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Executives

Pablo Eguirón – Head-Investor Relations

César Alierta Izuel – Executive Chairman and Chief Executive Officer

José María Álvarez-Pallete López – Chief Operating Officer,

Ángel Vilá Boix – Chief Financial and Corporate Development Officer and member of the Executive Committee

Analysts

Georgios Ierodiaconou – Citigroup

Ivón Leal – BBVA Research

Tim Boddy – Goldman Sachs

Mathieu Robilliard – Exane BNP Paribas

Giovanni Montalti – UBS

Robin Bienenstock – Sanford Bernstein Research

Frederic Boulan – Nomura

Luigi Minerva – HSBC

Jerry A. Dellis – Jefferies International Ltd.

Jonathan Dann – Barclays Capital

Luis Prota – Morgan Stanley

Torsten Achtmann – JPMorgan

Fabián Lares – JB Capital Markets

Justin Funnell – Credit Suisse

Keval Khiroya – Deutsche Bank AG

Paul Marsch – Berenberg Bank

Telefónica S.A. (ASDF.GH) Q4 2012 Earnings Call February 28, 2013 10:00 AM ET

Operator

Ladies and gentlemen, thank you for standing by, and welcome to Telefónica's January-December 2012 Results Conference Call. (Operator Instructions) As a reminder, today’s conference is being recorded. I would now like to turn the call over to Ms. Pablo Eguirón, Head of Investor Relations. Please go ahead, sir.

Pablo Eguirón

Good afternoon, ladies and gentlemen, and welcome to Telefónica’s conference call to discuss January-December 2012 results. I’m 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 not audited.

This presentation may contain announcements that constitute forward-looking statements, which are not guarantees of future performance and involve risk and uncertainties, and 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 our presentation, which you will find in our website. We encourage you to review our publicly available disclosure documents filed with the relevant securities and market regulators. If you don’t have a copy of the relevant press release 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 call.

César Alierta Izuel

Thank you, Pablo. Good afternoon, ladies and gentlemen, and welcome to Telefónica’s 2012 Results Conference Call. Today with me, I have all the members of the Executive Committee during the question-and-answer session, and then we’ll have the opportunity to answer the questions you have.

Let me start with the highlights of 2012. We are in the level of a strong operational transformation that is starting clearly to bear fruits. Latam is delivering quality growth and the enhanced profitability.

In Brazil, as the corner stone, expanding its market leadership. In Europe, 2012 has been a year of strategic change, with the Spain at the forefront. Fusión, it’s a clear commercial success. We already reach margin breakeven in December net. In addition, there has been a strong EBITDA margins and year-on-year growth in operating cash flow in the fourth quarter.

All this reflected in the product sequential growth cost in a month, and margin expansion across the whole group. Although with earnings per share, a free cash flow percent to continuous spending and underlying those, which in 2012 are twice announced dividend per share for 2013.

In addition to this operating progress, we have regained our financial flexibility, with a strong delivery which will continue clearly in 2013. If you turn to the left, we can see that 2012 has been a year in which we have adopted both the systems to transform our business across the globe.

One of the goals of this transformation effort is to lead the company towards a very sustainable top line growth. The creation of Telefónica Digital, the growing contribution of LatAm with more than 50% of our revenues. The innovation of our offers and the increase of data conclusion are clear initiatives to recover our traditional extra growth graph we’ve seen in this industry.

We are also leaving the sector in a new commercial model. Moving away for the mobile base and new subsidies, incentivizing customer addition. To a new one oriented increased customer satisfaction breaking the rooms through new proposals. Simplification has been one of our top priorities. Simplification across the board; for a simple tariff to simplify the entire value system.

These as the lowest (inaudible) to significantly reduce legacy, to increase the focus on productivities or immediate returns in terms of efficiency. In terms of CapEx optimization has been the key. We want to have the work but we have a new approach, we never said in co-investments. And at the same time efficiencies for lower churn are for our strategy.

Lastly, I also want to highlight that in this six months we are regaining our financial flexibility. When this will consequence of all this is that we have recovered operating cash flow organic growth in the fourth quarter

In slide number 4, I would like to show the results that this transformation is already delivering. In the first place, the net organic revenue performance is driven by Telefónica, LatAm and mobile data, accelerating organic growth trends. Some example of this transformation are the standing commercial of mobile broadband and fee broadband, and increase of digital sales.

I would like to highlight our progress to our OIBDA stabilization on the back of a strong execution skills. Cost transformation by eliminating some in Spain and operating core reduction in different areas.

In addition, disciplined CapEx management along this year, has very positively impacted operating cash flow, by reaching almost €13 billion in 2012, and 6.2% year-on-year organic in the fourth quarter reversing previous trends.

Slide number 5, outlines earnings per share continued the provision quarter-on-quarter reaching €0.46 in the fourth quarter in underlying terms. Underlying earnings per share of December was €1.44 and FCFS €1.55, provided strong going forward, but the forces that were stability of our $1.75 cash dividend coming month for 2013.

In terms of financial flexibility the reduction of our net debt figure to €51 billion, as of December is very significant. Reducing leverage 0.3 times in this six months demonstrate Telefónica capacity to leverage, and also quotient at the end of the year was fairly much higher than the last year figure.

Moving to underlying activities, all operation transformation is already began in 2012, some by OIBDA provisions. In absolute terms underlying line OIBDA, grew sequentially from the third quarter in a row at the group and at the regional level. OIBDA margins is 37% in the fourth quarter and expanded growth to 200 basis points quarter-on-quarter.

Revenue highlight that year-on-year margin improved 10 basis points in the fourth quarter, due to the positive trends registered in the previous quarter. Important the first year-on-year improvements in the first quarter of 2009 and despite the lower contribution from tower sales. As such progressing much in recovery and drop OBIDA stabilization year-over-year.

And now let me hand over to our Chief Operating Officer, José María Álvarez-Pallete who will discuss in a more detailed fashion our operating transformation strategy.

José María Álvarez-Pallete López

Thank you, Alierta. Please move to slide 7 where I would provide few examples of our operational transformation. In Spain, the new commercial model is active example of our transformational approach. The process was started in mid-2011 with the launch of new tariffs, which drove both lower ARPU and lower churns.

The second step was to remove mobile subsidies in that position, leading to lower commercial expenses. Simplification and focus on quality followed. To end, with that Quad play offer, Movistar Fusión. Fusión implies lower ARPU at the beginning, but it brings also lower commercial cost, benefits from lower churn and high value share gains.

It does not only work commercially, it also works pretty well in financial terms leading to visible results. This demonstrates how position of high value customers is compatible with a rational commercial model, making in addition the model more sustainable.

Another example of our focus on higher sustainability is in LatAm, reflected in our datacenteric services. In this process, we are leading set of transformation. We have the best starting point, because we have the largest counter base in the region.

Our focus now is in leading the smartphone adoption and thus revolve the business towards data. This growth is more during short term but it is more sustainable as well, as is based in differential quality and higher customer loyalty.

Turing to the next slide let me review the progress made by Telefónica Digital. While plus to capture the value of opportunities in the digital world. First we continue innovating in the development of new communication services, in order to strengthen the telecommunication environment. Let me highlight that the first handset with Firefox OS will be launched in Spain, Brazil, Columbia, and Venezuela during summer 2013.

