Telefónica's CEO Discusses Q4 2013 Results - Earnings Call Transcript

| About: Telefonica S.A. (TEF)

Telefónica S.A. (NYSE:TEF)

Q4 2013 Results Earnings Conference Call

February 27, 2014 10:00 AM ET

Executives

Pablo Eguirón - Head, Investor Relations

César Alierta - Chairman and CEO

José María - Chief Operating Officer

Ángel Vilá - Chief Financial and Corporate Development Officer

Eva Castillo Sanz - Chairwoman and Chief Executive Officer of Telefónica Europe

Santiago Fernández Valbuena - Chairman and CEO of Telefónica LatAm

Analysts

Luis Prota - Morgan Stanley

Nick Brown - Goldman Sachs

Georgios Ierodiaconou - Citi

Ivón Leal - BBVA

Fabián Lares - JB Capital Markets

Frederic Boulan - Nomura

Mandeep Singh - Redburn Partners

Jerry Dellis - Jefferies

Justin Funnell - Credit Suisse

Operator

Ladies and gentlemen, thank you for standing by and welcome to Telefónica’s January-December 2013 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we’ll conduct a question-and-answer session. (Operator Instructions) As a reminder, today’s conference is being recorded.

I would now like to turn the call over to Mr. Pablo Eguirón, Head of Investor Relations. Please go ahead, sir.

Pablo Eguirón

Good morning, ladies and gentlemen. And welcome to Telefónica’s conference call to discuss January-December 2013 results. I’m Pablo Eguirón, Head of Investor Relations.

And before proceeding, let me mention that this document contains financial information that has been prepared under International Financial Reporting Standards. This financial information is unaudited.

This presentation may contain announcements that constitute forward-looking statements, which are not guarantees of future performance and involve risks and uncertainties, and that certain results may differ materially from those in the forward-looking statements as a result of various factors. We invite you to read the complete disclaimer included in the first page of the presentation, which you will find in our website.

We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators. If you don’t have a copy of the relevant press releases and the slides, please contact Telefónica’s Investor Relations team in Madrid by dialing the following telephone number, 3(491)-482-8700.

Now, let me turn the call over our Chairman and CEO, Mr. César Alierta, who will be leading this conference call.

César Alierta

Thank you, Pablo. Good morning everybody. And welcome to Telefónica 2013 results conference call. Today with me are the members of the executive committee. So during the Q&A session, you will have the opportunity to address to them any questions you may have.

Before starting, let me briefly explain to you the agenda for this conference call. I will first explain the significant changes in our operating model that the Broad of Telefónica approved yesterday. These changes are not due to change in organization but to go one big step further in the transformation process starting in 2011 to become a total digital telco, a digital telco that will be a [sector] reference on revenue growth and efficiency. José María will provide some details on this new operating level, and then Ángel will explain 2013 results in detail.

Please turn to slide number 3, to start talking our digital opportunity. We have talked many times about the digital. The revolution is more and more evident each day. In fact revolution is making us more confident than ever about the big growth opportunities the digital revolution is putting in front of us.

Traffic: both fix and mobile is (inaudible) networks. However, fiber and LTE deployment, the massive adoption of connectivity for every device, the growth of video and the new digital services making significant the growth in (inaudible) because the volume of mobile traffic expected for the next five years is going to increase about 11 times the one in 2013.

[We show] in the slide number 4, telcos are the privileged of being at the core of this digital revolution but there are new capacities needed to optimize or response to this big opportunity. Our mission is very clear and has not change. We need to become and we are becoming a digital telco combining our traditional assets with digital SKUs to allow our customers to have access and enjoy all what technology can offer them to enrich their lives. For this, revolution is key. We have differential assets, our network and systems, our distribution capabilities and our customer knowledge are [non-replicable].

At the same time, we need to perform our commercial prepositions to capture the growth of new digital services.

The slide number five shows transformation journey toward the digital telco and the next step to be taken. We started our transformation in September 2011 with the creation of Telefónica Digital and Telefónica Global Resources, taking strategic decisions in advance as well as key initiatives in operating transformation.

All these actions are translated into new sustained improvement of our results, a significant increase of our financial flexibility and (inaudible) asset portfolio, all of them improving our position in the sector.

Telefónica Digital, Telefónica LatAm and Telefónica Europe have been key actors of this transformation. But now we clearly need to move one step ahead, we need to accelerate our revenue and we need to accelerate our efficiency gains even further.

