers want to have a safe and open digital experience. We believe there is clearly a window of opportunity to achieve a fairer and less-intrusive policy framework in Europe. The need for a level playing field and the need to recognize the investment risk with a more investment-friendly framework are the key elements of our regulatory and public policy strategy. We defend that policies and regulations should be revised, considering the whole internet value chain. This is necessary to guarantee a better internet experience for consumer base, enterprise and public administrations, and have an open internet, a portable digital life and a safe and enjoyable digital experience. But also, it is very important to avoid any situation of abuse of dominance and ensure that users have choice in all layers of the digital value chain, which means that digital markets need to be watched carefully. Moving to the next slide, let me explain our financial priorities for the next two years. We have a firm determination to reach three interactive targets. First, we will have strengthened our balance sheet after the proposed O2 UK disposal. In addition, we have already de-risked balance sheet with Venezuela FX adjustment, which allows us to limit GVT capital increase up to EUR3 billion. On leverage, we aim to have a ratio in both years lower than 2.35, including the proposed O2 UK sale. The result of this financial policy should translate into ratings stabilization reflecting our regained financial flexibility. Second, we will maintain an attractive shareholder remuneration comprised of sustainable dividend payments, tactical share buybacks and shares cancellation to mitigate scrip dividend dilution. Third, to support sustainable organic growth based on differentiation, we will keep analyzing inorganic opportunities to accelerate value creation, as our portfolio strengthening policy remains in place. Let me now highlight our guidance for this year and the ambition for 2016. 2015 is going to be the year when we will increase our revenue growth to more than 7%, while our EBITDA margin will present a limited margin erosion of around 1 point to allow for commercial flexibility if needed. Our CapEx to sales ratio will be around 17%. For the period 2014-2016, the cumulative average growth rate revenue growth will stand at higher than 5%, with EBITDA margin stabilizing in the year 2016 versus 2015 and CapEx to sales to be stable around 17%, reaching the peak in this period as it will be 2 points lower in 2017. Revenue guidance in organic terms is compatible with our strategy to accelerate growth. On the financial guidance, let me add that we will do all of this maintaining our dividend for 2015 at EUR0.75 per share, with the same mix structure as last year. The first tranche, EUR0.35, will be payable in the fourth quarter 2015 by means of a voluntary scrip, and the second tranche of EUR040 in cash in the second quarter of 2016. Moreover, our intention is to increase the cash dividend to EUR0.75 per share once the UK deal is closed. In order to mitigate scrip dividend dilution, we will propose to the General Meeting the cancellation of treasury shares equal to 1.5% of outstanding capital in the fourth quarter of 2015, plus an additional 1.5% cancellation once the UK deal is closed. And now I will pass on to Angel to review 2014 results in detail. Ángel Vilá: Thank you, César. 2014 results clearly reflect the solid steps in our transformation strategy towards a digital Telco, focused on accelerating long-term sustainable growth. Commercial momentum, particularly in high-quality services, has gradually strengthened throughout the year, which, along with booming mobile data monetization, has allowed Telefónica to recover strong revenue growth and increase customer value. Thus, in the fourth quarter, revenue growth accelerated to 5%. All this, along with further efficiencies across the board, has translated into robust profitability, with OIBDA growth returning to positive territory in 2014 and limited year-on-year margin erosion. CapEx was up 16.9% in 2014, focused on technological transformation, setting the basis for future growth and differentiation. At the same time, we have strengthened our balance sheet, levered on solid free cash flow generation and active portfolio management. Let me stress that including the proposed O2 UK sale, the leverage ratio improves to 2.15 times. This proactive management of our asset portfolio has allowed us to lead in-market consolidation and bolster our competitive position in key markets, through value enhancing deals. Finally, we delivered on 2014 operating guidance and confirm 2014 dividend commitment. Moving to the next slide, let me summarize our key financials. Reported year-on-year evolution is significantly affected by non-recurrent factors, FX headwinds and changes in the perimeter of consolidation. The fourth quarter is particularly affected by these non-recurrent items. Regarding FX, we are applying to 2014 financial statements the exchange rate of the Venezuelan bolivar set at the previously denominated SICAD II at 50 bolivars per U.S. dollar. This decision has impacted OIBDA by EUR0.9 billion and net income by EUR0.4 billion. It is important to note that revenue contribution from this country is now reduced to just 1% and the net cash position is now below EUR0.4 billion, minimizing the impact of any further potential adjustment. Other non-recurrent effects include: one, a provision for restructuring costs with the aim of increasing efficiency in the future, impacting OIBDA in EUR644 million and net income in EUR405 million, mainly affecting Germany with announced lever program; second, a value adjustment of our investment in Telco has reduced net income in eur0.3 billion; and third, asset sales in Spain, mainly towers with close to EUR0.2 billion impact on OIBDA. These non-recurrent items provide a clean, sound and de-risked base for profitable growth going forward. To see these impacts in more detail please move to Slide Number 15. FX has been the main factor, dragging 23.9 percent points to OIBDA year-on-year variation, with the evolution of the Venezuelan bolivar explaining over 90% of this effect. Let me stress again that this impact is mitigated at free cash flow level. On the other hand, the consolidation of E-Plus since October 1st turned the contribution of perimeter changes to revenues to positive and reduced the negative contribution to OIBDA, still affected by the deconsolidation of Czech Republic and Ireland. Non-recurrent effects reduced Q4 OIBDA and net income by EUR1.4 billion and EUR1.1 billion, respectively. Turning to slide number 16, sequential top line acceleration of 220 basis points in the quarter to 5% year-on-year organically is explained by strong commercial momentum, particularly in value services coupled with churn stabilization on a yearly basis. Mobile contract customers increased 11% versus 2013, boosted by smartphones which delivered a remarkable growth of 39%. Pay TV momentum remained high, with strong net adds of 437,000 in the October to December period, and accesses increasing 1.5 times versus 2013, surpassing the 5 million mark. Fiber connected customers posted record net adds in the quarter and accesses doubled year on year. Best-in-class diversification and better revenue mix towards data explain the consistent improvement shown in sales performance during 2014. OIBDA in the full year pointed towards sustainable growth reflecting revenue flow and efficiency gains. Organic OIBDA margin decline of 0.8 percentage points versus 2013 underlined higher commercial investments and network and IT costs. Turning to Slide Number 17 we review the strong performance of mobile data. Smartphone penetration reached 35% at the end of 2014 underpinned by increased LTE adoption. This, along with a strong year-on-year growth in average data consumption across our footprint, is driving the acceleration in total mobile data traffic, up 64% year on year in the fourth quarter. The boost in data traffic and smart pricing are reflected in data monetization and improved performance of non-SMS mobile data revenues which grew 24% organic year on year. I would like to highlight that in one-third of customers actually use more data than they initially subscribed in their data plans, and one-third of them subscribe additional “data snacks”. This leaves us plenty of room to upsell as we currently have just one-third of customers already on plans with more than 1 gigabyte of data included. Please turn to Slide 18 for an update on our investment profile. In terms of network investments, and in order to meet increasing customer demand for data traffic, both in fixed and mobile, we have devoted 74% of our investments to growth and transformation, 5 percentage points more than a year ago in organic terms, while at the same time we have reduced investments in legacy. By concepts, fiber CapEx increased by 81% and investments related to TV increased by 79%. On the mobile side, 3G investment was 30% higher and 4G spend was 19% higher, while we also advanced on transmission and IT investing 15% more than a year ago. It is also remarkable the effort made in acquiring differential spectrum in 2014 to secure valuable spectrum in Brazil and Hispan-American countries. Let me now review the performance of Telefónica España in Slide Number 19. We are especially satisfied with the progress made in building a stronger franchise. Our successful convergent offer enhanced in 2014 with a differential quality TV product drove a sound commercial turnaround, leading to an acceleration of growth in high value: fiber customers doubling year on year, pay TV tripling, and contract mobile resuming growth. Movistar Fusión traction continued, reaching 73% of fiber base and -- of the fixed broadband base, and 57% of mobile contract, securing a larger revenue stream in the consumer segment on more loyal customers with higher ARPU. Lastly, we fulfilled the target of ultra-broadband coverage with more than 10 million premises passed with fiber and 58% population coverage with LTE, supporting structural differentiation, which was reflected in the investment effort made in 2014. On Page Number 20, the sequential improvement of revenue year on year in Spain is a clear reflection of solid fundamentals, underpinned by ongoing commercial momentum, price stabilization and a diminishing back-book impact. Importantly, revenue decline improved 7 percentage points in the last four quarters, and this, along with savings from efficiency measures, limited year on year OIBDA erosion in the last quarter and delivered a healthy OIBDA margin of 45.6% in 2014, excluding tower sales. Hence, Telefonica España is on a clear trend to recover revenue growth. To review our operation in Germany, please turn to Slide 21. The successful integration of E-Plus consolidated Telefónica Deutschland as the mobile market leader by customers, recording solid contract net adds with focus on data monetization. Increased LTE coverage, 62% at the end of December, and attractive bundles, are driving an improvement in the bundle adoption mix. New tariffs launched on February 15th are further incentivizing increased data usage and upselling initiatives. On financials, mobile service revenue, now representing 70% of the combined company, stabilized its year-on-year trend in the fourth quarter. Fourth quarter OIBDA margin was 18% in 2014 excluding restructuring costs of EUR401 million, reflecting higher commercial spend to capture market growth. Finally, the company has already started to execute the synergy program with quick wins in places such as cross and upsell activities, aligned procurement, defined network grid and personnel restructuring agreed. On slide 22, Telefónica UK added 394 thousands customers, the highest of any quarter since 2008, underpinned by the contract segment, up 6% year on year. Market leading customer loyalty was reflected in contract churn at 1% for the full year and the quarter. The rapid rollout of LTE is translated into an outdoor coverage of 58% at December, with customers having 3 times average usage versus a 3G user. This led to ARPU stabilization, with broadly flat year-on-year performance in the quarter. As a result, mobile service revenue, excluding O2 Refresh was up 3% versus the fourth quarter of 2013, with total revenue 5% higher, also boosted by the increased trading of high-end devices. OIBDA margin grew 0.2 percentage points versus 2013 to 24.7%, with O2 Refresh adding 3.7 percentage points but negligible impact in the annual variation. In Brazil, moving to Slide 23, we have reinforced our market position in high-value customers in both businesses. In