Second we have launched a number of digital services, leveraging our global approach and focusing financial services, cloud computing machine to machine security, and video communications.

And third now we have a larger relationship with our customers, which places us in a privileged position to maximize our customer base value. These are the certain skills are forced in the transformation of our core business and they are already driving growth.

Going forward we need to continue accelerating innovation, working on building our own platforms, but also reaching agreement with third parties and partnerships to fulfill our target of transforming Telefónica into a leading digital vendor.

Moving to slide number nine. We continue to invest to bring hand sale position to our customers. These efforts have allowed us to grow our customer base by 2% year-on-year to 360 million accesses. We recorded a strong acceleration in the fourth quarter of the year, especially mobile, driven by record smartphone sales and the superior increase in the contract segment. At the same time fixed growth and fixed line improve momentum especially in Spain after the launch of our successful Convergent offer in Fusión.

Lastly, we are doing a selective deployment of whole broadband services in the markets that meet potential demand, regulation and competition. At the end of this year, approximately 26% of our practices are currently ready for commercial (inaudible) growth on services and out of them 9% are already connected.

The slide number 10 dictates the evolution of the Telefónica’s revenue mix. We are increasing the capital in growth opportunities, allowing to offset headwinds in Europe. Latin America continue to be our margin growth engine, and kept position forcing growth acceleration in the fourth quarter to 7.5% year-on-year, purely organic. This performance led Group revenues to show a sequential improvement of 0.8 percentage points. It is worth highlighting the remarkable performance of these revenues in the first year’s occupation.

On the mobile data business, our key strategic area for Telefónica, we are recording the strong results. Fourth quarter non-SMS data revenues continue to deliver a sustained ramp up in the year-on-year organic increase, and already account for 60% of data revenues, on the back of our profitable data monetization strategy. it is worth highlighting the very rapid expansion of smartphone penetration that which 19% at the year-end, six percentage points more than a year ago. This represents a huge potential ahead mainly in Latin America.

Let’s turn to slide 11 to talk about efficiency. I’d like to stress the substantial sequential reduction in OpEx in the fourth quarter consistent with performance posted in the last two quarters. This is the result of efficiency improvements, cost control measures and significant decline in commercial cost, due to a much more rational approach to subsidies across geographies, and in spite of record smartphone sales. As such good progress of profitability along 2012 reflected firm actions on cost efficiency, highlighting among others, overhead simplification of processes, quality of services, outsourcing call center, new data centers, and synergies and integration of operations.

January-December 2012 profitability stood at 54.9% with a very limited year-on-year decline, reflecting higher network and system cost to expand network coverage and capacity, and commercial cost on the back of a very rapid smartphone adoption.

Please turn to slide 12 for an update on our investment profile. In 2012, CapEx in growth areas has significantly increased especially in fiber, up 50% year-on-year, followed by mobile, 3G, and 4G networks and with higher effort executed in our Latin American region. Overall, total investment remains stable despite the increased CapEx in growth. Thanks to the prioritization of deployments and benefiting from improved purchase efficiency and a positive impact from churn reduction.

It is also important to highlight that we had a completed spectrum in the most relevant markets, with the less acquisition in UK demonstrating our commitment to drive future growth in our company of operation at a reasonable price.

As a result in 2012, we have been able to continue to transforming our networks, investing in high speed broadband both fixed and mobile while keeping CapEx to sales ratio of 14.2% flat versus 2011. With all these, I would like to highlight that operating cash flow grew 6.2% organically year-on-year in the fourth quarter.

Main accomplishments reached by global resources are based on our IT devices, global sourcing and networks and operations. In IT, we have achieved a significant savings in both OpEx and CapEx, mainly thanks to the efforts on our simplifications and new data centers.

In devices, Skv is playing a significant role, increasing the value of global negotiations on portfolio optimization. We aim to have in 2013 an even more balanced spend on that. Global sourcing was also central for increased savings while the most visible results come from network savings and assets optimization.

TGR is also contributing in our global position approach to multinationals. Thanks to our scale benefits.

Let me now hand over to our group CFO, Ángel Vilá who will take us through the detailed group and regional results.

Ángel Vilá

Thank you, José María. Please turn now to slide number 14 to start with a detailed review of full year results. Both in 2012 and 2011, we booked several significant exceptional items with fourth quarter numbers being particularly impacted by first, the reduction in the value of Telecom Italia investment. Second, impairment recognized in the value of Telefónica Ireland and third the revaluation in Venezuela.

So to better understand the underlying performance of the company, we are providing a P&L excluding those non-recurrent effects and non-cash impacts. In those terms, revenue reached €62.4 billion in 2012, down 0.7% year-on-year, while OIBDA topped €21.7 million with a margin decline of 1.3 percentage points, a lesser margin decline compared to last year and posting a better performance for the third quarter and above, underlying net income total €6.5 billion with an EPS of €1.44 per share.

I would also like to highlight that the material items such as the asset write-downs are flowing into the P&L. There are other transactions that are enhancing our equity but not flowing through the P&L. For example, the restructuring of the Colombian operations increased shareholders equity by €1.6 billion.

Let me now summarize our operations by region starting with Latin America. In 2012, our selective commercial strategy delivered the results way into revenue growth outpaced accessories growth as we continue to leverage from booming mobile data and remaining opportunities on increased mobile voice usage, while continuing to transfer our fixed operations.

Hence, revenue continued accelerating in Q4 at 7.5% year-on-year organic terms. Once profitability remains strong, we believe that growing year-on-year at 1.6% and OIBDA margin above 40% in the quarter with a lower contribution of our sales compared to one year ago.

Please turn now to slide 16 to review our Brazilian operation. 2012 was a key milestone in our transformation journey towards fixed and mobile integration, while consistently improving the quality of our services and the satisfaction of our customers. In the fourth quarter, commercial activity in the high value segments of the mobile market remains strong, driven by our top service quality. In the fixed business, we’re in the process of changing the dynamics, that’s driven by the innovative services launched this quarter.

As a result, revenues accelerated in Q4, fueled by the outstanding performance in the mobile business, which already represents almost two-thirds of total sales. Our successful strategy resulted in a solid revenue trend outperforming the market and gradually expanding this gap. On the fixed side, conversion offers are limiting erosion in the traditional business.

Turning to slide number 17, let me stress that profitability of our Brazilian operation is consistently improvement. We kept gaining our OIBDA market share quarter-after-quarter, as annual growth progressively improved along the year reaching an outstanding performance in Q4.

OIBDA margin stood at almost 45% and expanded on a yearly and on a sequential basis on the back of efficiencies implemented throughout the year. On top of that, despite maintaining strong CapEx efforts at 15% of sales, integration benefits continued slowing the bottom line with a strong cash flow generation.

In the next slide, we review the operational performance of the rest of the countries in Latin America. In Mexico, we keep focused on the turnaround process that Q4 showed is starting to deliver results with commercial activity progressively improving and financial metrics also posting a gradual recovery.

Mobile service revenues increased by 2.7% year-on-year in Q4 and OIBDA margin continued improving sequentially and reached 31.4%.