Moving to slide number six, you can see some details about what this acceleration means. We had very clear what are the four pillars to reach our target. First, we need to generate more revenues and we are putting absolute focus on data traffic monetization, digital services, customer insight, first [time] to market and new commercial channels. These (inaudible) are basic skill to succeed.

Second, we will become a more technological company, accelerating network modernization by deploying more fiber and LTE, applying an IT transformation and increasing digitalization. Third, we need to be even more efficient and improve our execution. We are announcing today a new synergy program based on OpEx and CapEx savings that the new organizations will allow us to capture. And fourth, we want to lead the sector to new fully positioning, chasing the (inaudible).

It is very clear an evident that the new digital ecosystem requires clearly the (inaudible) of our dated or duplicated revolutions. The implementation of a level playing field forward, which will drive the increased investment and capacity in innovation, will make the chain or the digital ecosystem equivalent to each one real contribution. And I want to underline this, to make digital ecosystem equivalent to each one real contribution which is not the case now, thus privacy and security are fundamental for the big end use of the new digital service.

I’m very sure that the new single digital market in European Union which I think will implemented in the very near future, will make all of this a reality. And thus all this will accelerate our sustainability growth and (inaudible) all this value creation.

On slide number 7, you can see a new group organization. Basically, we are creating a new Chief Commercial and Digital Officer to revisit our services to the core of the business, a new area to force the broad base on (inaudible) customers’ insight which will clearly accelerate our revenue growth. In addition, we are reinforcing the empowerment of the Chief Global Resources Officer to execute the needed changes in network transformation to maximize a efficiency generation. We are also increasing the level of reporting of key market, crossing distances within strategic and operational decisions and increase visibility of key business.

And now, José María will give you further details on this operational transformation.

José María

Thank you César. Turning to slide eight, we want to highlight the multiple advances that Telefónica Digital carried out in the last two years towards a differential commercial proposition. Thus, when we established our digital unit, we were pioneers moving forward to the digital world, aiming at transforming the company into a digital telecom with digital at the core of our operating businesses. Since then, all steps taken were focused on developing platforms where our core capabilities are differential, finding opportunities alongside innovation chain and partnering with category leaders to provide end to end solutions. All in all, final target of enabling Telefónica to move one step ahead was clearly met as revenue growth trend showed accelerating to 19.4% organic year-on-year in Q4.

Please move to slide 9 where you can see how we believe the new Chief Commercial Digital Officer will ensure further data monetization. The Chief Commercial Digital Officer is the man responsible for revenue growth, with the role to implement a single data monetization strategy for the core group, leveraging in market intelligence, channels and so on, who will define the valuable position for the customers, acting also as a single product factory for the group, including old and new digital products. All-in-all we have clear focus on the market increasing commercial attraction of our differential proposition for Telefónica’s customers.

Moving to global resources on slide 10, main accomplishments reached by global resources are based around network development, IT simplification and value creation through global procurement. In terms of network transformation and to meet increasing customer demand for data traffic, both fixed and mobile, we have devoted around 68% of our investment to growth and transformation including fiber, LTE, 3G capacity and transport.

As a result, we have launched LTE services in many markets and we have [passed] 5 million homes with fiber in our two main markets, Spain and Brazil, 1.7 times more than a year ago. It is also to highlight the efficient deployment of ultra-broadband with network sharing agreements signed in markets such as UK, Germany, Brazil, Spain and Columbia among others.

In IT, we focus our efforts around simplification and consolidation. As such, we have closed six datacenters, reduced physical servers like 12%, and increased mix of servers utilized by 7 percentage point year-on-year. In addition, we have turned off more than 1,100 applications in 2013.

In slide 11, we show our main priorities in terms of 2014 CapEx deployment. First of all to highlight that our main focus in 2014 is to increase the capacity of our networks to support data traffic growth and to build network differentiation by developing high-speed infrastructure.

In this sense, in 2014, 70% of our organic CapEx will be devoted to growth and transformation, 7 percentage points versus last year, with investments in fiber growing 65% year-on-year. This CapEx will translate into approximately two times more robust in a year to $10 million at the end of 2014.