mobile, during 2014 we strengthened our leadership, capturing more than half of new contract customers and almost 40% of new LTE accesses, thanks to our superior network and our innovative services. This strategy underpinned outgoing ARPU up by 6% year-on-year on increasing data adoption. In fixed, we continue the process of transformation into a fiber company with connections and IPTV accesses accelerating throughout the year. Slide 24 shows our solid Brazilian financial performance. The quality customer growth strategy is leading to sustainable revenue growth. Thus, mobile service revenue year on year organic growth accelerated in Q4 to 5.7% excluding Q4 2013 one-off on strong data growth and despite negative regulatory effects. In addition, despite the strong commercial activity, the efforts to achieve higher efficiencies resulted in an increase in costs much lower than inflation. And consequently in full year 2014 OIBDA returned to positive year-on-year growth. Turning to Slide Number 25 we review the performance of Telefonica Hispanoamerica. Strong trading, with mobile gross adds growing year-on-year by more than 10% in Q4, and higher traffic volumes, leading to mobile ARPU growth, underpinned the steady double-digit revenue growth. On top of that, full-year organic OIBDA margin was 0.5 percentage points up year on year returning to 2012 levels, with a special mention in profitability increases in Colombia, Chile and Mexico. Let me stress that OIBDA growth remains in solid double-digit when excluding Venezuela. Let me now go through Mexico where, as shown in Slide Number 26 we are gaining momentum and accelerating growth. Strong commercial traction, with record gross adds once again in Q4, led to sustained revenue growth acceleration to reach the highest mobile service revenue growth in five years in Q4. Let me also remark that the mix of top-quality assets on strong CapEx efforts in the past, and the economies of scale starting to flow into the results, expanded profitability, with OIBDA almost doubling year on year in Q4. Turning to Slide Number 27, we review the performance of other countries in Hispanoamerica, where solid top line growth boosted bottom line performance. In Colombia, revenues continued outpacing inflation, growing by 6% in Q4 amid strong increase in profitability. As such, margin expanded by more than 4 percentage points year-on-year in the last quarter of the year. In Peru, revenues also consolidated the trend posted in last quarters while OIBDA was affected by high commercial activity to regain high value customers. In Argentina, the main highlight is that along the year we managed to offset the inflation and FX pressure and profitability was slightly up year-on-year. Let me now move to the financial slides on Page 28. First, I would like to highlight the strong cash flow generation shown in 2014 which has allowed us to reduce the comparable net debt figure as of yearend 2014 to EUR43.9 billion. However, by applying the SICAD II FX rate of 50 bolivars per dollar, this figure increases to EUR45 billion. Second, I wanted to underline the active portfolio management which is helping us to increase financial flexibility at the time we reinforce our strategic position and credit profile. In this regard, the proposed O2 UK sale will trim our net debt figure to less than EUR32 billion which will in turn bring our leverage ratio to 2.15%, comfortably below the 2.35 times target. Moving to Slide 29, we continue delivering a prudent financial policy aimed at, first, maintaining a healthy and robust quality in liquidity which exceeds EUR19.4 billion; second, diversifying our funding which reached nearly EUR15 billion with higher role for capital markets and hitting historical lowest coupons on our long-term bond issuances; and third, keeping costs under control so that average cost of debt is 5.4% and remains nearly flat, below the midpoint of the long-term guidance range of 5% to 6%. Changes in debt composition, due to increasing LatAm weight and repayment of maturing lower cost debt in euros, would have increased cost by 0.47 percentage points, but this has been nearly offset by 0.41 percentage points savings from lower interest rates. Now I will turn to José María to review the outlook for 2015 and beyond. José María Álvarez-Pallete: Thank you, Angel, and good morning to all of you. As you can see on Slide 31, our business mix will be transforming, working towards our goal of growing average revenue per access. Services over connectivity and broadband are both set to increase going forward, while there will be a slight reduction in access and voice and equipment, moving us away from selling minutes to selling gigabytes. We will focus on creating voice bundles and variable data propositions for our customers, allowing more flexibility and quality of service. Our portfolio, as I think we have proven over the last 12 months alone, is evolving towards a much stronger position in our key markets: Spain, Brazil and Germany, with bigger local scale. By the end of 2016 we aim to see the contribution from these markets to Group revenues increase to roughly two-thirds. On Slide 32 we have set out how we will maximize the mobile data and video explosion. Telefónica will participate in and benefit from the digital revolution, capturing growing revenue streams. Differential LTE will form the basis and we will advance towards higher LTE penetration and faster network, which will lead to more devices connected. The right devices for our customers is also a critical piece. We will increase the penetration of smartphones in our customer base by broadening our portfolio, lowering entry price points and seizing upon the prepaid smartphone opportunity in Hispanoamerica. As the network improves and devices’ affordability increases, customers will consume more data, exceeding their allowances, and thus upgrading to complementary bundles, bringing in extra data revenues. We will leverage this trend by creating tariffs and pricing structures that will bring quality and satisfaction to our customers. On top of this, we aim to create an environment where everything is connected, be it through multi-device or multi-user data plans, or through improving connectivity with fiber-to-the-home and LTE, leading to the adoption of new data-based services. On video, we are pursuing a focused strategy to fully capture the opportunity and where the uptake is key: multi-device accesses, new high-definition technologies and larger screen devices are all increasing the appetite for video services. On Slide 33, we show our main priorities in terms of network. First of all, I would like to highlight that our main focus is to increase the deployment of our future proof ultra-broadband networks, that would result in up to 22 million premises passed with fiber in 2016, that is nearly double those of 2014, but of course always subject to adequate regulation. The number of LTE-enabled base stations will be approximately 50,000, more than double versus 2014, and in Europe, this will mean a population coverage above 85% in 2016 and more than 55% in Latin America. Network modernization and rationalization are the key pillars of our transformation to all-IP network. Technology benefits are expected to result in steady customer adoption of IP access technologies and network capabilities, voice-over-IP accesses, fiber-based broadband, and the rise of 4G. Regarding IT execution strategy, our main priorities are: first, to accelerate the business transformation delivering more customer migrations to full-stack projects; second, simplification, including virtualization, which will improve business efficiency generating synergies; and third, enable growth businesses through digital capabilities, like online and multi-channel and big data, among others. On Slide 34, you can see the savings, including synergies, that we will continue to capture under the new operating model. Early quick wins from the different initiatives to become a leaner company were already visible in 2014, with the realization of savings above our initial expectation EUR300 million versus originally EUR250 million. This was the result of several activities, including simplification of corporate functions from a regional to global model, and adapting the structure to the new operating model, SG&A global policies and outsourcing of support functions, for example in Brazil. In the fourth quarter of 2014, we booked a provision for restructuring costs, as Ángel mentioned before. Additionally, we continue working with the simplification of the other channel optimization customer initiatives like self-care, transformation of support functions, elective deployment base of analytics, network automization and synergies in Germany and Brazil. By applying these initiatives, we will be able to generate up to more than EUR1.8 billion OpEx and CapEx gross savings annually from 2017, with EUR700 million already to be achieved in 2015. In Spain, we face a more positive scenario, with improved macro, market consolidation which should lead to more rationality in the market, and a pro-investment approach in European regulation. Amid this backdrop, we plan to reinforce differentiation with an unparalleled CapEx effort to further increase next-generation network coverage to have the best-in-class network, and bring four years forward the fulfilment of the European Digital Agenda targets just with our networks. We aim to cover up to 18 million premises with fiber-to-the-home and more than 85% of population with LTE by 2016. But as we have always stated, this ambitious investment plan could only be executed in a scenario with adequate regulation. Movistar Fusión will continue to be the key pillar of our strategy, accelerating the take-up of pay TV, and making fiber the principal fixed broadband technology in convergent households. Growing high-value services will increase ARPU and reduce churn, and ultimately translate into the recovery of top-line growth from 2015. Focus on OpEx control will continue and contribute to maintain a leading profitability. CapEx in 2017, once the next-generation networkis made, will go down and return to 2013 levels, as network structural transformation will be mostly completed. Main priorities of the other business units are shown on Slide 36. Within digital services, we will focus on accelerating our capabilities in cloud, security and machine-to-machine in order to capture the full growth potential, especially refreshing the portfolio in the SME segment, while at the same time we continue to drive emerging digital services. In Germany, we will base our strategy on three main pillars. First, setting market trends through a clear focus on stable mobile customers. Second, monetization of LTE opportunity, with tailored offers per customer segment and with a goal of reaching an outdoor coverage up to 90% at the end of 2016. And third, offer the best high-speed experience with a flexible combination of the latest technologies. The execution of synergies, personnel, shop footprint reduction and mobile site decommission, will improve profitability. For 2015 we are expecting EUR250 million of recurring operating cash flow synergies, approximately 30% of the target expected after year five. In Brazil, main focus will be on mobile data growth, increasing the penetration of high-value customers on our superior network quality and innovative services. In the fixed business, we will continue deploying fiber, aiming to cover more than 5 million premises by 2016. As such, our strategy will be conducive to a more balanced revenue growth, while we continue working on cost reductions and on the significant synergies the GVT acquisition will bring once we get the definitive approvals from regulators. Finally, Hispanoamerica will continue to be one of the most significant levers for growth in a landscape of different business realities and a context of favorable macro conditions in core countries like Mexico, Colombia, Peru and Chile. Now I will turn to César for the closing remarks. César Alierta: Thank you, José María. To wrap up, please move to Slide 42 for our final conclusions. I know it has been a long presentation, but let me round up. We have reinforced our growth model in 2014 with the right fundamentals to grow and transform further. And in the fourth quarter we are just showing the first signs of the change. We have a very focused portfolio, with a very strong position in core markets. We are determined to maintain the financial flexibility recovered. And we are fully committed to offering very attractive returns to our shareholders. Thank you and now all of us, we are open to take your questions.