Our operation in Venezuela shows an impressive operational performance with increased profitability. And in Columbia, I would like to highlight that the benefits from the integration of the fixed and mobile businesses are starting to be reflected on the results with operating cash flow growing by more than 30% year-on-year in 2012.

Turning now to the southern region, let me highlight the positive results delivered in Peru across all metrics. We have sustained commercial momentum along with healthy sales growth and profitability. In Argentina, the improved commercial activity from Q3 continued this quarter, while revenues and OIBDA margin accelerated. And in Chile we continued posting solid growth and profitability amidst a highly competitive environment.

Let me now review the performance of our operations in Europe. 2012 has been a year of a strategic change for Telefónica Europe, delivering the right balance between customer growth and profitability. Successful commercial moves in key markets led to sustained momentum in contract mobile throughout the year and a solid uptick of smartphones leading penetration to 35% at 8 percentage points year-on-year.

Growth strongly accelerated in Q4, thanks to Movistar Fusión in Spain. The good news is that we have achieve this commercial traction with lower operating costs, down 7% year-on-year, thanks to the transformation initiatives put in place across the footprint for Fusión optimizing the allocation of strategic costs and investments.

So efficiency gains and the continued monetization of year data, resulted in a sequential improvement of profitability and with Q4 margin posting a year-on-year expansion despite continued revenue pressure. No doubt we have laid the foundations for future growth.

Please turn now to slide number 21, to start reviewing the Spanish business. The successful execution of our transformation which started back in September 2011, has already delivered visible results with clear improvement at both OIBDA and operating cash flow level throughout the year.

Telefónica España has been able to manage the continued top line pressure due to tariff repositioning and lower usage. With multiple initiatives of cost cutting across the board. The strong focus on quality, increased customer satisfaction and lower claims and churns. Subsidies removal and portfolio simplification, processes and personnel have driven a sharp OpEx decline.

As a result OIBDA has been stabilized while OIBDA margin year-on-year trend has sequentially improved to 47.2% in the last quarter, 5.5 percentage points above previous years.

On top of that we increased our resources devoted to fiber and at the same time, we’ve reduced overall CapEx, positively impacting cash flow. As a result efficiency gains offset revenue declines in Q4 and operating cash flow increased by almost 8% year-on-year, retuning to growth.

All in all, I would like to stress that this strategy that dramatically changed the business model has set the basis to deep commercial traction in 2013, while delivering sustainable cost savings.

Let me now update you on the progress made by Movistar Fusión, a key step in our transformation journey.

Movistar Fusión is a revolution in the Spanish market place where Convergent is the new name of the game. Our priority was to recover leadership in the market and in just five months we have achieved this goal. Our quadruple play offer leverage on our integrated profile, has made major market to grow and in a more profitable way more than 1.5 million customers have already signed to Movistar Fusión.

As of December, more than 30% Fusión customers have contracted new mobile or fixed broadband services but Fusión is not only helping to get new customers, it is also accelerating the de-cap of high value services such as fiber and mobile broadband. So Fusión has improved our commercial performance as shown by Q4 net adds. The lowest loss in fixed telephony in five years and the highest additions in fixed broadband since the second quarter of 2008.

Looking at the financials, top line dilution of Movistar Fusión is easing with an increasing proportion of up selling our new customers joining in. So we are on track for Fusión revenue given in 2013. On the cost side savings and commercial costs are material on the back of no subsides, lower acquisition and billing costs and lower churn. All in all Movistar Fusión is on the right path to be margin accretive, considering just December net adds of Fusión have already reached margin break-even.

Turing now to slide number 23, Telefónica UK consolidated the success of the commercial stagey started in Q3 ’11, and regain momentum specifically in the contract segment with the contract mix of 3 percentage points year on year reaching 52%. As a result we continued closing the gap in terms of revenue performance versus competitors with market leading profitability. It should also be noted that we continue to gain high value customers with an expansion of more than 3% of the customer base and noticeable reductions in both prepaid and postpaid churn.

The strong commercial direction flows into financials with underlying revenue churns moving towards growth by the last quarter of the year. In parallel we balanced the right equation of growth and profitability. With the first half of the year heavily impacted by the higher commercial activity, while in the second half we saw more comparable trading.

Lastly, let me stress that Telefónica UK has successfully secured two blocks of 10 MHz in the 800 MHz spectrum band for the total investment of £550 million.

To review our operation in Germany please turn to slide 24. Let me highlight our sustained trading momentum in the contract segment that is supported by the continuous improvement of contract churn as we focus on the right balance between growth and value. These together with the successful data monetization strategy led to grow revenues despite MTR cuts in December and today mobile service revenue share outperforming competitors throughout 2012. The higher ARPU of new customers versus churn is the main growth lever. Though revenue shows that had acceleration in Q4 year-on-year due to the increased renewals of the yearly launch integrated by this portfolio within the base.

On the profitability side continued sales growth and scale benefit flow into OIBDA up 5% year-on-year in Q4 leading to OIBDA margin expansion. CapEx grew as we invested in LTE, reaching 15% 4G coverage at the end of 2012, and operating cash flow is up 12% year-on-year in 2012.

Let’s now move to the financial side on slide 25. Net financial debt has been reduced by 5 billion during the year, mainly thanks to our strong cash flow generation jointly with our successful portfolio management execution. As a result, our leverage ratio has improved dramatically to reach 2.358 times OIBDA, minimally above our target leverage commitment.

Importantly, we will continue our deleverage in 2013, in fact backed by our cash flow generation as well as asset continuous rationalization measures to place ourselves comfortably below the 2.35 times net debt to OIBDA. We have delivered almost €7 billion of free cash flow, as a result of better operating performance and working capital continuation as quarters were progressing. Free cash flow per share reached €1.55 comfortably covering our 0.75 cash dividend commitment.

Slide number 26 shows our outstanding and diversified financing activity in 2012 where we raised close to €15 billion, complemented by an additional €4 billion in the first two months of this year. Our financial policy has placed our average debt life at 6.4 years unsteadily reinforce our liquidity position up to €21 billion, covering well in excess of three years maturities. And we have also improved the quality of our liquidity with substantial cash balances and higher percentage of long-term and use committed credit lines. Our access to markets is normalized.

To wrap up, we have kept our effective interest cost at 5.37% decreasing from Q3 and standing at the lower part of our medium term guidance despite the burden of a high cash provision.

Now let me return the presentation to our Executive Chairman and CEO, César Alierta who will outline the guidance and priorities for 2013.

César Alierta Izuel

Thank you, José. Let me now highlight our guidance for this year. 2013 is going to be the year when we recover our growth in D&A while we keep reducing our leverage. We will go back to revenue growth with revenue growth in Europe is stabilizing the first part of the year, and is starting to recover again in the second part.

In Latin America revenue growth we continue strong throughout the year, based on our customer base expansion, increase mobile broadband penetration and LatAm revenue growth. We will also keep limiting the EBITDA margin erosion, delivering benchmark EBITDA margins liberate or a strong de-notification in the case.

Let me address that we will do all that while maintaining our CapEx sales level. Although we will have to keep transforming the company. On the financial guidance, the leverage will continue in 2017. We define our goal of net finance debt lower than €47 billion.