In Spain, population coverage, we’ll spend around 40% and in Sao Paulo we had coverage of approximate 25% of homes in urban areas. On LTE, the number of LTE-enabled base stations will be two times higher year-on-year. And Europe this we will translate into a population coverage about 50%. Lastly, mobile base station connected with ultra-broadband will increase more than 5 percentage points year-on-year.

At the same time in IT, we will continue with the simplification process faster in transformation and generating synergies by reducing physical servers, increasing virtualized servers, closing more datacenters and cancelling applications.

On slide 12, you have detailed savings we aim to capture with this new operating model. We will [extract] significant savings from network operation in an integrated manner by adopting global standards and designs for key networks element and by transforming processes analysis.

On IT, by implementing share services and global initiatives, we will be able to reduce cost and accelerate transformation in a digital Telco by concentrating production in regional datacenters, increasing virtualization levels, while we continue decommissioning applications on legacy.

Finally, in support areas, we will also be able to work in a more efficient way by concentrating activities to achieve higher efficiencies and improve execution. On commercial, we will optimize channel mix, developing best online platforms and building sustainable hardware models.

By applying these initiatives, we will be able to generate up to $1.5 billion OpEx and CapEx growth savings annually in the coming years. Additional to the ones, we should capture in Germany and excluding Venezuela.

Let me now hand the call over to our Ángel.

Ángel Vilá

Thank you, José María. Let me start with highlights of 2013 on slide 13. It has been a year of significant progress in our strategic transformation towards digital Telco. First, we are back to organic revenue growth in 2013. In the October-December period, we hosted the third consecutive quarter of year-on-year growth in organic terms, increasing contribution from LatAm, mobile data; digital services and the very rapid expansion of value customer base explain this performance.

Second, results up to December reflected business stabilization, with annual organic OIBDA flat versus last year driven by the growth posted in the fourth quarter, consolidating the improved trend already seen in Q3.

Growth transformation and efficiency gains are translating into stable OIBDA margin versus 2012, both in the year and in the quarter. Higher CapEx allocated to growth areas has though impacted operating cash flow.

Third, free cash flow generation was sound despite FX headwinds, allowing both free cash flow per share and earnings per share to comfortably exceed our dividend per share.

Fourth, we improved further our financial flexibility as reflected in the ongoing debt reduction in 2013 to €45 billion or 2.36 times OIBDA. Including post-closing events, net debt would stand at €42 million or 2.31 times.

Fifth, we’re successfully advancing our portfolio rationalization focusing on our core markets to increase return on capital employed. And finally we continue delivering on our commitments meeting our 2014 guidance.

Let me now summarize key financials on slide 14. In organic terms, revenue growth reached 1.8% in October-December and 0.7% in the full year to €57.1 billion. OIBDA amounted to €19.1 billion stable versus 2012 figure reflecting the 1.2% growth posted in the fourth quarter. Profitability stood at 33.4% and net income at €4.6 billion, 17% above last year figure despite the reduction in the value of Telecom Italia investment of €245 million in the year, of which €155 million was in the quarter.

2013 reported figures especially in the second half are negatively impacted by ForEx and by changes in the parameter of consolidation. Let me stress at the first factor FX drag 7.5 percentage points to 2013 year-on-year revolution of revenues on OIBDA, but at the same time reduced CapEx, interest, tax and minorities payments in euros. As a result, about two-thirds of FX absolute impact on OIBDA is mitigated at free cash flow level.

I would like to highlight the outstanding debt reduction of €16 million or close to 30% in the last 18 months in June 2012, allowing us to regain financial flexibility and significantly improve leverage metrics despite the mentioned impact of FX.

On the next slide, free cash flow generation remained very robust in 2013 and reached almost €5.4 billion or €6.9 billion before spectrum payments, [absorbing] most of the already mentioned adverse FX impact. Free cash flow per share up to December was €1.19 comfortably covering the dividend of €0.75 for 2013 and resulting in a free cash flow payout of 63%. EPS also improved on a sequential basis and reached €0.31 in the period October-December and €1.01 in January to December.

Please turn to slide 16 for a quick review of our 2013 targets. In terms of operating guidance, all targets have been met even CapEx was just slightly above 2012 level due to the accelerated investments in Venezuela devoted improvement for quality and at the same to improve the balance between real assets and cash position in the country.

As I already mentioned net debt end of the year will be low the €47 billion mark that we set as a maximum target for the year 2013. Also we have met a 2.35 times leverage ratio target. These objectives were reached through both organic and inorganic means.