Thank you. [Operator Instructions] Our first question comes from the line of Nick Brown from Goldman Sachs. Please go ahead.

Thanks. Three questions please. Firstly, when you talk about Spain returning to growth in 2015, is it realistic to expect the point of inflection may be in the first half? And secondly, I think previously you were guiding for margin stabilization in 2014. Are you expecting you may have to invest more in commercial costs in Spain now to support revenue growth or is there another market where you want this flexibility? Thanks. José María Álvarez-Pallete: Thanks for your question. In Spain we are not guiding in which quarter we are going to be returning back to growth, but the trend set during the fourth quarter indicates that we reaffirm our vision that within 2015 this should be accomplished. The first information that we have for the first month of the year and the advance that we have for the month of February are also driving into this direction. So we cannot be more precise on which quarter, but reaffirm the trend that now Spain is set to be back to revenue growth in 2015. And in terms of margin, we are guiding for limited margin erosion on the basis of: first, overall I'm talking of the consolidated level, the improved revenue trends in all markets, driven, as we have been presenting during the slides on data monetization, a deeper smartphone penetration, LTE and fiber expansion, and smarter bundling. It is true that we are going to be encouraging higher commercial costs, namely commissions and promotions as we see growth ahead of us and we capture -- and we want to capture these revenue trends. But it’s also true that we are going to have higher content costs, namely in countries like Spain and also in Brazil, where our TV offer is booming, and we are building best-in-class video offering and it's gaining traction. As the more traction it gets, the more diluted this effort in content is going to be, taking advantage of the scale and network effect. We are also facing higher network costs as we keep deploying ultra-broadband networks, both fiber and LTE, in all our geographies. But we are also seeing progressive positive impact of synergies generation, namely in Germany, and potentially in Brazil when the GVT transaction will be cleared. Finally, let me stress that we are also seeing progressive, positive impact of the simplification program. We already captured EUR300 million of savings in 2014 ahead of our initial expectation of EUR250 million. So overall we see OIBDA growing significantly in absolute terms and accelerating in 2015 with a limited margin erosion as we see profitable growth ahead of us and we really want to capture it. Should that not be the case, we will be adapting our commercial strategy and therefore adapting our commercial expenses.

