Telefónica - Earnings Call - Q3 2011
November 11, 2011
Transcript
Speaker 4
Good afternoon, ladies and gentlemen. Welcome to Telefónica's conference call to discuss January-September 2001 results. I am María García-Legaz Ponce, 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 an analytics. 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 release and the slides, please contact Telefónica Investor Relations team in Madrid by dialing the following telephone number: +34 91 482 8700. Now, let me turn the call over to our Chief Financial and Corporate Development Officer, Mr. Ángel Vilá Boix, who will be leading this conference call.
Speaker 2
Good afternoon, ladies and gentlemen, and thank you. It is my pleasure to chair this call as the new Chief Financial and Corporate Development Officer. Today, I have with me Julio Linares, Chief Operating Officer, José María Álvarez-Pallete López, Head of the New Telefónica Europe, and Santiago Fernández Valbuena, Head of Telefónica Latin America. Also with me are the heads of the new global units, Telefónica Digital and Telefónica Global Resources, led by Matthew Key and Guillermo Ansaldo, respectively. Miguel Escrig Meliá, our CFO, is also attending this call. During the Q&A session, you will have the opportunity to ask questions directly to any of them. The results released today show that our diversification and scale enable us to deliver strong revenue growth and solid profitability despite ongoing economic pressure and severe regulation in some of our markets.
We are particularly pleased with the very strong commercial activity recorded in the last quarter, leading our customer base to reach the 300 million mark. On the back of outstanding performance of Telefónica Latin America and sustained growth in mobile data, our underlying EBITDA margin was 36%, with limited erosion year on year, as guided at the beginning of the year. In regions, Latin America is already the largest contributor to key financial metrics, and quite soon will represent 50% of our results, driving Telefónica's growth. Within Europe, stabilization of underlying trends in Spain is to be highlighted, while the very good performance in Germany offsets the slowdown in other European countries. I would also like to highlight the new organization announced in September, which will allow us to bolster growth and to further improve efficiency.
Finally, let me stress that we fully confirm our goals for 2011 and our shareholder remuneration commitments. Let me turn to slide number four. Both Q3 2011 and Q3 2010 are quarters impacted by very large extraordinary items that materially affect reported results. Therefore, in order to facilitate year-on-year comparisons, we are showing a P&L in underlying terms. That is, adjusting the distortions derived from such exceptional items, investments in spectrum, and non-cash impact from PPAs. In these underlying figures, we are not adjusting the impact from changes in our consolidation perimeter nor effects. In these terms, revenue rose sharply at 6.8% if we exclude NPR cuts ahead of our peers. Our EBITDA exceeded €16.7 billion, flat year on year, as we decided to ramp up commercial activity to foster future revenue growth. Excluding regulation impacts, our EBITDA would have grown 1% year on year.
Net income was over €5.4 billion, down 10.6% year on year due to the increase in depreciation and amortization and financial expenses. As a proxy to cash flow generation, operating cash flow pre-spectrum topped €11.2 billion, and spectrum outlays were less than half compared to 2010. Diversified portfolio allowed us to deliver solid profitability and healthy cash flow generation for around 45% of consolidated figures in underlying terms, from revenue to operating cash flow. It is important to highlight our lower dependence on Spain, which now is just 28% of our sales and 35% of our EBITDA. By services, we made further progress in enhancing our revenue mix with broadband and services beyond connectivity, already representing over 26% of revenues on the back of their double-digit year-on-year growth. In organic terms, as slide number six shows, revenue grew 0.3% up to September, or 1.6% excluding regulation impacts.
Our EBITDA declined 4.6%, while operating cash flow dropped 8.6% year on year as we increased CapEx in fixed broadband and mobile broadband. These organic results put us on track to fulfill our 2011 guidance. Turning to slide number seven, I would like to highlight that net financial debt has decreased about €1 billion in the quarter, falling slightly below last year's end level. Over €2.5 billion of free cash flow have been generated in the quarter, and free cash flow generated in the nine months to September was €5.7 billion, up 11.6% year on year. Let me also highlight that up to September, cash repatriation from Latin America has reached €1.7 billion. Net financial debt stood at 2.49 times rolling EBITDA at the end of the quarter and at 2.55 times when including commitments, slightly lower than previous quarter after recent repayments.
Effective interest cost of our debt stood at 4.58% excluding FX results. This is 24 basis points lower than in the first nine months of 2010 on a comparable basis, is only 37 basis points higher than in the first half in spite of current unfavorable debt market conditions, and is well below our guidance. Next slide, number eight, showed the limited impact from currency fluctuations year to date, benefiting from Telefónica's active FX management policy and adequate diversification. Our operating cash flow has been adversely impacted from FX movements by just €34 million in the first nine months, with appreciating currencies offsetting losses from those depreciating. On top of that, such movement is compensated by reduction in debt not denominated in euros. In order to protect our solvency, we proactively managed the currency mix of our debt to reduce the FX sensitivity of our leverage ratio.
In this sense, as of September, our debt in non-euro denominated European currencies approached two times our EBITDA in those same currencies, and the debt in Latin currencies, ex Venezuela, was slightly above two times operating cash flow generated in the region. In slide number nine, let me highlight that we have a solid liquidity position that withdraws any pressure for refinancing of 2012 maturities. We can comfortably manage long-term debt maturing next year that amounts to €7.1 billion as first. We have an extension option on €2 billion preferred shares maturing 31st of December. Second, the biggest maturity has indicated loan tranche for €2.4 billion that is also in December, with more than one year to address its refinancing. Third, €1.8 billion equivalent debt matures in Latam, where local funding markets are not under stress.