Moving to slide 17, we continue to capture high value customers reaching more than $89 million contract accesses at the end of the year, after growing 9% year-on-year increasing the weight of our total [waste] to 35% and representing 83% of total net adds in Q4. Smartphone growth is the main driver of this contract base, reaching a penetration of 27%. At the same time we are proactively (inaudible) with the broadband update with 1.5 million connections at year-end and a penetration equal to 34%.

Looking into slide number 18, in 2013 we have improved year-on-year performance across the board versus 2012. It is also highlighted what would be the groups evolution excluding the negative contribution of Spain, as the Spain is starting its recovery, this will flow and this flows into speeding up growth at group level. As such our diversification is key for this performance.

Turning to slide 19. Our organic revenue growth ramped up progressively along the year to 0.7% up to December or 2.3% if we exclude the negative impact of regulation.

Let me highlights that Latin America representing 51% of group sales, grew at double-digit rate in Q4, while our push in mobile data has delivered a 22% annual organic growth in non-SMS data revenues also in the last quarter. Organic OIBDA year-on-year variation recorded the second sequential quarter of improvement, growing for the first times since the fourth quarter of 2012. This was driven by revenue flow on further efficiencies on savings despite intensified efforts on smartphone acquisition and higher network costs related to a more data centric business. As a result year-on-year margin erosion was limited to 0.2 percentage points, 1.1 percentage points lower than the erosion in 2012 and the absolute margin exceeded the level of 33%.

Please turn now to slide 20, for an update in our investment profile. In 2013, we have been increasing our CapEx devoted to growth and have continued transforming our networks investing in high speed broadband both fixed in mobile and building differential networks.

As a result fiber CapEx increased 50% and investments related to TV increased 38%. On the mobile side, 3G and 4G spend was 38% higher. (Inaudible) advanced on data transport and invested 16% more than a year ago. It was also remarkable the effort done in according spectrum in the last four years to secure valuable spectrum in main markets of operations.

So the bulk of spectrum investments is already behind us. In 2013 spectrum acquisition amounted to €1.2 billion more than two times year-on-year.

Please turn now to slide number 21 to review our operations in Latin America. 2013 we lead spectrum transformation towards data. We captured the most valuable customers, reaching $7 million new customers in the contact segment and accelerating smartphone adoptions with 22% of penetration over mobile accesses. Moreover, the process of transforming the fixed business is already delivering visible results, with net adds improving across services in both Q4 and fiscal year 13. This outstanding commercial activity is flowing into financials, with revenue accelerating to surpass once again the 10% mark this quarter and OIBDA growing by 6.1% despite more intense commercial activity.

Moving to the next slide. Let me highlight how revenue growth drivers are ramping up. Mobile service revenues improved their year-on-year performance in 2013, growing at almost 12% rate fueled by booming data. It is particularly noteworthy the non-SMS data revenue trend gradually accelerating to increase more than 40% year-on-year in the fourth quarter and already contributing with more than 6 percentage points to mobile service revenue growth this year.

At the same time, fixed business revenue trend improved significantly; stable year-on-year in 2013, but growing 3% year-on-year in Q4. In Q4 on the back of increased contribution of fixed broadband and new services growing by almost 13% in the quarter.

In slide number 23, we review Telefonica in Brazil. In 2013, we have reinforced our market position. Posting record high adds in the contract segment with 5 million new customers after capturing almost 60% of the market growth. This is the result of a superior competitive positioning leverage on the best quality proposition served by our best-in-class network and brand.

In the fixed business, commercial turnaround started in the second half of 2013 and is reflected in improved commercial dynamics with all fixed services posting positive net adds. Going forward we keep committed to the transformation process and will increase our fiber coverage in 2014 to reach 2.5 million households further reinforcing our commercial proposition.

This commercial progression is delivering solid revenue and OIBDA performance as we show in slide number 24. Revenue trend around the year reflected a solid mobile service revenue performance with growth above 5% every quarter, therefore faster than the market. These market share gains will become more evident with the stabilization of the fixed business which is the fourth quarter shows a significant improvement in revenue trends.

Furthermore, OIBDA margin erosion this year is mainly driven by the strong commercial activity devoted to capture quality growth. In Q4 sequential margin improvement illustrates the cost control efforts and the moderation of commercial expense increase.