Right, thanks. Pablo Eguirón: Thank you, Nick. Next question please.

We will now take the next question from Mandeep Singh of Redburn. Please go ahead.

Hello. Thank you for taking the question. I had two questions please. First of all, just on Spain, just so we are very clear, are you guiding that Spain will grow for all of 2015 or it will return to growth at some point in 2015? So that's the first question. The second question is really on Brazil. Are you still supportive of consolidation? Do you think it’s likely to happen? And if not, what do you think the future is for Oi? And if you could maybe give some color on sort of concession renegotiations and how you think that might play out for the market as a whole? José María Álvarez-Pallete: Thanks for your questions. In the case of Spain, we are guiding for growth at the end of 2015 on a cumulative basis, not just on a quarter-on-quarter basis but on a cumulative basis.

Thank you. Ángel Vilá: Regarding Brazil, our focus continues to be getting the approvals for the GVT transaction and reach a successful closing, which we expect in the first half of this year. In the meanwhile, we continue strengthening our position both in mobile and in fixed broadband and we are posting clear growth both in revenue and OIBDA. And GVT, when it finally closes, will reinforce our position, increasing our growth prospects and allowing us to have a convergent footprint and to reach significant synergies. Regarding mobile consolidation, we have stated in the past that we are strong believers in the benefit of in-market mobile consolidation, which we would support and which could generate substantial synergies. But at this stage we are fully focused on GVT and we maintain our full optionality regarding potential consolidation in Brazil.

And any thoughts on concessions please? José María Álvarez-Pallete: Well, on the concessions, there are not many news around. We are pretty focused on what is going on. We think that, as we have been stating publicly, it’s for all the wireline concessions, there not just for all of us -- for just our case. We think it’s going to have a rational outcome, but too soon to say. I mean, we are positive, but too soon to say.

Thank you. Pablo Eguirón: Thank you, Mandeep. Next question please.

We will now take our next question from Georgios Ierodiaconou of Citi. Please go ahead.

Good morning and thank you for taking the questions. I just had a question on Spanish regulation, on the wholesale fiber access that was announced earlier in the year and also on the Digital Plus acquisition, if you could give us an update. And especially a clarification on the Group Capex of 17%, CapEx to sales. The way I interpret it is that this assumes you carry on investing towards 18 million homes passed in Spain. If you would scale that down, does that mean CapEx goes somewhere else, either in Spain or somewhere else in the Group, or will you come a bit lower on CapEx to sales? And then my second question is around Mexico, if you could give us an update of your options there, and whether you confirm that any M&A that will happen in Mexico will still mean you consolidate the resulting assets? Thank you. José María Álvarez-Pallete: Taking the first part of your question on Spain, we are addressing our CapEx effort to the areas that have been considered to have already competition and we will -- we take our coverage in other areas once it is clear what the rules of the game are. But we keep deploying and we keep focus on the areas that have been declared already with significant competition. And the CapEx over sales that we have stated includes this effort and the CapEx guidance that we have been giving for the future includes the assumption that regulation is going to be stable on this subject. César Alierta: With respect to the regulation, now the important thing is that the main challenge of Europe is the digitalization of the economy. And this is very clearly seen by the -- in every country in Europe. And I think I am fairly optimistic that this year there's going to be big changes, big changes in favor of investment, and investment in what, in fiber and LTE. And the framework is going to be more positive for us investing in fiber and LTE. Having said that, my perception of how the regulation is going to be in Spain is very positive, in the sense that everybody wants more digitalization of the Spanish economy, and it means that regulations have to favor it. So I am very optimistic on that. With regard to Digital Plus, I am also fairly optimistic. I think that in the next couple of months it will be approved and we fully complete the transaction. In regards to Mexico, as Àngel and José María have been saying, we are focused on organic growth. The new regulations in Mexico favor us, and this is our main objective. If there is any opportunity that we think is reasonable, we may do it but it has to be reasonable at a fair price. We are very consistent on that, and so we are very enthusiastic about the future of our operations in Mexico.