Fourth, €6.4 billion credit lines maturing beyond 2012 more than cover the sum of banking and Latin debt maturities that year. Fifth, only €1 billion Telefónica debt matures in the first 11 months of next year, and that has been already covered by the €1 billion bond issued in October. We also enjoy a €4.1 billion cash position excluding the cash at Venezuela. It is also worth mentioning that we have been reinforcing our liquidity position by increasing our underwritten committed credit lines by €1.3 billion in the quarter, most of them long-term to a total of €9.2 billion. In any case, we will continue with a prudent early access to credit markets, as we have done during the year, where we have raised close to €11 billion so far.
Let me now review our operating results, starting on slide number 10, where I would like to stress the very strong commercial volumes recorded in the third quarter. Our strategy targeted at increasing the value of our customer base translates into two key data points. Contract mobile customers accounted for roughly 50% of mobile net adds in the first nine months of the year, and mobile broadband penetration has already reached 15%. Figures for our European operations exceed by far the average for Telefónica, while the low data penetration in Latin America is a huge upside opportunity for us. Especially worth mentioning is the rapid expansion of the mobile broadband base, up 76% year on year, being a key growth lever for the future of Telefónica Digital.
Moving to page number 11, mass marketing of smartphones, which capitalizes on the larger availability of handsets with competitive prices and on tier pricing in all of our markets, is bearing fruits, as shown by the sustained ramp-up in mobile data revenue, which boosted an outstanding 20% year-on-year organic growth. Mobile data revenue already accounts for 30% in Latin America and over 40% in Europe. Particularly strong is the booming growth of non-peer-to-peer SMS revenue, which stands now at 52% of total data revenue and limits the cannibalization risk from new applications, which so far continue to have a negligible impact in our geographies. Actually, peer-to-peer SMS revenues continued to increase over 4% year on year up to September. It is also worth highlighting that Latin America is delivering a sharp 32% growth in mobile data sales despite low mobile broadband penetration.
Let me now walk you through the performance by regions, starting with Latin America in slide number 12. The most relevant feature of Q3 in the region is the very strong commercial momentum, with total net adds beating previous historical records, increased volume across all businesses, and even higher activity than in the second quarter. Total net adds rose by 60% versus the third quarter of 2010, while the growth was over 10% quarter on quarter. It's not only the absolute number what makes the quarter exceptional, but the good quality of the customer base expansion with focus on the higher value segments.
In the mobile business, in Q3, mobile broadband growth adds almost tripled the 2010 figure, and contract growth adds were 25% higher, while in the wireline business, we continued delivering double-digit growth in fixed broadband with a significant ramp-up in pay-TV net adds and a successful protection of our traditional lines. All these led to sustained acceleration in total customer growth, setting the basis for enhanced top-line growth in the coming future. Slide number 13 sets the financial results in Latin America. Reported revenue growth was over 18% up to September, on the back of the excellent top-line performance posted by Brazil, which already accounts for 50% of our results in the region. Excluding Mexico, revenue would have risen a sharp 21% year on year.
Underlying year-on-year growth in EBITDA was 11%, again driven by the increased contribution from Brazil, leading to a solid 36.1% EBITDA margin in the first nine months of the year. In organic terms, revenue growth was close to 5%, driven by the very strong performance of data and broadband across businesses, which already account for roughly 25% of fixed and mobile revenues, with outstanding and sustained acceleration in mobile sales. Our EBITDA declined 0.9% year on year in organic terms, with a sharp increase in commercial activity dragging 4.4 percentage points year on year. On top of that, annual comparisons were impacted by the lower contribution of regional projects, non-strategic tower disposals, and by insurance compensations related with the earthquake in Chile a year ago, which altogether dragged 2.6 percentage points in EBITDA growth year on year. Stripping out these effects, our EBITDA growth would have been very strong.
Moving into our Brazilian operations, we are very pleased to note that one year after taking full control of Vivo, we are now even stronger, and we continue to widen our leadership in Brazil. In Q3, we posted record commercial volumes, with mobile net adds up over 70% year on year and 50% quarter on quarter. More importantly, we continue to gain market share in the high-value segments, with close to 37% share in the contract segment and 43% share in the mobile data space. Improving volumes and quality at the same time would not be possible without our differential asset base, particularly in 3G coverage, where we are well ahead of our competitors. It is also worth highlighting the launch of new products like Push to Talk, which has gained lots of traction in just a few months, and the projected launch of fixed wireless services.
On the financial side, revenue and EBITDA performance were stellar in spite of increased commercial costs. Total revenue rose 5.4% up to September, with especially remarkable performance of mobile service revenue, which continued to ramp up quarter on quarter, driven by booming data revenues. On top of that, fixed broadband and pay-TV revenues posted a very strong annual growth, already accounting for 20% of total revenues. Our EBITDA growth stood at 7.8%, with margin expanding year on year to 36.3% despite increased commercial investment, as we are leveraging integration synergies. Regarding the... In early October, I'm pleased to announce the increase of the original guidance provided a year ago for the expected synergies. After increasing in July our target for operating synergies, we are now upgrading the net present value of expected tax and financial synergies to €1.7 billion.
All in all, we expect now to reach synergies with an NPV between €4.4 and €4.8 billion, well over 50% of the total value of the deal and ahead of our initial forecasts. Let me now move to slide 16 and quickly review the performance of our operations in the southern and northern regions in Latin America. In the south, commercial activity in the third quarter was strong across our footprint, with strong revenue growth in Argentina, Chile, Peru, and Colombia, and sustained acceleration in mobile service revenue across markets. In the north, our operations in Venezuela boosted solid revenue and strong margins, while Mexico's performance continues to be weak.