Moving to next slide. We review the performance of other operations in LatAm. Telefónica Peru keeps accelerated revenues to more than 10% in Q4 and we have been the first player launching 4G services to further differentiate ourselves in terms of quality and innovation. In Argentina we reached best ever mobile network this year that are gradually fueling into revenue performance. Meanwhile OIBDA margin erosion is gradually easing surpassing 30% margin again this quarter. In Chile it’s worth mentioning that new plans launched this year have bolstered commercial performance resulting in better revenue trend in both businesses. 4G services are available from Q4 ‘13 reinforcing our market position.

In slide number 26. Columbia is accelerating its revenue share gains on the back of the renewed regulatory framework implemented in 2013 that is fostering mobile service revenue growth to 10% in Q4. 4G services were already launched in December. In Mexico despite ups and downs in financial performance there are positive advances already delivered in Q4 results.

Commercial activity awakened in the quarter reaching record net adds of 1.2 million accesses. Also voice traffic is starting to show clear sense of recovery growing by 38% year-on-year in Q4. At the same time we keep committed to a more efficient use of our resources by signing wholesale agreements.

Finally in Venezuela strong growth in volumes is a main driver of revenue growth. Thus voice and data traffic grew above 20% and 30% year-on-year respectively, driving revenue growth above 45% year-on-year.

Moving to slide number 27. Let me revenue the performance of Telefónica Europe where we have looked for new market equilibrium with focus on profitability. From a trading standpoint, strong momentum continued in the quarter and proved our right positioning in a very dynamic and competitive environment on the back of differential data centric propositions across the footprint.

And with this backdrop ongoing efficiency measures such as deep simplification and lower commercial costs led to an organic OIBDA margin expansion of 1.3 percentage points in 2013 to 37%.

Lastly, I would like to remark the reshaping of the European asset portfolio, which improves our position in to benefit from the rate opportunity ahead of us.

In Spain, on slide number 28, commercial activity has improved during the quarter and especially in the most valuable segments, which seems to suggest an incipient change in consumption dynamics. We are building a superior quality proposition to exploit this change in market dynamics, capturing in the quarter record net adds in pay TV and fiber to reach 600,000 fiber connected customers as of December, doubling last year’s figure.

In addition, successful Christmas campaign drove a better contract mobile performance, despite increased subsidies from competitors in the quarter. Movistar Fusión traction continued, surpassing 2.9 million customers. It is worth to highlight that 64% of quarterly gross adds were new or upselling customers.

As a result, in a consumer segment more than 52% fixed broadband accesses and 45% contract mobile were within Fusión. So we could think that the bulk of the back book impact is already behind us.

Finally, we increased our quality leadership through the rapid deployment of LTE, based on our differential backhaul. And the acceleration of fiber rollout in Q4 took over 20% of total homes. In 2014, we will be double FTTH coverage to 7.1 million homes.

In terms of financials, Telefónica España showed a gradual stabilization across metrics throughout 2013. Revenue trend consolidated the recovery path, the recovery path started in the first quarter of 2013, driven by improved performance or fixed revenue and handset revenue and despite the negative drag from regulation.

Please note that commercial momentum improvement was progressive along the quarter, so its full benefits are yet to be seen in the coming months.

The high level of profitability is remarkable. OIBDA margin reached 49% in 2013, 3.3 percentage points above 2012 figure organically, reflecting the large benefits of the simplification and transformation process. Moreover, ongoing efforts in sourcing simplification of CRM and the transformation of the distribution channel and some of initiatives we are executing to continue capturing further efficiencies. Lastly, operating customer generation remained very solid at €4.8 billion in 2013 with an operating cash flow margin of 37%.

In slide 30, Telefónica UK maintained momentum in the fourth quarter underpinned by the contract segment, up 8% year-on-year after recording a market leading contract churn in the year.

Refresh continued gaining traction and reached over 1 million transactions. The rapid rollout of LTE translated into an outdoor coverage of 38% at the end of the year with the target of reaching more than 60% by 2014 year end. The data monetization opportunity ahead of us is based on increasing data consumption with LTE customers having two times average usage versus a 3G customer.

Total sales in the quarter increased 0.3% year-on-year, driving to a flat performance in the full year while profitability continued to expand in the quarter to 25.4%; as a result, operating cash flow excluding spectrum increased by an outstanding 19% year-on-year.