Very clear. Thank you. Pablo Eguirón: Thank you, Georgios. Next question please.

We will now take the next question from Mattieu Robilliard of Barclays. Please go ahead.

Good morning. Thank you for taking the questions. I have two questions. First, on Slide 2 of your presentation pack, one of the items you highlight is the strengthening of your portfolio, as opposed to the focusing of your portfolio in the past, so I think Mr. Alierta you just mentioned Mexico as an area potentially for strengthening the portfolio. Generally conceptually, I mean where are the regions where strengthening of the portfolio could take place? Do you see more opportunities in Latin America or in Europe? So that's the first question. And the second question has to do with Brazil. GVT acquisition is not closed, but just thinking about the next few years ahead, obviously one of your competitors on fixed is quite weak. When we compare the GVT coverage to one of Net Service, for example in terms of households passed, there seems to be a big scope for an acceleration of the growth of the network. Is it how you’re thinking about Brazil? By that I mean, would GVT be a good platform to penetrate more households in the regions where you’re not present or you would be more focusing on transforming the existing homes passed into more subscribers? Thank you. César Alierta: Okay. We are very happy with the present footprint and this is where we are. And we are very clear that we are concentrated on our core markets. And our core markets are very clear. It's Latin America, except the three countries in which we are not, which are Honduras, Paraguay and Bolivia, and we are not going to go to Honduras, Paraguay and Bolivia. And in Europe, we are very happy with our position in Germany and Spain, and that’s it. And where we are going to go is in those markets. We do not perceive going into other markets at all. And so the focus now is in our present footprint and growing there, in which we think we have tremendous opportunities. José María will elaborate further. José María Álvarez-Pallete: Thanks, César. On the GVT situation, once and when the regulators approve the transaction, we have shared what our ambition is. We are going to be combining the efforts of both companies, and therefore, we are going to be significantly improving the network deployment of Vivo outside São Paulo in terms of fiber to the base station, and we are going to be significantly improving both our backbone and our backhaul. And you are right, in terms of our ultra-broadband deployment outside São Paulo, but also in São Paulo, we are going to be taking significant advantage of the GVT situation. In fact, in places where we are deploying fiber in São Paulo just today on the Vivo perimeter, we are gaining market share out of our competitors, including the cable operators, which means that we have a pretty competitive product, that the effort that we are doing in CapEx is paying off. And therefore we will continue supporting the GVT effort outside São Paulo in the cities that were already considered. So overall we think that out of the approval of the GVT process you should expect us to keep investing and to keep growing both, and we aim to regain market share because of the fact that wherever we are competing with significant attributes like the speed and capacity, we are very relevant for customers and we are gaining market share. So, pretty optimistic on the outcome, pretty confident that GVT will bring significant value and will foster our growth in Brazil.

Thank you very much. Pablo Eguirón: Thank you. Thank you, Mathieu. Next question please.

We will now take our next question from Giovanni Montalti of UBS. Please go ahead.

Good morning. Thank you. Just a question on content, what kind of competition, especially on pricing, do you expect in the content market in Spain going forward? Thank you. José María Álvarez-Pallete: Okay. In Spain, as in other markets, but namely in Spain, we do see revenues accelerating or improving on the basis of a more rational market. Infrastructure-based competition means that all major players in the different markets, but mainly in Spain, are going to -- are building more sophisticated all-IP networks. And that means that the sector is able to offer more sophisticated services both in core attributes like speed or capacity, but also in value-added services like video, financial services, or other. That’s why data traffic is booming overall, and namely in Spain, with significant growth year over year, above 50% in average at the Group level. We have a product as a sector, data, that people love and need. And providing more value is what it is driving effectively higher ARPU. So we see more rationality on the market on the basis of more sophisticated products, a significant infrastructure-based competition, and as a result of all of that, we see better trends in ARPU. And this is going to -- this is what is driving revenue up, and also data monetization in terms of bundling, in terms of out-of-bundle consumption. So overall I think that there is more rationality on the marketplace, focus on churn reduction, and I think that we are going to see better fundamental trends in the Spanish market.

Sorry, if I may quickly follow up, in this context what kind of let’s say inflation do you expect for the cost of content in Spain? Do you expect significant competition for example from the likes of Vodafone, Ono, or the players that in the past were active in the content arena in Spain? Thank you. José María Álvarez-Pallete: I think that on the content side, you will see that, whenever the Digital Plus transaction would be approved, we'll have a clear picture of what are the remedies that are imposed and therefore what are the wholesale offers that we will need to have. So overall I would say that it’s probably going to go through wholesale offers, but I think that overall the content cost is going to remain under a rational environment. But most of all, take into consideration that pay TV penetration is still very low in Spain, and therefore the more it grows, the more diluted the overall content costs are going to be on the overall customer base. César Alierta: On top of that, you have to think that we are going to expand our pay TV in all Latin America, which the penetration of pay TV is very low, which means the cost per user is going to go down for us very significantly in the coming years. Because if we look at the base of potential costs in pay TV in all the world, it doesn’t have to do with total costs after what José María said, which is right, and we don’t see prices going up in Spain, but the cost per user is going to be going down, down in the coming years. And that’s very good news for us. Pablo Eguirón: Thank you, Giovanni. Next question please.

We will now take our next question from Pedro Oliveira of BPI. Please go ahead.

Hi, good morning. Thank you for taking my questions. The first question, you provided in the last conference call the weight of Fusión in consumer revenues and the weight of consumer revenues in the total Spanish revenues. Can you please provide an update on this breakdown? And the second question was regarding your working capital evolution. In the fourth quarter it seems to be around EUR2.5 billion. EUR400 million are explained by the provision in Germany. I was wondering if you could provide some detail on the remaining evolution. Thank you. José María Álvarez-Pallete: Could you repeat please the second part of your question?