We are already adapting our commercial proposition in Mexico to the drastic cuts in MTRs, having launched new tariff schemes that should contribute to accelerate the capture of mobile market share, as well as to accelerate the cannibalization of fixed traffic in the coming future. Moving now to Europe, I will start with Spain on slide number 17. During the third quarter, we launched new commercial offers across businesses to enhance our competitive position, which are already delivering positive results. The new integrated fixed broadband offer introduced in September has clearly set an inflection point in net additions, while the new mobile offer launched in July has led to lower churn levels. As revenue recorded the same decline as in Q2, 6.6%, while EBITDA deterioration was contained quarter on quarter, delivering a marginally improved EBITDA margin.
Please bear in mind that 2011 results still do not reflect the benefits of the new social agreement signed in Q2, which should lead to additional cost savings. Therefore, the healthy EBITDA margin reported is also a reflection of our rational approach to commercial expenses, and particularly subsidies, in a context where some of our competitors are just focused on volume and are heavily deteriorating their margins. Our strategy has allowed us to continue reporting revenue, EBITDA, and operating cash flow shares well above accesses market share. Turning to slide 18 to cover our Spanish fixed business. In the broadband market, the new commercial offer launched in September has led to a significant ramp-up in gross adds. Therefore, we expect our fixed broadband access base to record a better performance. Our enhanced content proposition, including all the football league, is also being reflected in our strong net add figures.
We are seeing improved commercial trends, which are compatible with a better performance of our connectivity ARPU, which remains stable quarter on quarter. Again, our new offers are very attractive for our customers, but are not value disruptive for us. In terms of revenues, Q3 year-on-year performance continues to be driven by similar factors to those we have seen in recent quarters, though we recorded a slight sequential improvement on the back of the better broadband business already mentioned and improved trends in traditional revenues. Regarding our mobile business in Spain, and despite the adverse economic conditions, I'd like to highlight the very strong growth delivered in mobile data. Mobile broadband accesses rose close to 50% year on year up to September, while data ARPU recorded a solid improvement, driven by the strong performance of connectivity services, which already represents 75% of our data revenues in Spain.
The good data performance is also helping to manage ARPU in the contract segment, which already accounts for 69% of our customers, delivering stable ARPUs quarter on quarter. Our focus on this segment is driven by our policy to maximize the value of our customer base, with significantly higher relative ARPUs and lower churn versus prepaid. Churn should improve as the new tariffs launched led to a 30% drop in churn for those customers who applied for the new rate. Finally, a very strong performance in data should be further empowered by the new data-centric offer recently launched. We are bundling voice, SMS, and data, being the first in the market to launch bundles with unlimited SMS and offering lower prices for those customers who have fixed broadband with us, therefore boosting cross-selling opportunities.
In the UK, in the third quarter, we regained commercial momentum in a challenging environment with no signs of competition relief. Contract mobile net adds increased over three-fold quarter on quarter following the launch of the new smartphone tariff structure at the end of August, while we kept churn low at 1.1%. Smartphone adoption continued growing, reflecting the good acceptance of our renewed tariff portfolio, reaching a 36% penetration in September. It is remarkable that 60% of the customer segment has already contracted one of our triple-ton tier pricing choices, the majority of them in the £6 to £10 price range. This is central to data revenue growth acceleration to close to 10% year on year, driven by the non-peer-to-peer SMS revenue increase of over 38%.
Offline continued to be under pressure, impacted by the slowdown in customer growth, sustained out-of-the-bundle and tariff optimization amid customer confidence weakness, and a significant hit of regulation. Regarding profitability, we posted a solid EBITDA performance up 5.1% year on year, with a 27.3% margin in the first nine months of the year. In Germany, turning to slide 21, we continue posting very good results, gaining value market share, as we leverage a strong commercial momentum on our renewed tariff portfolio, boosting customer satisfaction and the flexibility of my handy handset commercialization model. It is also worth highlighting our partner distribution channels, which are driving the low-end smartphone segment with sub-€100 devices. We are very pleased with the remarkable contract mobile net adds, over 250,000 in the quarter.
This, combined with increased usage of data services, led to an acceleration of mobile service revenue growth from 5% in the first quarter to 9% in the third quarter, excluding the negative impact from MTR cuts. In addition, EBITDA posted a year-on-year organic increase of 2.3%, reaching close to 25% margin in the third quarter, with the benefits of business restructuring and large scale and further efficiencies offsetting increased commercial spend. To close the review of our European operations, let me highlight the sequential operating and financial improvement across the board posted by Telefónica Czech Republic, as shown on slide number 22. Solid commercial performance in focused areas was maintained in the third quarter. In mobile, we outperformed in the contract market after recording positive net adds driven by mobile broadband customers' uptake.
It is also worth highlighting the fixed broadband performance on the back of the BDSL launch, which is helping to protect the existing customer base and to better manage ARPU. As a result, we have increased our fixed broadband market share by 2 points, 2% year on year. In addition, line losses continue to decrease sharply. In the third quarter, Czech revenues showed a sequential improvement, and in Slovakia, we recorded another strong set of results. Profitability remains stable year on year, thanks to cost efficiencies, consolidating the best-in-class margin in the Central and Eastern European region, while operating cash flow generation continues to be very strong, exceeding half a billion euros up to September. Let me now briefly explain the new organization approved in September, which will accelerate the execution of the strategy presented at the investor days.