To review our operation in Germany, please turn to slide 31. Let me highlight that 2013 has been a transition year in the German market with competition focused on smartphone tariffs and devices. In this regard, the share of LTE enabled handsets sold over total grew to 80% in the quarter and LTE coverage was above 40% at the end of the year.

This operational performance has led to continued strong growth of non-SMS data revenues, up 22% year-on-year in 2013, already representing 70% of data revenue in the fourth quarter. Nevertheless, revenue pressure remained through the year, mainly on tariff renewals and further decline of SMS revenues. Profitability remained at similar levels versus 2012, ending the year at 25.1%, if we exclude asset sales in the fourth quarter.

Moving to slide number 32, a strong free cash flow generation combined with an active portfolio management on productive refinancing has allowed us to continue to improve our financial flexibility, in spite of FX headwinds. Reported net debt as of December 31st, stood at €45.4 billion or 2.36 times OIBDA, achieving our targets. Including the divestment of Telefónica Czech Republic already closed in January and Telefónica Ireland, net debt would stand at €42.3 billion or 2.31 times OIBDA.

On slide 33, I would like to emphasize the ample liquidity cushion above €22 billion which allows us to comfortably address the maturities going forward. The average debt life is above seven years.

We have executed a diversified financing activity across products and geographies, reaching above €12 billion of well diversified long-term financing. Effective interest rate cost stays at 5.34% in the lower half of our long-term guidance.

Let me now highlight our guidance for this year. 2014 is going to be the year when we will increase investments to build network differentiation for fostering future revenue growth allowing simultaneously to stimulate free cash flow generation and improve strategic market positioning and return in core markets.

Our outlook for the year is on organic basis and excludes Venezuela. So regarding operating targets, we expect revenues to be in the positive territory on the back of continuing healthy growth in Latam and improved trends in Europe.

OIBDA margin will trend towards stabilization with an erosion around one percentage point to allow for commercial flexibility if needed. CapEx to sales ratio will be increasing to 15.5% to 16% as we will be accelerating network, IT and digital capabilities transformation.

On the financial guidance, we will continue to deleverage in 2014 with the final goal of net financial debt lower than €43 million at year-end. Let me also remark that we reiterate our commitment with a leverage ratio of 2.35 times.

We will do out of this maintaining our dividend for 2014 at €0.75 per share and further improving our financial flexibility. This year the dividend will be payable in two tranches, €0.35 voluntary scrip dividend in the fourth quarter of 2014 and €0.40 in cash in the second quarter of 2015. Scrip dividend will let us reinvest into business growth while CapEx growth crystallizes in higher fee cash flow.

To finish, please move to slide 35 to sum up the final conclusions. We are moving one step further in our evolution to the digital era. We are transforming ourselves to maximize returns from the digital opportunity. We will be stronger technologically and we will have differential infrastructure that has non-replicable advantages on the base.

In 2013 we have done significant advances. We recovered revenue organic growth, posted stable organic OIBDA and margin along with strong free cash flow generation. We have regained further financial flexibility increasing the focus in core markets and improved Group’s growth potential through in-market consolidation.

In 2014 we will accelerate growth, building stronger networks to improve our market positioning in key market coupled with increasing efficiency levels. Financial discipline and superior shareholder remuneration are our core principles and we keep having capacity to further exploit our portfolio.

Thank you very much. And now we are ready to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Our first question comes from the line of Luis Prota from Morgan Stanley. Please go ahead.

Luis Prota - Morgan Stanley

Yes, hello. Couple of questions please, one is on your strategy in content in Spain you have been in the press recently been mentioned having been buying rights to broadcast motorbikes and Formula 1 this year. I wonder if you could summarize a little bit what you’ve done, what’s the cost and how you are going to get returns off of that?

And secondly in terms of Venezuela on the currency we’ve seen already a couple of companies moving to translate their accounts using this kind of parallel exchange rate closer to 12, (inaudible) dollar, I don’t know whether you have been looking to it or are you going to be sticking to the official exchange rate of 6.3 or planning to at some point move towards this other exchange rate? Thank you.