In the slide number 28, we summarize our 2013 priorities. In Europe, as Spain sustained implication of the commercial approach and we continue accelerating this during 2013, which is already driving lower OpEx and CapEx. The commercial momentum seen in UK within our IT proposition will continue and we will do a rational deployment of the 4G network.

In Germany, we continue outperforming in mobile market, while improving the margins. Moving to Latin America, and starting with Brazil we are really working hard on the fixed business scenario, while keeping a full focus on maintaining the mobile business performance, leverage on our top quality proportion.

On the other hand, our original level we are also focused on exploiting the benefits of further efficiency gains, but we will grant the advantages and opportunities that our original footprint provides us. At the same time, Telefónica we continue positive growth leveraging our core assets and building powerful positions through partnerships, on top of that benefit from the Telefónica Global Resources will further continue to Telefónica operating excellence.

To conclude, mainly highlights, first we have reinforced our growth model in 2012, as well as inclusion of transformation via delivering visible results. Second, we have regained financial stability, third we have delivered our 2012 guidance and four, we are able to provide you with a very realistic outlook for 2013. Thank you very much and now all of us, the members of this call are ready to answer your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Georgios Ierodiaconou from Citi. Please go ahead with your question, sir.

Georgios Ierodiaconou – Citigroup

Good afternoon. I have two questions. My first question is on asset portfolio management, you’ve got an extensive portfolio of real estate assets and you started to monetizing them the last couple of years. There are some reports in the Spanish press suggesting that you’re planning 2.5 billion of disposals of towers in Spain and Brazil this year. Is this something that you are considering and should we think of this projects that come on top of what you guided and therefore the 47 billion of net debt position could actually end up being much lower. Any possible could you give us an indication of the marketable you have received on the tower sales last year in terms of the sale price compared to the lease rent that you pay?

And my second question is related to page 11 and the OpEx evolution in the fourth quarter. When I look at the guidance it suggests that you will have so much erosion in 2013. So I was wondering whether this is down to specific reasons how we made the fourth quarter numbers look back to pass on the underlying terms or whether you’re all living yourselves with some room for commercial expenses to go up? Thank you.

César Alierta Izuel

Thank you, this is César Alierta. First, I’d like to make clear, be clear, now we are very realistic at our, net debt by the end of 2015 below €47 million. I have to say two things. We will be basically down, because where we’re going to have it filled cash flow generation. And the second thing, which is very important and it’s unique to Telefónica. All the portfolio management we are going to do in the coming months, which will result in a deleverage, which at the same time, in case, different mentality of our business.

Telefónica is in a position that we have a portfolio management in which we reduced the leverage and other thing we deleverage, we in case have the record, I want to say recorded profitability of our business. And in the coming months, we are going to see. So we see comfortable with I always do that you are going to do to price, when we announced how we do that. It is unique in the industry and it’s because to position Telefónica has.

Now I’ll hand to José María to talk about our strategies.

José María Álvarez-Pallete López

Thanks for your question on towers, I mean we are not aware of any offer of towers neither in Spain or in Brazil or so we are not contemplating that today. But we are open, because we are really open in terms of capital allocation as we have been during 2012. That means that we are reviewing the way we allocate capital, that means that we are considering on a strategic towers divestment, but always with the financial criteria that financially it makes sense in terms of the lease covenants make sense compared to the financial expenses that we are right now, the financial fiscal that we have right now.

So no plans nothing is included from the guidance on that purpose, that mean that we are not concentrating but we will be very opportunistic on a case-by-case basis. I guess these things will make a sense.

And considering the page 11, OpEx evolution most of the efforts we have done in 2012 are sustainable, that doesn't mean we are recurring in terms that we cannot keep the level of improvement of those permanently because we will keep growing our commercial efforts in Latin America, but we do think that the commercial efforts can statement that has been done in Europe, and mainly in Spain are there to stay.

So in terms of the OpEx evolution, we feel that the efforts that we have done by changing the model, effectively changing the model focusing on quality on churn reduction, on simplification on making our billing efforts much more profitable are sustainable. And finally we have guided that our OIBDA margin erosion is going to be more limited in 2013 than it has been in 2012, so you can make your own calculation on where we are pointing at.

Georgios Ierodiaconou – Citigroup

And is it possible you a multiple on the tower sales that you had in 2012?

José María Álvarez-Pallete López

No, we are not disclosing that information, sorry.

Georgios Ierodiaconou – Citigroup

Thank you.

Pablo Eguirón

Thank you. Next question please.

Operator

Our next question comes from the line of Ivón Leal of BBVA. Please go ahead with your question sir.

Ivón Leal – BBVA Research

Yes, good afternoon everybody. Just two questions on our OpEx , I don't know if you could give us a rough idea of, what were the subsidy cost in 2011 and 2012. And the second one is some personnel cost, I think the redundancy program was put back in quarter 2011, so I don't know after which quarter in 2015, we can keep on seeing that 12% decrease in interest on cost that we have seen through 2012?

Eva Castillo Sanz

Thank you. With regards to the redundancy program I think that we have stated that our large scale of institutional structuring, which is particularly 257 million savings in 2012.

Ivón Leal – BBVA Research

And that’s supposed to continue through 2015?

Eva Castillo Sanz

Well, we have as you know it was a three year program, so it’s up to 2013, end of 2013.

Ivón Leal – BBVA Research

Okay.

Eva Castillo Sanz

So it started in 2011. We completed the whole program in 2012, which was expected and we will finalize it in 2013, so we are on track.

Ivón Leal – BBVA Research

Okay. What about the subsidy cost?

Eva Castillo Sanz

Yeah. In terms of savings in the commercial costs, we believe that they were more than 500 million during financial year 2012, so mainly coming from a new subsidy policy.

Ivón Leal – BBVA Research

And could you keep the number of subsidy cost in 2012, just to see how much is left there?

Eva Castillo Sanz

Well, I am afraid that I cannot disclose that information now.

Ivón Leal – BBVA Research

Okay, no problem. Thanks anyway.

Eva Castillo Sanz

Thank you.

Pablo Eguirón

Thank you Ivón. Next question, please.

Operator

Our next question comes from Tim Boddy of Goldman Sachs. Please go ahead with your question, sir.

Tim Boddy – Goldman Sachs

Yes, thanks for taking my question. Just more questions around Fusión really just trying to understand the few of the statements you have made, and then obviously the remarkable progress made on costs. First of all, to what extend does the – what do you mean by revenue breakeven, is that the total revenues on the Fusión products, including new customers ought to be the same as beforehand or is this just on the customers, within your base adopting Fusión. And then I guess kind of around that, I would think that as we go into Q1 and Q2, particularly you get a larger revenue pressure because more of the customers are taking more of the discount, which is lasting for the whole quarter. So should we look to see a softer first half, both in revenue and possibly EBITDA growth trends in Spain before we get to that point of stability?

But the last question I have really it’s just more of a wider strategic question about Spain, where and just really how you see the regulatory roadmap panning out, and is it really in your interest to have Vodafone and Orange build yet another fiber infrastructure, as opposed to allowing them attractive access to your own fiber many thanks.

Eva Castillo Sanz

Thank you very much, yes, we speak that we are a working towards revenue breakeven in 2013. Yes, we talk about the totalized clients so the former on the news so basically the ones who are other together with the one that are ready with us, thus the extension the same way we use it in, what we call breakeven, the margin breakeven we that were particularly having in December.