The creation of Telefónica Digital and Telefónica Global Resources will reinforce our status as a global player and leader in the digital world and will allow us to capture the most of the opportunities afforded by our global scale and industrial alliances. At the same time, we are simplifying and balancing the business geographic mix, leading to the configuration of two large regions, Europe and Latin America. Reporting along this new structure will begin in the first quarter of 2012. The first new global unit is Telefónica Digital, a brand new organization with a mission to create the power for Telefónica to outperform in the digital world and reinforce our profile as a growth company. Telefónica Digital aims to create new propositions and revenue streams and provide value to customers beyond pure telecommunications services.
We are starting from solid foundations, basing in the same cluster both existing assets like Terra, Jajah, Tuenti, Telefónica, and Lycos, and the verticals featuring digital services in key growth areas such as financial services, machine-to-machine, cloud, security, health, media, and advertising. We are now in the process of assessing and prioritizing the opportunities where we can make breakthroughs and add value to Telefónica. Telefónica Digital will exploit our leadership position in markets where we are present, leveraging on our 300 million direct customer relationships, and will also explore over-the-top opportunities in the right markets with the right partners. The second new global unit, Telefónica Global Resources, aims to leverage the full potential of our global scale to maximize business profitability. We have already been making significant progress on global projects, but we aim to accelerate the generation of additional synergies and to maximize the benefits from scale economies.
We are already working on a few flagship projects, focusing our efforts on fewer but with higher value impact opportunities. First, we will increase the level of standardization in global sourcing to further increase the level of aggregation in global purchases, leading to significant additional savings. Second, we will further advance in the global management of IT infrastructures, progressing in transformation and providing enablers to the regions to carry out their business with competitive advantages in terms of cost and service quality. Third, we will apply more radical approaches in the management of our operating assets. For example, we aim to further advance in network sharing, breaching new agreements, and going beyond the traditional site sharing in some cases. We will continue with the sale of non-strategic network elements such as towers in the areas where they do not provide a competitive advantage.
Finally, we will speed up the growth of our M&C business, reaching our natural market share. Clear priorities in the short term to drive growth and profitability and to improve our financial flexibility. In Latin America, Santiago and his team are focusing on maintaining our operating and financial leadership in Brazil, while negotiations with the Colombian government to merge our fixed and mobile businesses are underway. This transaction, when finally approved, should lead to significant synergies and debt reduction. Turnaround in Mexico is another key target for the short term. In Europe, José María and his team are working to balance stronger commercial momentum with free cash flow protection in Spain, while in the UK, the main goal is to enhance our commercial activity.
In Germany, the whole team is focused to keep on gaining high-value market share, while in the Czech Republic, we aim to continue delivering a superior cash generation. Regarding Telefónica Digital and Telefónica Global Resources, both Matthew and Guillermo are working fast to quickly launch their units to foster growth in the digital world and to fully leverage scale benefits. Finally, my first priority in my new role is to improve financial flexibility, exploiting several levers and building on our strong free cash flow generation. We will proactively manage our asset space. We will also increase our focus on profitable and efficient investment, where we will continue to have a very strict working capital and tax management. All of these will allow us to reinforce our growth profile and to deliver on all our commitments, which we reiterate. To sum up, we are building the foundations for future revenue growth.
We are on track to meet 2011 guidance, leveraging our diversification and strong growth in mobile data. We continue to have a sound free cash flow and a strong liquidity position. Our new organization will bolster growth and efficiency gains, enhancing execution. We will pursue an active portfolio management to optimize use of capital and improve financial flexibility. The strong free cash flow generation will allow us to comfortably reiterate our dividend commitments. Thank you very much. Now we are ready to take your questions. The first question comes from Jesús Romero from Maryland. Please go ahead with your question.
Speaker 1
Thank you. The first question was on the P&L account. How concerned are you with all the austerity measures that could be introduced in Spain with a new government starting on November 20, 2011? Do you feel confident on the possibility of maintaining the trend that consensus is looking at for EBITDA in 2012? Ángel, you were saying about the financial flexibility. How important is the credit rating that Telefónica has right now? Do you see the net debt to EBITDA declining materially over the next 12 months? Thank you.
Speaker 0
I'll take your first question on Spain and the overall economic situation. We do not expect any improvement in the short run. Competition is not showing any sign of competitive relief. We are focusing highly on our remodeling of our commercial strategy through the tariffs. You know that we have been launching new tariffs on the contract side. On the mobile side, we have been launching a new fixed broadband proposition as well. Very recently, as of yesterday, we launched a full bunch of new tariffs on the mobile, both voice and data. No major changes. We do not expect any major improvement in the short run, but we keep growing and commercial activity is improving. Our commercial momentum is becoming stronger. We are not scoring or considering any improvement, but we keep going in the same direction, commercially speaking.
Speaker 2
This is Ángel. Jesús, on the leverage ratio, we have reiterated our target for leverage ratio for year-end. The exact level by year-end will depend on the financial market rates, especially on FX, but also on interest rates. It will also depend on further improvement targeted in working capital, also on the pace of commitments on new predetermined programs and the EBITDA evolution in the last quarter. I should say that we don't have just the ambition of generating cash flow to pay the dividend, but to have some leeway for other purposes and also including some debt cancellation. We reiterate the leverage ratio for year-end as we have expressed.
Speaker 3
Next question, please.
Speaker 2
The next question comes from Tim Boddy from Goldman Sachs Group. Please go ahead with your question.