My second part was your working capital, your consolidated, was around EUR2.5 billion in the fourth quarter. Out of this EUR400 million will be the provision in Germany. The rest EUR2 billion, I was wondering if you could provide some detail to explain the evolution of the working capital [ph] in the fourth quarter. And if there is any relation with Venezuela's evolution. José María Álvarez-Pallete: Okay. Thank you for your question. In terms of Fusión, we have reached 3.7 million customers, with 1.4 million mobile lines on top of that. This is a 27% year-on-year growth. 73% of our fixed broadband is already in Fusión. 57% of mobile contract is already in Fusión. Fusión represents approximately 50% of the residential revenues in Spain, which approximately represent 50% of the total revenues in Spain. Churn in Fusión is 1.1%, significantly stable and significantly contributing to create value out of the product. So this is the overall figures that we have for Fusión. If I may complement, let me remind you that 80% of the existing customers of the add sales and of the gross adds that are coming to Fusion, 80% are coming not to the basic product but to one value-added product. Therefore, the accretion of Fusión, so to say, in terms of value, keeps going up. Ángel Vilá: With respect to working capital in the fourth quarter, it has had a positive impact of EUR2.4 billion. Out of this, we have several factors, some of them recurrent and some of them which are now -- which are just one-time. Among the recurrent ones, we have the typical cyclicality of working capital and the evolution of CapEx accrual versus payments. We also have factoring. But you have to take into account that there are also some positive impacts which are not recurrent. One is the restructuring charge, not only the German one, but the overall restructuring charge. So, something between EUR0.6 billion and EUR0.7 billion that have been taken through EBITDA but will be paid in 2015 and later. Second, part of the cost of spectrum that we accrue in Brazil -- or the cost of the spectrum in Brazil, part will be the clean-up that will be taking place in later years. And this is to the tune of EUR300 million. And then we had also the advanced collection of some deferred payments that we had in the Czech Republic transaction. We had agreed some brand fees and some management fees to be collected across a period of four years from the buyer of the Czech Republic. And we negotiated with them in the fourth quarter to collect them in advance. So these would be some of the impacts that we have in this positive free cash flow figure in the fourth quarter.

Thank you very much. Pablo Eguirón: Thank you, Pedro. Next question please.

We will now take our next question from Ivon Leal of BBVA. Please go ahead. Ivón Leal - BBVA: Hello. Good morning everybody. Two questions. Maybe the first one in Spain. I think you've announced first price increase in broadband in January, to be applied in April. Do you think there's scope for further price increases in Spain, maybe on mobile and Fusión bundles? And the second one on your financial cost. I don't know if you could remind us what is the average financial cost of debt, and what -- if there is a scope for improvement going forward? José María Álvarez-Pallete: Taking your first question, I mean we are seeing more upselling rather than price increases. What we are doing right now is, the more value we put into the offer, the more we see appetite from consumers to pay for that and to value for that. So this is part of the strategy that we are putting together. And this is especially relevant at the time that we are increasing coverage of both LTE and fiber and on the TV side. So overall I would say that we do see a more rational behavior, both from operators but also consumers more willing to invest more value for more services. So that applies to fixed broadband, but that also applies to mobile contract, that also applies to value added services like voicemail or others. So overall I would say better trends, more rational trends in the Spanish market, yes. Ángel Vilá: Regarding the interest cost. As you can see on Slide Number 29, we are seeing forces that are going in different directions. On the one hand, we have the reduction of interest rates, which is clearly working in the direction of reducing our interest cost. But on the other hand, after we divested, for instance, Czech Republic in Europe and Ireland, we have been cancelling some less-expensive debt in Europe. Also, we had some maturing euro debt that had less cost than the debt that we have in Latin America. So the mix, in a lesser amount of total debt, the mix is moving towards, you know, Latin America is weighting more in the mix of our debt. And the cost of Latin America is -- Latin American debt is 3.5 percentage points higher than the one that you can see in Europe. We are still digesting the higher cost of debt in the refinancing exercises that we had to take through 2011, 2012, and partially 2013. But this impact is going to be fading away, and you will see, progressively, better interest cost flowing through our accounts. We maintain the 5% to 6% range, but we're going to be, in 2015, in the lower part of that range. And in 2016 and forward, it would be improving. Ivón Leal - BBVA: Thank you. Pablo Eguirón: Thank you, Ivon. Next question please.

We will now take our next question from David Wright of BoAML. Please go ahead.

Yeah. It's David Wright from Bank of America Merrill Lynch. Just a couple of things, thank you for a very comprehensive presentation. I had two questions please. First of all, just on the net debt guidance. If you could just maybe talk us through some of the bigger sort of ticket items that you're expecting, so, for instance, the Hutchinson cash and obviously we've got GVT cash out. Are you looking to exploit the option on E-Plus and also whether there are any convertible proceeds expected? So, just the big ticket sort of net debt items in the 2016 guidance please. And then second of all, just a comment on Venezuela. You've moved to SICAD II, but clearly the more commercial rate has gone way beyond that. Is this something that you could be forced to reconsider again in 2015 or is this something you tend to look at on an annual basis? Those two questions, thank you. Ángel Vilá: Thanks, David. On net debt, the first outflow would be the acquisition of GVT. GVT is going to be financed from Telefónica Brasil with capital increase to raise money in cash and then issuing shares to Vivendi. The cash portion would be consequently also financed by a rights issue at Telefónica parent level. The capital increase in Brazil will be to the tune of EUR4.7 billion. Our percentage of that would be EUR3.4 billion. We are going to do a capital -- a rights issue at Telefónica parent of EUR3 billion, less than those EUR3.4 billion, because we feel that we have the room to do so. So, GVT basically is an equity financed transaction and should not have a major impact on net debt. With respect to the O2 UK transaction, we are now in exclusive conversations. We are progressing nicely. I cannot comment on that because those are confidential, but we are conducting due diligence with no surprises. The negotiations are progressing and we are highly confident that that deal will be successful. The figure is known, it's EUR13.4 billion. That cash inflow would be -- and debt reduction would be at the time of closing of the transaction, which would be subject to Phase II review in Brussels, so -- at some point in the first half of 2016. Also another item that will impact our debt is the demerger of Telco. In the demerger of Telco, we´ll get 14.8% of Telecom Italia shares. Part of that, up to 6.5%, will be given in lieu of the mandatory exchangeable in TI shares, so that EUR750 million will not increase our debt, but out of the EUR1.6 billion of debt that Telco has, our pro rata part of the debt of Telco, EUR0.9 billion we will have to absorb in our balance sheet because we will not be selling 8.3% shares that we give to Vivendi. So we swap them, we don’t sell them, so -- and that’s about EUR900 million that will increase our debt. With respect to the E-Plus option, it is out of the money. We have no intention to exercise it. What we could do potentially over time is gradually increase modestly our stake in Telefónica Deutschland. Then, regarding Venezuela, what we saw is that events accelerated in the fourth quarter of last year. The last auction on the old SICAD I and SICAD II systems took place in October, there have not been auctions since then. And in the first half of February there was a new FX system enacted in Venezuela where they joined the two SICAD rates and they created a new rate which is called the SIMADI marginal system of currency. So we decided that the most prudent was to move to the most conservative of the official exchange rates prevailing in the country at the end of 2014, which was SICAD II at 50 bolivars per dollar. SICAD has still not undergone any auctions of currency so far in this year. There have been some of this new system, the SIMADI, there has been some auctions. Those are at a much lower rate, to the tune of 150, 170. We are still assessing which would be the rate that we need to apply, but what is very important is that now Venezuela accounts for less than 1% of our revenues. The cash that we have in Venezuela is, after the move to SICAD II, is to the tune of EUR390 million equivalent. So any further devaluation that we could see in the country would have a negligible impact in our cash position. We have neutralized, we have mitigated completely this financial impact in our accounts while we continue to believe in investing in the country, obviously as much as we can, in local currency, because we are getting good operational traction in the country.