With regards to your second question, again just to reemphasize what we have stated up to December, we had new services accounting for around 30% of the totality, and that improved during the quarter, so I can’t say that we were quite happy. Yes, to let you know that by the end of December we will account this for 1.1 total clients, and I think that the head of Spain already expressed that we are up to 1.5 million in February, José María?

José María Álvarez-Pallete López

I will take your question on regulation and deployment of fiber or basically network sharing philosophical approach. We’re very open to that, we think it makes your sense to have so many networks in Europe already open to share infrastructure at reasonable price and at reasonable conditions. We have been doing that in Spain namely with Jazztel you know that and his public information so open to conversation because we think that time has come for more rationalize approach to CapEx and mainly to CapEx and networks deployment in Europe.

Tim Boddy – Goldman Sachs

And just on the first half of 2013, should we see increase pressure on revenue and margin from Fusión before it gets better or you think which is now very linear type of improvement we should anticipate?

Eva Castillo Sanz

Well I think that Fusión is one of the components of the total offering in Spain, and there are many moving parts in the churn, if we ask ourselves, what we want with Fusión is clearly we want to achieve the goal of revenue growth, and first thing we need to see that coming from the growth of our customer base. We are in fact feeling that we have mentioned throughout our presentation and the beauty of this offer, this is not yet an offer it’s a concept, which we can focus on specific situations in order to make them even a more important in today the offer.

I have to emphasize it is still early days and we still facing a strong competition but the capabilities of working on particular efficiencies in each of this services and products that we offer, it is quite important so I think that is the answers.

Tim Boddy – Goldman Sachs

Great, thank you for your time.

Pablo Eguirón

Thank you Tim. Next question please.

Operator

Our next question comes from the line of Mathieu Robilliard of Exane BNP Paribas. Please go ahead with your questions sir.

Mathieu Robilliard – Exane BNP Paribas

Good afternoon and thank you very much. I just wanted to look for clarification on the guidance. I think that during the presentation the Chairman said that revenues in Europe were expected to stabilize and maybe grow, I just wanted to make sure I get there and find because that’s the case then basically expecting Spanish revenues to stabilize because of the size between Spain and other European assets.

The second question had to do with Spain, very impressive decrease in line loss, is that due to Fusión, in one way or another, and is that something you expect to continue into 2013, this lower rate of decline, and finally if I may are you expecting further spectrum auctions in Brazil this year? Thank you.

José María Álvarez-Pallete López

Taking your question on the guidance, I mean we start to predict the evolution of the Spanish economy today, but we do foresee a better second half of the year than the first one, and Spain had a significant impact in the overall region. So we will keep you posted but it is true, that the guidance imply a better second half of the year compared to the first half.

Trends that we are seeing in the market namely in Spain that is still challenging. We are improving in the UK, we are doing better in Spain, but still challenging so we will say but it is true that our guidance assumes that the second half of the year is going to be better than the first one.

César Alierta Izuel

[Foreign Language] This is something I will explain to you. The reality of Spain economy at this time much different than previous years, that’s a fact. And these are supporting the relations. So this is the fact and these are the reality. So anyway, it’s in our way and we have been very conservative.

Eva Castillo Sanz

In terms of your question regarding it, the reduction of line loss was due to Fusión we believe so, it is due to Fusión. Fusión has marked several impact into the fixed line business, and I think it is important to highlight that we have obtained a definitely better fixed line growth than in the last five year. We see very top positive fixed broadband net adds which is providing the highest in full year. So we will see positive growth in the fixed broadband market and that’s something that we wanted to highlight in the third quarter.

Santiago Fernández Valbuena

Hi Matthew, this is Santiago, in terms of the possibility of the new Brazilian spectrum license. You know that it is under study of the government. We think it is unlikely that all the necessary status will be completed within this year, the 700 frequency is filled with things that need cleaning up and we would not welcome that spectrum process to take place this year while we are in the middle of the process of deploying NLT for all the sporting events coming out in Brazil. So we have the way of knowing, but certainly we think it is unlikely and that we will not support it being anticipated.

Mathieu Robilliard – Exane BNP Paribas

Thank you very much.

Pablo Eguirón

Thank you. Next question, please.

Operator

Our next question comes from the line of Giovanni Montalti of UBS. Please go ahead with your question, sir.

Giovanni Montalti – UBS

Good afternoon. Just following up on the improvement in terms of fixed line, thanks to Fusión. I was not noticing that we do not see these, let’s say investment of the trend in terms of new full unbundling lines. So I was just wondering if these means that big share of declines, they start taking Fusión are coming from let’s say mobile only households. Thank you.

Eva Castillo Sanz

Well, we believe that there is a market growth in this particular piece of the business and we are prudential with a new land. So there is market growth there and we’re capturing it?

Giovanni Montalti – UBS

Sorry. But sorry you can hear me?

Eva Castillo Sanz

Sure, yes.

Giovanni Montalti – UBS

And is it to correct to say that the big chunk of the clients that are taking Fusión do not have any, let’s say fixed broadband connection, not too many traditional fixed lines, because these things looking at the trends of say unbundling that is still strong actually in this quarter is our approval of last year. So there is no sequential investment in the trend of deals and connections? Thank you.

Eva Castillo Sanz

It’s actually coming from both, but it is showing growth in the market.

Giovanni Montalti – UBS

Okay.

Eva Castillo Sanz

I hope it’s answered.

Giovanni Montalti – UBS

Thanks so much.

Eva Castillo Sanz

Thank you.

Pablo Eguirón

Thank you Giovanni. Next question please.

Operator

Our next question comes from the line of Robin Bienenstock from Sanford Bernstein. Please go ahead with your questions, sir.

Robin Bienenstock – Sanford Bernstein Research

Thanks very much. Two questions if I may, first, I’m just wondering whether a deeper relationship with KTG would make sense for you to expand and whether that would be coherent with the longer-term strategy towards more unified services? And secondly, I’m wondering whether you need to accelerate your wireline investments as well in Brazil, given GDPs access to sell how or whether to make sense to the LTE first and then think more about fiber in Brazil afterwards? Thanks.

Eva Castillo Sanz

Well, thank you Robin. I think that basically, I don’t think we can make any comments on the [KBV] for the situation or that possibility. Also I think that there has been some statement there. In our case what we believe is that every market is particularly different and that in any case as we have shown before, we had kept quite on an open minded strategy for particular agreements.

So if you look at what we are doing in Germany in particular we have a special agreement with Deutsche Telekom on VDSL, which is working well and we are doing fiber with DTAC which in São Paulo as well, shows that we are open for those possibilities. If you ask us about particular German market as you know it’s behaving a lot more rationale than the other European markets, but still knowing the formula of convergence we would be at least be actively responding to some of the potential situations by agreements as we have so far.

Ángel Vilá Boix

This is integral Robin. In terms of fixed-line investment in Brazil, and especially in São Paulo which is where we have an exposure. We don’t lose so much of competitors to our sales. We have a clear problem that’s substituting old revenue sources with new revenue sources, that is VDSL and fiber and that’s what we are doing, whether that will be fasting up to compensate the secular decline in voice revenues remains to be seen. But it has nothing to do with GVT because we have limited overlapping markets with GVT and São Paulo.