Speaker 1
Yes, thanks. Two questions. First of all, in Latin America, it seems like the cost of growth for a couple of quarters now has been consistently higher than expected. Is this a sort of sustainable trend, or could we see a point perhaps next year where we start seeing EBITDA growth accelerating faster than revenue growth as opposed to, obviously, this year's trend? Secondly, just on what you're saying around disposals, it would just be helpful to understand how broadly you're thinking. Is this, you know, are all of the current assets in scope, including things like the China Unicom stake? And then just to clarify your dividend guidance in relation to that, I know you're saying you want to pay the dividend out of cash flow. Would that be cash flow that includes cash generated from disposals? Thank you.
Speaker 2
Tim, this is Santiago. Let me take your question first about when and if the EBITDA decline that you've seen this quarter might turn around. I think the answer is twofold. First, the market is growing faster than we had originally planned, and we are doing better in general terms than what we originally thought. That has required, especially in a place like Brazil, that we step up our commercial efforts. This is a welcome development in the sense that acceleration in growth is going to mean higher penetration and a better result for those already present at relevant market shares like it generally tends to be our case. On top of that, we have had on this quarter a number of different irregular events that have coincided in the sense that they are non-recurrent or they do not happen every quarter.
That might have blurred the EBITDA picture, which I think that underlying you can say is proceeding at the right pace. Whether we will regain acceleration in EBITDA growth sometime next year will continually depend on what happens with market growth and with the attitude of other competitors who are, of course, also trying to reach the same goals. With regard to the investments, we're working in several projects to maximize the value of non-core assets and to optimize the use of capital. Given the volatility that we are seeing in the markets, we would rather not disclose which are those projects or the timing of those executions. I should say that the final target of these sales is to optimize our portfolio rather than a must to accomplish our remuneration commitments.
Speaker 3
Next question, please.
Speaker 2
The next question comes from Georgios Ialdiaconou from Citibank. Please go ahead with your question.
Speaker 1
Yes, good afternoon. Two questions from my side. The first one is on the EBITDA trends. Obviously, we've seen just over a 1% decline in the margin, and your three-year guidance suggests a small decline, more or less flat margin. I was wondering whether you can give us some color on how you expect the margins to progress beyond 2011, and will the improvement be a result of specific efficiency measures beyond the one you announced in Spain, or whether that's a result of lower commercial investment in Latin America and other parts of the footprint? My second question is on the Spanish business. The regulator reported close to 90,000 mobile number portability deficits for every one of the three months in the summer. I know in the past you are very focused on churn, but it has been rising this year.
My question is, would you be willing to allow churn to increase further, or do you believe at this time the priority is to stabilize the KPIs? Thank you.
Speaker 0
First question, this is Julio Linares. When we provide our guidance for this year, we prioritize top-line growth and efforts to capture growth opportunities in our footprint. Because of that, and taking into account the uncertainties that we saw in the market around macroeconomic competition and consumer behavior, we provide a flexible guidance to be able to manage those uncertainties. Reality has been tougher than we thought, and we thought that it was tougher because of the macroeconomic evolution, because of regulation, and because of competition. Additionally, consumers were very sensible. On the other hand, it was great, the growth in mobile broadband, though it has a significant impact on the core site because of the commercial effort regarding smartphones. Because of that, we have this kind of margin and EBITDA evolution.
Of course, we are using all the levers we had in order to improve this efficiency, particularly now taking into account our new organization for global resources.
Speaker 3
Next question, please.
Speaker 0
No, no. The next question, no. I mean, taking your question about Spain and churn. For us, we focus on churn on the different segments, and as a result, we need to answer on different fronts. First of all, in terms of the new products and services that we have been launching, we are starting to get traction, as I was telling you before, and that's showing significant improvement in net add figures and reducing down churn, namely on the fixed broadband side. You will see some traction and some improvement in the coming months. On the contract side, with these sixth sense studies that we launched a few months ago, starting to show good signals as well. Therefore, on the contract side, the churn on the mobile side is getting better.
The new studies again that we launched yesterday bundling voice and data on the mobile side again will help us in that direction. The pending issue would be on the prepaid side, where we are going to become very tactical. We will see some campaigns. You will see some campaigns from us from here to year-end, but we are not going to be disclosing them now. Churn is always a focus, but we are also very keen on value. Therefore, for us, we are managing churn on the different segments. You will see some improvement on the different products and services, and we'll keep you posted.
Speaker 3
Next question, please.
Speaker 2
The next question comes from Will Milner from Arete. Please go ahead with your question.
Speaker 1
Thank you. I guess the first question is just on shareholder returns. The commitments are to pay shareholder returns at a similar level beyond 2012, so I think €8 billion annually. I guess just in the context of the organic EBITDA trend today, which is over -4% and rising interest costs, are you still confident in your ability to pay that level of shareholder returns beyond 2012? What might cause you to think differently about that?
Speaker 2
Okay. We are reiterating our shareholder remuneration in the light of the strong free cash flow generation that we are seeing. The first nine months, as I said before, we reached €5.7 billion of free cash flow, which is up 11.6% year on year. We explained free cash flow performance for the full year. We do not provide free cash flow targets, so we cannot provide a free cash flow payout for the next year. As a reference, last year, after spectrum, we generated €8.5 billion free cash flow, €1.75 per share within €27.9 billion of that, which would be 78% of the free cash flow generated in a year like 2010. From 2013 onwards, we have not decided what would be the speed of shareholder share between dividends or potential share buybacks. That will be decided later on, taking into account investors' interests and also market conditions.
Speaker 1
Okay, thanks. My second question is about the UK. It looks like minute volumes there are now falling 11% year over year, and you know the relative performance, I guess, has deteriorated. I just wonder if you can talk around the prospects for improving that relative revenue performance in the UK. Thanks.