That's clear. And just to come back on your comments on net debt, I think in the last conference call, when it was clear you guys were maybe just heading a little bit over the original guidance for 2014, you did suggest you could look at hybrid instruments. I assume now with the Hutchinson sale -- sorry, the O2 UK sale, that you would no longer need to go down that route. Is that correct? Ángel Vilá: Yes. That's correct.

All right. Thank you. Pablo Eguirón: Thank you, David. Next question please.

[Operator Instructions] We will now take a question from Keval Khiroya of Deutsche Bank. Please go ahead.

Thank you. I've got two questions on Brazil, please. I mean, firstly, from an economic perspective, it sounds that the news from Brazil has become a little bit weaker. I think many expect it to be in recession for this year. What are your thoughts on how the Brazilian economy could affect your business in 2015? And secondly, you've done a very good job at cost control in Brazil. OpEx was basically flattish in the second half of 2014 even though the latest inflation is now 6% or 7%. Leaving GVT aside, could you give us some color on whether you think that's sustainable and where maybe the OpEx trends should get to? Thank you. César Alierta: With regards to Brazil, we are very optimistic, being realistic. We expect GDP to grow at least 3%, in the long-term growth of Brazil GDP is going to be higher. You have to take in mind that in the last decade, a large part of the population has become part of the middle class. Now the middle class and the upper income, there are 150 million people. This is one of the biggest markets in the world, 150 million people that are high consumers. The position of the country is very good. External debt is 21% of GDP, and the total debt is 34%. The reserves of the country cover 80% of external debt, so the financial situation that we're seeing, the potential is there, the market is there, and we are very, very happy to be number one in a market like that. José María Álvarez-Pallete: Taking your question on the cost structure of Brazil and the recent evolution. Overall, at the end of 2014, total operating expenses have been flattish, I mean have declined 0.5% in the last quarter and flat year-on-year. If we open that split in terms of supplies, supplies is roughly EUR2.7 billion out of the EUR7.7 billion total. They have been down 6.3% year-on-year, and this is mainly due to interconnection. I mean the interconnection drops that are significant in Brazil, that are affecting us on the revenue side, has another impact on the cost side, and this is going to keep going as the glide path is already in place. In terms of labor costs, which is roughly EUR976 million out of again EUR7,700 million, it has been down 4.2%, and will keep going down because we have been doing another round of efficiency in the first months of this year, so we are very demanding, internally demanding, in terms of efficiency. You should expect us to keep focusing on efficiency on that front. And then, on the other expenses which are EUR4 billion namely, they are up 6% year-on-year, and those are mainly commercially driven. We are talking about handsets, we are talking about commissions, and we are talking about promotions. And again you should expect that to keep going because we do see profitable growth namely on the mobile side. So overall we think that we can keep going on the efficiency side. We have been able to absorb a 6% CPI in the country with significant focus on cost reduction. Interconnection is positively affecting us in terms of interconnection expenses. We do think that on a standalone basis we can keep going into that direction. And now, if you put in place the potential impact of the GVT transaction, we have announced a EUR4.7 billion synergy program which could significantly improve the situation as most of the other operating expenses are also network related. And we consider the fact that we need to connect more base stations with fiber, the backhaul synergies with GVT are very significant. So overall we are moderately optimistic on the trends of operating expenses in Brazil.

That's very clear. Thank you. Pablo Eguirón: Thank you, Keval. Next question please.

We will now take our next question from Luis Prota of Morgan Stanley. Please go ahead.

Yes, thank you. Two questions please. The first is a kind of a follow-up on Spain, and you were mentioning your expectations of coming back to revenue-growth in 2015. But it would be very helpful if you could give us some kind of guidelines, in terms of EBITDA margins in Spain. And I'm particularly interested in understanding the content costs, how much would that be on an annual basis, and how is that going to affect EBITDA margins in Spain in 2015 and 2016? And the second question is a bit more a theoretical one on the scrip dividend, relative to the share buyback of shares that you were announcing and the cancellation of 1.5%, which is pretty much in line with the amount of shares from the scrip. So, why keeping the scrip dividend in 2015 instead of just going for an all-cash dividend if, at the end of the day, you are going to buy a similar amount of shares and cancel? So I understand that some shareholders might like the scrip dividend, but it looks like, I don't know, the share buyback you are mentioning is a tactical one, I don't know whether that means that it might happen or it might not. So, anything you could elaborate on that would be helpful. Thank you. José María Álvarez-Pallete: Thanks, Luis, for your questions. Taking the one on Spain, and namely on the OIBDA margin going forward. We are not guiding, as you know, on margin in Spain. Having said that, I can give you some color on the trends that we are seeing. Again overall, out of the total expense figures of Spain, which is EUR6,965 million, it has had a 1.1% decline during 2014. If you open up that between supplies, which is EUR2.6 billion, they have been up 4.2% year-on-year, namely because of the content and also because of the smartphones that we have been putting into our offer. In terms of labor force, it's EUR2.1 billion. They have been growing 1.2% as the measures that we took in 2013 are fading away, in terms of the contribution to the pension fund. And therefore, this trend should keep going. And in terms of other operational costs, which is roughly EUR2.2 billion, they have been down 8.5% year-on-year because of the simplification effort that we have been doing. Keeping an eye on 2015, content costs will keep going up because of the new content that we are acquiring. But we are also working on other activities in order to mitigate the impact in margins, namely in insourcing activities and also about reconfiguring the distribution model, namely the amount of our direct distribution that we have. If you take the overall into equation and you also put in top of the equation the churn reduction that we are also seeing, we think that we should be able to have an attractive evolution of margins for Spain in the next quarters. Ángel Vilá: Regarding the second question, the scrip dividend was designed temporarily to accommodate three interactive targets. One, the increase in investments, derived from acquisitions and CapEx that are weighting on our free cash flow. And from our presentation, you see that we're going to keep on with substantial CapEx intensity in 2015-2016 and that will be easing in 2017. So we wanted to accommodate with the scrip this increased investment intensity with our leverage and the shareholder remuneration objectives. The share buybacks, as you know, as we announced publicly at the beginning of January, we have 2.88% of our share capital in treasury stock. So basically what we're announcing now is to clarify the destination of this 2.88% that we already hold in treasury shares, that 1.5% would be cancelled this year and an additional rounding 1.5% would be cancelled in 2016 once we close the O2 UK transaction. It's not that we're planning to acquire the shares and then cancel; it's the use that we're going to give to some shares that we already have as treasury stock.