Robin Bienenstock – Sanford Bernstein

If I may follow-up my question was really given that GVT now has more access to São Paulo and potentially entering new owner whether you thought that they would be more aggressive in places where they could overlap with you in other words, whether the overlap would increase and therefore you need to build defensively against that?

José María Álvarez-Pallete López

Well, when they get to Europe we will be there.

Robin Bienenstock – Sanford Bernstein Research

Thanks.

Pablo Eguirón

Thank you, Next question please.

Operator

Our next question comes from the line of Frederic Boulan of Nomura. Please go ahead with your question, sir.

Frederic Boulan – Nomura

Hi, if I can come back on Spain for a second. So we’ve had a pretty strong decline contract mobile sales, is it acceptable and what can you do to limit their market share erosion? What makes you confident customers will remain with Movistar when they need new handsets, and there is some pricing Movistar now about 50% of expenses in Vodafone and Orange, including handset costs, so do you think the premium is sustainable?

And secondly, to come back on the revenue question, revenue so dropped 13% this year and 2012, can you discussed what’s the impact of ongoing micro pressure on the business plan and where you can realistically improve this top line in 2013 considering the Fusión the dilution. Thanks a lot.

Eva Castillo Sanz

Thank you very much Fred and basically on the mobile performance in Fusión and in Spain in particular, I think that the market dynamics have changed significantly from the launch of Fusión. So basically we have seen the market increasing, advertising, competitors, we are seeing competitors launching or trying to replicate our offers and very importantly we have seen new handset and mobile offerings. In after three, four months of Fusión what we believe is that it is a successful offering, but we need to there is room for improvement in execution and particularly we need to work harder in our internals to get the offer closer to our customers. We still are in early days for the financing model, which I think is what you were referring particularly. I have to say that the mobile demands we have seen the markets and the customers understanding a lot better, our offering in financing, this was better understood of Europe, but now we are seeing these as a reality, as an opportunity for adding financing model and handset of financing model here.

We believe that still there are market dynamics that are tough. It’s not just macro, it’s the fact that we have seen the market is shrinking overall, it’s the cleaning of lines and so that is also need to be taken into account. In any case, we think the market can be profitable and we are seeing offers in the market, which we believe are not sustainable, so we need to stick to our principle within Fusión with not handset subsidy and moving more and more into financing model.

Pablo Eguirón

Thank you, Frederic. Next question please.

Operator

Our next question comes from the line of Luigi Minerva of HSBC. Please go ahead with your question, sir.

Luigi Minerva – HSBC

Yes, good afternoon. The first question is on fiber in Spain. A couple of weeks ago, there was a statement that you would reach 8 million households by 2015, does this imply that the co-investment agreement with Jazztel will be extended beyond the current 3 million. I mean we just said also with other players if they join?

And the second question is on the cash flow and over the last couple of years, you benefit from a timing difference between reported CapEx and cash CapEx, do you expect similar trend in 2013 and the same amount of 2012 or 2011? Thank you.

Eva Castillo Sanz

Thank you very much. With regard to your question, just to clarify that we have compromised on 3 million numbers in households during 2013 with Jazztel, so just to clarify that. And the agreement is flexible. It’s a flexible investment approach in the coming year, with the goal of reaching 8 million households by the end of 2015.

Ángel Vilá Boix

Hi, Luigi. This is Ángel. With respect to your question on cash flow, as you have seen working capital has followed the traditional seasonal profile that as we have been in the last few years, and as we have indicated in previous conference calls, it has clearly improved in the second half, part of this is due to the different phrasing of accruals sort of payment of CapEx and that really would be…

Luigi Minerva – HSBC

Okay. Thanks.

Operator

Our next question comes from Jerry Dellis of Jefferies. Please go ahead with your question, sir.

Jerry A. Dellis – Jefferies International Ltd.

Okay. Very stable OpEx performance particularly on commercial costs, so I wonder how sustainable you think that is going into 2013, and what the implications of the tactical turnaround plans of the TV businesses at local management discussed on Monday, that might have for the OpEx outlook in Brazil.

Second question is on Spain, on the wireless business, you highlighted in the press release, how while the service revenues benefited from fewer retention upgrades in the fourth quarter. I am just wondering as we sort of model wireless service revenues quarter-by-quarter going forward, was there particularly higher volume of those redeem loyalty points falling in the fourth quarter relative to what we can expect would normally fall into the Q1 and Q2? Thank you.

César Alierta Izuel

Jerry, can you please repeat the first question?

Jerry A. Dellis – Jefferies International Ltd.

Yes, of course. In Brazil, you reported a very stable operating cost performance in the fourth quarter I think, Brazil just 1% on an underlying basis and that was particularly characterized by quite tight control of the commercial cost for selling expenses. So my question is how sustainable, do you think that performance is going into 2013, clearly it is a pretty competitive broadband market, lots of things that are not entirely within your control. And there is also one specific issue in 2013, which I guess is the turnaround trends of the pay-TV business. And I’m wondering what implications that re-launch might have for cost trends going forward? Thank you.

César Alierta Izuel

Yes ladies and gentlemen we started it out of Brazil. Well first of all cost containment has received a greater focus at the end of 2012. We’ll continue to be one of the top priority items into 2013. We are talking subsidies, we’re talking cost control, headquarters and we’re talking deepening all the synergies that were created by the combination of both companies last year. The fact on pay TV that you mentioned is important, and it is one of our focal points of developing, for the revenue line this year that we would think it is going to be a very likely associated with available cost model, and then it is not going to be the case that we invest large amounts in the customers. With that them being in position to allow the amount of revenue that we would expect from them.

So all in all, we think those trends should continue well in to 2013 and TV is focal point that should not be a detrimental to this cost containment effort.

Eva Castillo Sanz

With regard to your question on the mobile service revenue in Spain, yes, the year-over-year trend improved. It mainly due to fewer handset profit and that is specifically to highlight that is not seasonality in this number which by the way where around minus 48% year-over-year [audio gap] if I may Pablo, I think that to answer more completely to Luigi, our commitment internally at Telefónica with regard to fiber past household is 8 million but our commitment with Jazztel in the agreement with Jazztel is 3 million co-investment in 2013, I hope it is clear now.

Pablo Eguirón

Thank you next question please.

Operator

Our next question comes from the line of Jonathan Dann of Barclays. Please go ahead with your question, sir.

Jonathan Dann – Barclays Capital

Hi, the first question is on plans for network sharing in for say, what actually happening in place like Germany, but also plans to perhaps extend the model into Latin America. And then secondly it is back on I guess the quarter-by-quarter domestic margins, I guess my question normally the fourth quarter EBITDA dipped the margin dipped in Móviles and I guess could you get some sort of sense in 2011 the ratio of commercial costs in the fourth quarter by comparison to the first second and third quarter, and I guess what I’m really asking, is what we expect Q1, Q2, Q3 margins to be above –2013 above the level they were in 2012?