Speaker 0
Thank you for the question. The answer, obviously, is yes. We keep focusing on volumes rather than on value, but we need to acknowledge that during the last months, the deceleration in service revenues has been mainly based on the reduction in the base growth. Therefore, we are already launching, we have already launched at the end of August a new set of tariffs, namely on the smartphone field on the contract side, where we specifically aim to redress market momentum. In fact, according to the latest figures that we have, we are getting traction on that side, both in prepay and in postpay. Yes, we are focusing on that, and yes, we are taking commercial action.
Speaker 1
Thanks.
Speaker 3
Next question, please.
Speaker 2
The next question comes from Jerry Dellas from Jefferies. Please go ahead with your question.
Speaker 1
I've got two questions, please. The first one is regarding the workforce reduction and the new collective agreement in Spain. As the benefits of that come through in 2012, should we expect to see this invested in heavier commercial investment as we've seen in Brazil and in Mexico in the last quarter, or should this feed through perhaps into a stabler EBITDA trend as you see market conditions at present? The second question is just regarding mobile data. Back in April, you provided some very interesting information about the percentage of customers who were hitting the caps in their tiered data plans. I wonder whether you had any other updated information around that to give us some sense for what proportion of your smartphone customers are now trading up through the tier mix. Thank you.
Speaker 0
I will take the first question on the workforce reduction in Spain. The process is being run and is processing according to a schedule. We will see the benefits of that reduction flowing through the P&L account during 2012 progressively, because it's going to depend on the year of this year, how many people will be registering for that. Secondly, at what time of next year they will be leaving the company, and therefore, they will have a time impact all along the year. The use of those savings, of those efficiencies, is going to be decided all along your basis depending on market and commercial conditions. You should expect those efficiencies to flow all along the year, not at the beginning of the year, but throughout the year 2012. We'll keep you posted on the process. Regarding your second question, I'm trying to answer for the whole Telefónica group.
Right now, we have a penetration of mobile broadband, I mean dongles, smartphones, and tablets altogether of 15% of our total base. With this penetration, we are above expectations, both in accesses and ARPU levels. The ARPU that we are getting with this kind of mobile broadband customers is 1.5 average mobile ARPU, which is in line with the information that we provided in our investors' conference in London. The profit that we have seen in this mobile broadband customer base is better than average profit and is as well in line with the information that we provided at that conference.
Speaker 3
Next question, please.
Speaker 2
The next question comes from Keval Khiroya from Deutsche Bank AG. Please go ahead with your question.
Speaker 1
I'm asking two questions from each, please. First, you reported 0.3% revenue growth in the first nine months. Do you consider this to be within the definition of up to 2% revenue growth? Secondly, you have upgraded your Brazil synergy targets, which is a positive. Can you give some time, some color on the phasing of the incremental synergies? Thank you.
Speaker 3
Can you repeat the second question, please?
Speaker 1
Yeah. You have upgraded your Brazil synergy guidance, which is positive. Can you give us some color on the phasing of the incremental portion of the synergies?
Speaker 0
Regarding your first question, our revenue growth is within our guidance that we provided at the beginning of the year. That means that we will have positive growth up to 2%.
Speaker 1
Okay, thank you.
Speaker 2
Yes. In terms of the synergy extraction process in Brazil, what we can share with you is that what we have upgraded is an operating part of them, now that we have been able to clarify a bit better how the full impact of the reorganization processes is going to be. Unfortunately, we're not in a position to disclose at this very moment exactly how they are going to be falling. Those will be, however, event-driven, meaning by the time we report the results and we file the tax returns or we refinance the earnings, I'm sorry, the synergy new values will be more visible than they are today.
Speaker 1
Okay, that's clear. Thank you.
Speaker 3
Next question, please.
Speaker 2
The next question comes from Torsten Achtmann from JPMorgan Chase & Co. Please go ahead with your question.
Speaker 1
Have a good afternoon. Two questions, please. First, on Latin America, when do you expect to see the benefits of the higher commercial activity come through in terms of revenues? Therefore, when do you think we can see more accelerated revenue growth coming from Latin America? Secondly, on Spain, it seems total voice traffic seems to have declined, and seemed to have accelerated in the quarter compared to last quarter. Can you give me an update on what is happening, and is there any chance this could turn around in the near term? Thank you.
Speaker 2
I would say, this is Santiago. Let me take your question on Latin first. The sequence of events should be we get new ads, especially those related with contract and the contract segment, or with new products like mobile broadband. That eventually translates itself into higher revenue growth. How fast that process happens depends crucially on how well penetrated the market is. It will be very market-specific. It is hard to generalize because I might be off in one market and in some others. Brazil is probably at the tail end of that process. Because Brazil weighs so much, I think it's going to be sooner rather than later that we can see some acceleration in growth. You've seen, for instance, this quarter that we've had very good top-line numbers in Brazil.
That, with the wobbles and the ups and downs that are to be expected from a very competitive environment, probably should be the trend going on. We're also very happy that our leadership in the new products like mobile broadband is so far unfettered. It's going to be very hard to catch up on us because of the investments that we've been able to make in the past. Eventually, those revenue growths should, of course, translate themselves when markets stabilize into EBITDA and then the rest of the account.
Speaker 0
Taking your question about voice traffic evolution in Spain, it's true. It has been the decline accelerated a little bit in the third quarter, and that's why we have reacted with this bundling strategy, both on the wireline and on the wireless. As a result, because we have increased the attractiveness and the amount of minutes that we are bundling, we expect to have a better evolution of our MOU during the next quarters. In fact, after the launching of the sixth sense studies, we have gained some traction. We hope that with the new studies and products that we launched yesterday, we will get some traction as well. Yeah, you're right. During the third quarter, voice traffic declined a little bit more than in the second quarter.