Okay, thank you. Than you. That's clear. Pablo Eguirón: Thank you, Luis. Next question please.

We will now take our next question from Luigi Minerva of HSBC. Please go ahead.

Yes. Good morning everyone. I have a question on Spain and on how convergence will influence the pricing environment as your competitors will aim to rebalance their fixed and mobile market shares. So, for example, if you take Vodafone-Ono, they have a lower national market share in fixed broadband than in mobile, they should target selling Ono fixed services to Vodafone mobile customers in order to rebalance their market shares. So, how is Telefónica going to react? Will you accept some further loss in fixed broadband market shares, or will you defend your market shares with pricing? Thank you. José María Álvarez-Pallete: Thanks for your question. We see that from another perspective. I mean the consolidation of the market, the example that you gave on Vodafone-Ono, but potentially also the case with Orange-Jazztel, means that the major competitors in Spain on the convergence side are going to have kind of similar overall ARPUs, overall ARPUs, in the blended scenario, which means that the average mobile ARPU and the average wireline ARPU is going to become pretty similar once you put both things together. If on top of that you consider the fact that both companies, both Vodafone and potentially Orange, have been investing significant resources to acquire both Ono and Jazztel, that means that they would need now to defend higher ARPUs in order to make sure that the value that they acquire is not destroyed. So -- and on top of that, let me also remind you that we -- it takes a while before you have a clear picture of what is the blended strategy, because you need to combine systems that are not similar. It took us, in the case of Spain, being in the same company for a long while, almost a year and a half to have a clear picture of the wireline customers that have or have not a wireless offer within the Group. So overall we think that we should expect a more rational performance and behavior from our competitors as they become integrated. And I think it's going to be shown not just in a more rational pricing scenario but also in a more rational subsidies approach, in terms of being more focused on defending their core customer segments. And therefore, we think that the core of the subsidies are going to be devoted at the market level to retain existing customers. This is how we see the market today. We will update you. But in our view, the trends are all going to a more rational behavior in the Spanish market.

Okay. Thank you very much. Pablo Eguirón: Thank you, Luigi. Next question please.

We will now take the next question from Jonathan Dann of Royal Bank of Canada. Please go ahead.

Hi everybody. Just one question -- fantastic results, and I understand the Spanish turnaround very well. A question on cash flow and the EUR0.75 dividend. Going forward, will the decision on whether or not to have a scrip dividend be based on if the annual cash flow is higher than the cash cost of the dividend? Is that -- I mean, I guess to simplify, do you think going forward you will have annual free cash flow of sort of mid-EUR3.5 billion and, hence, be able to pay a full cash dividend? Or is there some other decision around the scrip? Ángel Vilá: The answer is absolutely yes. That's why we're saying that we will move in 2016 to a full cash dividend of EUR0.75 per share.

Thank you very much. Pablo Eguirón: Thank you, Jonathan. We have time for just one final question please.

Okay. We will take our final question from Fernando Cordero of Santander. Please go ahead.

Hello, good morning. Thanks for taking my two questions. The first one is related with the UK and particularly with the Sky agreement, MVNO agreement. I would like to know to which extent this contract is already similar in terms of the structure of the contract to the new MBA MVNO contracts to be signed in Germany, just to understand at which extent this contract is already aligned with the potential remedies to be seen into the O2 regulatory approval process. And the second question is related with regulation in Brazil. On top of the discussions, or the general discussions or talks on potential changes on the fixed concession framework, I would like also to know if you are expecting or foreseeing any kind discussions on other changes in the regulatory framework, like, for example, talks about the spectrum caps, about the spectrum re-farming in Brazil and so on. Thanks. José María Álvarez-Pallete: Thanks for your question. On the UK question, on the Sky MVNO, the contract, as you might imagine, is subject to confidentiality clauses, but it's nothing different of the kind of contract that we have signed with other plays like TalkTalk. For us, the good news is that big wholesale customers like Sky, being able to choose between different options, decided to choose for O2. And the answer to that is that because we have right now the best customer experience in the world network. In terms of if that can be considered a remedy for the potential outcome of the consolidation that is going on in the UK market; well, it certainly creates a new player in terms of the mobile side. But again, this is not a major game changer considering the current scenario of MVNOs in the UK. In terms of the regulation in Brazil, we are holding discussions with the regulators, I mean because of the GVT transaction and also because of the concessions, we are discussing mainly on every single matter. But we do see a more, I would say, rational approach in all fronts in Brazil as well. The LTE spectrum has already been auctioned as you know; in 2015 we will be cleaning up the spectrum in order to prepare it to being exploited. And in terms of spectrum caps; too soon to say. I mean we -- it's all going to depend on the final picture on the Brazilian market, which is a moving target as we speak. So, no major news that I can share with you on that front, unfortunately.

Okay, fair enough. Many thanks. César Alierta: Well, thank you very much for your presence in this conference call and for your questions, which have been very important. I want to remark again that 2012-2014 has been a key transformation of Telefonica into a telco digital. We are very, very confident that 2015 and 2016 are going to be really growth years. On top of that, I just want to add a comment that I think the chain of regulation in the digital ecosystem is going to change for much better in this year and in the next year for the telcos, and the value chain is going to be what it has to be. And that will be very good news for all of us. Thank you very much.

Telefonica's January to December 2014 Results Conference Call is now over. You may now disconnect your lines. Thank you.