José María Álvarez-Pallete López

Tanking you question on level sharing overall globally we are very happy with the situation that we have in places like the UK, with Vodafone, we think it makes sense, we think it creates a huge amount of value, we’ve seen that by investing mostly the same we have a much better network in a much faster deployment effort, I mean a much more efficient way. The same think applies for Germany for example, where we found this transport agreement with Deutsche Telekom, and the same thing applies for the agreement that we have here in, so we are more than willing to do network sharing and to co-invest with people that are really focus on investing on creating network, and investing on the networks.

We think it makes sense and the answer is yes, we are more than willing to extend that model into Latin America and in fact it is already in place in some of our operations namely for example in Argentina, historically and yes, we are exploring ways of collaborating network sharing agreements all around the region. So for us it is a strategy we think it makes sense we think that having the best network is a must, having the best network as a competitor advantage only if it is sustainable, but if not network sharing is the answer.

Eva Castillo Sanz

And regarding your question and on the margins in particular and as you know and the question is this margin – high margin sustainable. We believe these high margins are sustainable because we have our cost reductions that are quite sustainable. We are first of all focusing on quality, as you know 56% of claims reduction just in fourth quarter and we have in fact reduction expected in 2013.

With regard to the portfolio and process simplification (inaudible) on services savings are clearly part of our strategy, and the most important is the new commerce with financing of handsets, and no subsidies, already has that included in the Móvil.

We also believe that Fusión is not a margin dilutive concept or a margin dilutive offer and as we mentioned earlier, is already margin breakeven in December in net adds. So basically no subsidies, lower billing cost, and lower marketing costs we have seen.

You have to remember as well that the last quarter 2012 we have one-offs of around 1% of the EBITDA margin. We strongly believe that the market can be profitable and Fusión is helping us to maintain these markets, but just to reemphasize that this necessary we can take some tactic moves if needed.

With respect to the fourth quarter in particular if you remember fourth quarter 2011 we have a strong marketing campaigns so commercial cost also assigned to that fourth quarter, while in fourth quarter 2012 we have already new model, which is different, completely different approach. So the impact as you pointed is completely different.

Pablo Eguirón

Thank you Jonathan, next question please.

Operator

Next question comes from the line of Luis Prota of Morgan Stanley. Please go ahead with your question sir?

Luis Prota – Morgan Stanley

Yes, thank you. Two questions please. First is on Venezuela and more specifically on margins whether you see any kind of margin pressure coming from the weaker currency? I don’t know whether you could give us a percentage of cost, you haven’t had currency and also in this regards, whether you see any change following the devaluation of the currency in terms of potential for repatriating any cash from that country.

And the second question is on the potential IPO of LatAm where we have seen some growth suggesting that you have canceled these IPO, but to be very honest, I am not sure whether that was unofficial news coming from the company or it was just pretty tactical so you can confirm that it would be helpful? Thank you.

César Alierta Izuel

In terms of Latin America, there is never going to be a deal in Latin America. Essentially beginning, we are regaining our total financial flexibility, and we are going to be well below €47 billion. We have M&A planned and this is not a priority to move to IPO in Latin American operations?

José María Álvarez-Pallete López

In terms of what’s going on Venezuela, Luis two observations, one is that margins continue to be very healthy. We continue to have the leading market operations in the country, the Venezuelan devaluation just happened, and so it is early days still to know what the final impact, is going to be on foreign currency denominated inputs, which are not a lot in the situation is not likely to be very different from what it was until now.

So certainly the translation is going to mean a different number, but they don’t seem the day-to-day businesses are going to be over affected by the devaluation.. So we see no sign of improvement anytime of the currency fluctuation issues and we have nothing to report on that.

Luis Prota – Morgan Stanley

Okay, thanks.

Pablo Eguirón

Thank you, Luis. Next question please.

Operator

Our next question comes from Torsten Achtmann of JPMorgan. Please go ahead with your question, sir.

Torsten Achtmann – JPMorgan

Good afternoon, the first one is on Brazil where you continue to outgrow competition, but overall the market in mobile seems to be slowing down and we don’t know that due to competition or is it due to the economy and going forward do we have now reached a stable base and we expect to grow from that over the next year. And the second question is on your net debt target of below 47 billion. Could you clarify in terms of potential asset base that is included and excluded and how many of them or if – only a few of them would be included, what would that be? Thank you.

César Alierta Izuel

Yeah. Torsten, in terms of mobile growth in Brazil, two observations, one is that growth still is there, we continue to expand both the customer base and the number of clients and at the same time, we continue to upgrade the existing customer base into more expensive and more interesting products. So that I think the growth rate is slowing down a bit, but it is far from how it’s stabilized or how we’re reaching maturity the way we see it. We’re also happy to report that we have been more moderate to successful and upgraded our customers in to the best segments of the market and we’ve seen that processes is at its early days, it’s not at its final days. So you have both the expansion and the migration that still have a lot of time to run.

Ángel Vilá Boix

Torsten, this is Ángel. With respect to deleverage and our target of net debt, we have stabilized the target of below €47 billion, net debt and we are also stating clearly that we aimed to be comfortably below 2.35 times net debt to EBITDA. This is going to be then associated initially organically in a significant way. We expect significant free cash flow generation to be in excess of our dividend commitments that we are confirming to the market, our cash dividend commitment to be paid this year.

Also we are going to be analyzing inorganic transactions that would improve our strategic position in markets where we operate that would create recurrent benefits while at the same time providing debt relief. So we expect to be giving you news in the future on these and soon as these transactions and projects that we are working on eventually materialize.

Pablo Eguirón

Thank you Torsten. Next question please.

Torsten Achtmann – JPMorgan

Thank you.

Operator

Our next question comes from Fabián Lares of JB Capital Markets. Please go ahead with your question, sir.

Fabián Lares – JB Capital Markets

Hi, good afternoon. Two questions; the first one with regards to the current tendency to move towards convergence and as you are implanting the Fusión offer in Spain, I was wondering whether you foresee that this type off offering is going to become prominent through Europe in this case, what would be your strategy in a country like the UK where your primarily mobile?

And second with regards to the (inaudible) divestment that you carried out, when you are focusing so much on customer service and quality of service, I was wondering if the fact that you no longer are on your call centers is not going to be a problem for that strategy? Thanks.

José María Álvarez-Pallete López

Thanks for your question. Regarding convergence, data plus voice, plus TV offers comes in structure in different markets through different ways. For example, you have access to unbundling in some places or you can play with complementary platforms like satellite that we think will also take a role in the global landscape. At the same time remember that accelerating our LTE deployment, bring LTE the first wireless technology that equalizes speed of access, data transmission speeds compared with ADSL or VDSL or even fiber. So replicating voice plus data plus broadband or even plus broadband offers, can be done in different places in different ways.

So we think that yes Convergys in terms of quadruple plays or reintegrated offers are going to be the way to go, the way it is going to be a structure in different markets is going to be different.

The turnaround in Spain, if that is the question it’s not just Fusión. Fusión I think converting offer. Fusión is much more – Fusión is a significant process that was starting by realigning our pricing strategy in Spain, by focusing on quality, significantly improving the quality and therefore reducing churn and reducing the number of monthly claims by more than half. At the same accepting the removal strategy by getting into the financing and putting the bulk of the commercial retention effort on the existing customer base and not on the acquisition, and finally, Fusión which is up more than a tariff.