Speaker 2
Thank you.
Speaker 3
Next question, please.
Speaker 2
The next question comes from Matthieu Robillard from BNP Paribas Exane. Please go ahead with your question.
Speaker 1
Good afternoon, and thank you. Two questions, please. First, with regards to organic EBITDA trajectory, which has deteriorated throughout the year for the reasons you've highlighted, Q4 2010 on my numbers is going to be a tougher comparable. I was wondering in which part of the business you were expecting a recovery so that you can offset that tougher recovery comparable and stay within guidance. A second question regarding LT auctions in Brazil. Apparently, the schedule is moving ahead, and I think the Ministry of Telecommunications was talking about the possibility of a new entrant in Brazil mobile through LT auction. Maybe if you can give us a little bit of color in terms of the timing and the kind of different players that you envision in the market. Thank you.
Speaker 0
Regarding your first question, what we expect is that in Spain, we will not see major changes on revenues. On EBITDA performance, we will leverage on our commercial activity that we expect to improve in this fourth quarter thanks to our new commercial proposition launched in the market, as well as the sales of some non-strategic assets. In Latin America, we will see improved trends as we capitalize the strong commercial activity reported in the last quarter, particularly, and the synergies in Brazil that are progressing well.
Speaker 2
Matthieu, in terms of the expected LT auction, the Minister of Telecoms in Brazil has said that at the end of April next year, there should be an auction. That is not a full decision, but it is an indication. It will be in the 2.5 gigahertz space. We are still unsure about what the other conditions about coverage, required investments, or quality would be. Certainly, there will be a few more of those. We have the intention, of course, to participate, and whether or not there are new entrants or new bidders remains to be seen. We certainly think this is a good investment for the future, although, quite frankly, it might come in a bit early relative to the recent auctions and the still ongoing deployment of 3G. Nevertheless, whenever it is auctioned, we will participate.
Speaker 1
Thank you very much.
Speaker 3
Next question, please.
Speaker 2
The question comes from Jonathan Dunn from Barclays Capital. Please go ahead with your question.
Speaker 1
Hi there. It says in the slides that so far you've repatriated €1.7 billion of cash. I think on the second quarter, you might have said you were expecting €3.5 billion. Could you just update us on the amount? Secondly, you've provided net debt in Spain, UK, Czech Republic. I believe Germany has to hold cash currently. Does it matter at the group level where the cash balances sit in terms of liquidity, or are you able to manage refinancing, etc., without much larger dividends from Latin America?
Speaker 2
Okay. This is Ángel Vilá Boix. On repatriations, we have repatriated €1.7 billion from Latin America last year. By the same time, we had repatriated €1.1 billion. What we said at the end of the second quarter conference call, we by then had repatriated €1.4 billion, is that we were expecting to double that figure by year-end.
Speaker 0
This is Miguel regarding your question about our cash. It is mainly located in Latin America. As the cash that we have usually in Spain or in Europe, it's used directly to pay down the credit lines that may be redrawn later on. Anyway, we have a centralized cash management, and although the cash is owned by Latin American companies, a big part of that is lent through our central cash unit management so that it can be used also at the holding level.
Speaker 3
Next question, please.
Speaker 2
The next question comes from Giovanni Montalti from Chevreux. Please go ahead with your question.
Speaker 1
Hello. Good afternoon. Sorry, just coming back to Brazil. Could you confirm if we can expect an improvement in profitability already starting from the next quarter? Thank you.
Speaker 2
I think it's not prudent to say when the acceleration in France is going to happen. I think the direction is quite clear, though. It might be next. It might be the following. Certainly, all the requirements are in place. I would rather not commit right now to an immediate acceleration in France.
Speaker 1
Okay. Can I quickly follow up on the synergies? Is there any synergies already? I mean, are you already making use and executing a portion of those synergies on the physical and financial side? Thanks.
Speaker 2
Most operational synergies are taking place gradually. They are happening after the integration, which is very recent. Some of them are going to be extracted by things like the Midastures, for example, by long distance being split between São Paulo and outside of São Paulo, which previously had to pay taxes because they belonged to different companies, and now they are all within the same company. This is an obvious, very clear tax saving that is because it is now going to be internalized. There are many others like that, not thousands, but there are many others like that that happen as services get sold. The financial and the tax events, as I think I mentioned before, are more event-specific. They will happen more likely next year than this year.
Speaker 1
Thank you.
Speaker 3
Next question, please.
Speaker 2
The next question comes from Luigi Minerva from HSBC. Please go ahead with your question.
Speaker 1
Yes. Good afternoon. Two questions on regulation. The first one in Europe. In a speech, Neil Cruz, at the beginning of October, mentioned two options or two possibilities with regards to incentivizing investments in the next-generation access investments. The first one was a reduction in ULL copper prices. The second one was an inevitable increase in wholesale and retail fiber-based prices in the medium term. I was wondering, what are your views on these two possibilities? On the first one, maybe in the short term, and the second one, whether it's acceptable over the medium term. My second question is on Brazil, and Anatel launched this bundling consultation process in August.
I was wondering if you can give us an update if you have more visibility now on the priorities of Anatel, the type of cost methodology they are thinking of, and whether Telefónica Brazil would be interested in becoming an unbundler outside São Paulo in the new framework. Thanks.
Speaker 0
Regarding your first question, we really believe that to artificially try to reduce prices in the market through wholesale or through unbundling local loop is not the right solution to incentivate investment in the new generation. We really believe that there are other frameworks that will be much better in order to stimulate that kind of new infrastructure development.
Speaker 2
In terms of the unbundling process, in Brazil, it just started. It was announced, but I think by early next year, we should have much more clarity about how and when it is going to be applied. Prices are, to the best of my knowledge, still not known. The Telefónica strategy is still not fully developed, but I can give you some indications. It's that outside of São Paulo, we have very little, if any, interest in using that instrument without knowing the prices. Maybe the pricing is attractive. We have to take a second look at that. Our current strategy is to use the fixed wireless technology to access the market outside of São Paulo, as we have just launched in some of the southern states of Brazil two weeks ago. We don't have still full clarity. It is coming.
The conditions are unknown, and we will, in all likelihood, not participate heavily, at least not heavily on the outside of São Paulo market.
Speaker 1
Okay, thank you.
Speaker 3
Next question, please.
Speaker 2
The next question comes from Yvonne Leal from BBVA. Please go ahead with your question.
Speaker 1
Hello. Good afternoon. A couple of questions in Spain. The first one is, given that you've highlighted in this third quarter the commercial investment in order to gain commercial traction throughout the markets, I was wondering if we should expect part of the savings generated in Spain as a result of restructuring to be reinvested in order to regain market share in 2012, or rather, we should expect that to flow through the BBVA line. The second one is, you've said that your latest commercial offering, fixed broadband in Spain, has given some good results. Actually, if I look at the numbers released by the Spanish telecom regulator, it looks like it's the fixed fiber deployment, which is really granting very good results. I don't know if your initial coverage target has changed at any point in time throughout the latest quarter.
Maybe give us some color on your target coverage for 2012 and how the fiber deployment is working.
Speaker 0
On the first question about how we're going to be treating efficiencies next year, first of all, efficiencies are not just going to come from the voluntary reduction program on our workforce. We have other plans in Spain, namely on the handset reduction in terms of the amounts of handset that we are buying externally, in terms of the catalog that we have. We have already announced that. We'll keep centralizing more of our purchasing effort. Therefore, we expect to generate more savings thanks to the action of Guillermo Ansaldo's team on global resources. You will see more savings than just or more efficiency process running in Spain and all around Europe than just this workforce reduction. For sure, we.
Speaker 4
invest some of those in commercial activity because we see the market. We see value in the market. We are seeing value in the commercial offer, as I was telling you before, on the fixed broadband, both on fiber and in DSL, and for sure on the mobile side, namely in contract. Yes, we intend to be much more efficient next year, but not just with the reduction of the workforce, with all the plans. Yes, we intend to reinvest part of that on the commercial effort because we do see value and growth on that side. On the second question, on the results, we are getting traction on the fiber. We are happy with the fiber deployment and with the speed of deployment. It is not huge. We are going step by step, but it is doing very well.
On the €24.9 offer that we launched at the end of August, beginning of September, the numbers of the evolution of net adds that were negative for a while are starting to show better results. I hope that from here to year end, you will see the traction on that product. Yes, we are optimistic and yes, we are getting better results.
Speaker 2
Could you give us an idea of HomePass already?
Speaker 4
I'm sorry, but we do not disclose that information. In terms of both HomePass, we're getting very significant traction, namely in Barcelona and in Madrid. I would try to give you more color on the next calls. For the time being, we do not disclose that information.
Speaker 2
Okay, that's fine. Thanks very much.
Speaker 1
We have time for one additional question, please.
Speaker 0
The final question comes from Fabian Lares from JB Capital Markets. Please go ahead with your question.
Speaker 3
Hi, good afternoon. Thank you for taking my question. Regarding the evolution of the company debt and the amount that has been paid down by the nine months generated, I was wondering, considering the foreseeable future, we do not see the capacity of the EBITDA rising any stronger. Obviously, with CapEx commitments, your capacity to generate more operational cash flow is probably limited. I was wondering whether as of 2013, you were considering other shareholder remuneration formulas outside the cash and the share buyback. Mainly, I'm thinking of SCRIP issues. The second item would be related to Argentina. I was wondering whether you give us more color related to the possible hyperinflation or the excess inflation that could be happening in that market and whether you're able to contain that at the EBITDA level. Thank you.
Speaker 5
Okay, with respect to the first question, regarding shareholder remuneration after 2012, we have still not decided which would be the split of such. As I said before, we would take into account market conditions and investor preferences when the time arrives. You spoke about the potential SCRIP dividend. What I can say is that we are not contemplating in our agenda SCRIP dividend given the low valuation levels that we have in Telefónica's share price.
Speaker 4
In terms of Argentina, two comments. One is that Argentina is still not a hyperinflationary economy by accounting standards. Inflation is quite high, but official inflation is slightly lower than whatever real recorded or expected inflation. This is not a new trend. This has been going on for a number of years. As a result of that, we've been able to adjust the non-inflation-exposed part of our business quite dramatically, meaning non-regulated or lesser regulated prices have taken a bigger role in our basket of products. Certainly, this fixed that remains with startups remains frozen, a big if there. There has been and there will continue to be an impact on costs because costs are adjusted, if not in full, to inflation, at least very much so. It's a difficult thing to combat it.
On the other hand, the increased tendency of Argentinians to spend on the back of a better economy and high inflation is helping alleviate that trend somewhat. Considering that inflation is not a work in development, we still think that in Argentina, it is a less unfavorable event than it might be in other regions.
Speaker 0
Okay. At this time, no further questions will be taken. Ángel Vilá Boix, I'll turn the call back over to you for closing remarks.
Speaker 5
Thank you very much for your participation. We certainly expect to have provided some useful insights for you. Thank you and good afternoon.