So the answer is yes, we believe in quadruple play and integrated offers. They were going to be – the structure is different. It depends on market dynamics. And by the way remember that roughly more than 80% of our cash flow is generated or is being generated in countries where we have integrated platforms, so we are very well positioned anyhow.

In terms of the quality how we have been improving quality and the call center role of that we do not feel that as an advantage because we have been divested in that, simplification is the key. We had too many products, we have become too complex company and therefore when you have 1000 but literally thousand of references of product in each company, you put a bargain of interaction at the call centers, at the IT part of your business, which may cause you to complexity transforming to high operational cost. Giving complexity going into simplification is the key. Now we can bill our customers with Fusión with one single line. The product doesn’t deserve any more promotions. So billing is much more easy. The number of calls that we’re having to the call center is been significantly reduced. So we do not see that as a disadvantage at all because we don’t have to because the key is in the transformation of the company to simplicity.

Fabián Lares – JB Capital Markets

Thank you.

Pablo Eguirón

Thank you Fabián. Next question please?

Operator

Our next question comes from the line of Justin Funnell of Credit Suisse. Please go ahead with your question, sir.

Justin Funnell – Credit Suisse

Thank you. Three questions please, just on this mix of people who are just bringing back on line or my firm intuition versus down shifters, I mean it was 30% for Q4 through the quarter. I guess get into January, can you give us a rough fair for what it might have been in January, into the 40s now, and what’s the big picture you will matching guidance. So little bit of mystery where this margin erosion is going to come from if Fusión continues good margins there, results would have been better. Is you guidance simply cautious or should we be (inaudible) margin erosion once the operations and what might those be please?

Eva Castillo Sanz

Okay. With regards with your first part of the question, just to re-emphasis that services and we are talking about working towards revenue break-even in 2015, which is already positive statement. In terms of a margin break-even, we have already got the net ops in December in positive territory. Hope that is clear.

José María Álvarez-Pallete López

Taking your question on the margin guidance, we get back to the issues if the trends that we have been experiencing in 2012 to sustainable or not and we think they are sustainable, because they are structured on the transformation of the operational model. To be more precise for example, TGR has raised more than €1 billion of OpEx and CapEx saving that has been transferred to the businesses. And therefore, this is playing the scale of group that it is really increasing, because now we are increasing the scope and decreasing the responsibility of TGR.

So on top of that, I will be cautious or not, we think that we need to preserve the optionality of growing faster in Latin America if the market is there. And therefore, we are keeping some room of maneuver to accelerate the market in Latin America if the market is there in a profitable way. So we are keeping, we are trying to keep both options, I mean the sustainability of the transformation of the business that we are doing and possibility of accelerating our growth.

Justin Funnell – Credit Suisse

Thank you very much.

Pablo Eguirón

Thank you, Justin. Next question pleas.

Operator

Our next question comes from the line of Keval Khiroya of Deutsche Bank. Please go ahead with your question, sir.

Keval Khiroya – Deutsche Bank AG

Well two questions, one on the UK and one Spain. So in the UK it was less about course of OIBDA so falling 9%. So how far do you think we are from revenue and EBITDA stabilization and what do you need to do to get that. And secondly on Spain, just touching back on your business slightly different way, how much further do you think commercial cost in 2013, if Fusión continues for its continues with it’s success. So could it be similar to €500 million savings in ‘12 or would it be high or lower? Thank you.

Eva Castillo Sanz

Thank you very much. With regards to the UK as you know, we are very happy with what happened in 2012, which is a combination of a very balanced commercial momentum and profitability. Reality is that we are a seeing more irrational market in the UK and it’s been illustrated so far by in contact increasing in inflation. We in particular our operation in the UK, Telefónica UK increased by 3.2% actually from today.

The other thing which was important to highlight is that we got close to 1 million contract base growth in 2012 and very importantly, we continue to work though with growth in revenue and profitability on the back of the strong commercial momentum that we have experienced.

We need to continue and we will continue stabilizing EBITDA while we continue our work in driving efficiencies and obviously growing our client base, that’s the focus in the UK.

With regards to OpEx in Spain, as you know we cannot release cost levels, but just to give you an idea that we believe the model is sustainable and that we have other initiatives in Spain i.e, in source i.e, increase our productivity that our team led by Miguel are working very hard on. So just to give you, that’s the only thing I can say.

Keval Khiroya – Deutsche Bank AG

Okay, thank you.

César Alierta Izue

Thank you Keval. We have time for the one last question, please.

Operator

Our last question comes from the line of Paul Marsch from Berenberg. Please go ahead with your question, sir.

Paul Marsch – Berenberg Bank

Thank you very much. Back to the Fusión again, you’ve talked about 30% of new Fusión connections on new services rather, what about the proposition of new customers, are there been any new customers or what proportion of new customers coming to Fusión. And then if I think about the services, if you’ve signed, say 500,000 new services about 30% of the total 1.5 million. It looks from your churn statistics on broadband and from the mobile adds, they’re about 300,000 of those who have broadband connections or broadband services, and 200,000 were mobile services. Is my calculation about right on that? Thank you.

Eva Castillo Sanz

Well, just to clarify when we speak of 30%, we talk about 30% in new clients, so that is the figure that I can give you specifically on the proportion of clients within the totality of Fusión. And I think I am not sure if I can give the deal, in terms of fixed broadband, we have already obtained 150,000 net adds in the quarter, and we need to emphasis, that is the major important figure we provided in fixed broadband.

Paul Marsch – Berenberg Bank

I think from your churn statistics, I can work out that your gross broadband adds were about 600,000 I think. So and not doubled by the looks of it, so can I assume that the increase there is all driven by Fusión?

Eva Castillo Sanz

I think that the main metrics I can give here that it was an important increase in net ops and because of Fusión. We have to come that well the churn, but the reality is very strong and steady strongest particular fixed broadband.

Paul Marsch – Berenberg Bank

Thanks.

César Alierta Izuel

All right, thank you everybody. This is César Alierta Izue. Years ago we had started the transformation of Telefónica. We think that Telefónica that service to grow revenue, where the Telefónica service to reduce our cost and if we see and we’re going to reduce. My colleagues in Viscom have said during this conference call, the key of Telefónica is transformation and simplicity and you have seen the numbers are flowing into increasing the profitability of our business clearly. 2012 was a clear example. 2015 is going to be much more clear.

And I would only add two comments, the things that are happening in this sectors, which are extremely important and we’re going to reflect it in the profitability of digital people like Telefónica. One which you would think is extremely important is the site we’re operating in and everything that’s going to be bright in the case of the value chain, and that is going to be reflective this year and next year. And one thing, which I think is extremely important for Europe is the new approach by the European Union to start – to have a single digital agenda, which is going to be the digital players. We are going to be in multitude of position for everything this year and the coming year. It is a fact that the two last comments are not reflecting our guidance, but let me tell you the results of these new policies are going to be very, very pretty seasoned to profitability not only of Telefónica, but the real price of the (inaudible). Thank you very much. And on behalf of my colleagues, for your question in Viscom and that was very good. Thank you very much.

Pablo Eguirón

Telefónica’s January-December 2012 results conference call is over. You may now disconnect your line. Thank you.

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