Eva Castillo Sanz

Thank you, Luis. And let me just give you a bit of overview of the Pay TV and also a content it will mean for us from now on. First of all as you know, since last year, we have managed to turnaround, to make a turnaround on our trading in Pay TV and specifically that’s not happened during the fourth quarter. And as you know that it is from the back of our strategy of reported this impact of the Christmas campaign and/or enhanced offer of Movistar Mini included in the Fusión fiber bundle.

So even on the numbers we have recorded ads of 63,000. We have increased -- we have 73,000 in TV Mini not accounted in our customer base within (inaudible). So our strategy to invest in fiber to upsale into TV needed to have a [fair lake] in which as we have been talking in the last few quarters, we wanted to add properly content.

So as we see Movistar TV as a key level for growth going forward, this needs to be based on differential content offer. So we have already reached agreements to offer for example the [Rolanga Rose] in exclusivity, we bought the rights until 2017. We have only Formula 1 together with ArtBridge Media and Telefonica will leave live broadcast Formula 1 World Championship.

Additionally we will offer a non-inclusive channel will be called Movistar F1, Formula 1 to follow all Grand Prix with exclusive reports, high definition six cameras and without advertising cut. We will also have a joint running of the Moto GP rights with Telefónica and Telefonica will live a broadcast a 19 Grand Prix of Moto GP Championship in high definition and again with six simultaneous cameras. And Telefónica will offer a live broadcast of nine of their races and 10 of their Grand Prix recorder.

This is very exciting because also we have the right for the Football League to broadcast the following football matches and I can give you all the details, if I have time. I can give it to you later, but all of the major U.S. champion leagues.

I think that again we need to differentiate our fads in this offering and the content on experience based on an improvement platform, it is very clear. The investment is based on our case (inaudible) and its life increase versus the previous year, which is well included in the business case for increase of investment during 2014, hope this is clear.

Luis Prota - Morgan Stanley

Yes. Can you disclose the cost of these contents recently acquired?

Eva Castillo Sanz

Luis, I’m afraid I cannot do it at the moment, but maybe during this year, there will be more opportunities.

Luis Prota - Morgan Stanley

Okay. Thank you.

Eva Castillo Sanz

Thank you.

Ángel Vilá

Hi Luis, this is Ángel. Regarding Venezuela in January this year some new local resolution came into force affecting the FX settlements of certain fixed stores and items, which will be settled at the FX rate that results from the allocation conducted through a system called [Sicad]. Although the rules and procedures applicable to this system have yet to be enacted, we consider that the settlements of the foreign currency will be conducted through Sicad and rates at which Sicad has been allocated dollars so far the year at above 11 -- per U.S. dollar.

So what we plan to do is in the first quarter to move from the official 6.3 rate to something closer to 11.4 and we would do this recording in the first quarter. So that among other impacts, the cash position that we have at year-end and the official exchange rate that is equivalent to €2.7 billion would be used in something close to around €1.2 billion, so we conducted from €2.7 billion to around €1.5 billion.

Luis Prota - Morgan Stanley

That’s great. Thank you.

Pablo Eguirón

Thank you, Luis. Next question please?

Operator

Our next question comes from the line of Nick Brown from Goldman Sachs. Please go ahead.

Nick Brown - Goldman Sachs

Thanks. Two questions please. Firstly in Spain you said the bulk of the back that re-pricing is coming to an end, but when should we expect this to translate into stabilization of revenue and earnings? And secondly, it looks like you’ve retained the financial flexibility to consider other inorganic options after Germany. Do you still see the opportunity to participate in consolidation in any of the other core market?

Eva Castillo Sanz

I think I understood, you’re talking about revenue stabilization on the outlook that we have. Let me say first that the revenues have stabilized in Spain quarter-over-quarter showing a similar trend excluding MTR. And underlying revenues actually are slightly improving as a result of three major things.

We have higher accretive contribution of Fusión which is more visible in the fourth quarter, although we have had a much tougher market conditions in the fourth quarter which have impacted our performance in the non-convergent mobile space as you have seen in our net ads figures. The third factor is we have seen a much better trading in December due to a very strong Christmas campaign which actually are not yet reflected in our revenues.

Let me say going forward that we expect top-line trend to improve on the back of Fusión saving and also leverage on fiber and premium content services as I explained earlier to Luis in order to capture growth from an improving environment. Frankly what we are seeing is that in general the macro sentiment in Spain is slightly better. We are seeing also our customer starting to look at much higher end and more added-value product, that’s obviously starting to reap out of a more intense commercial activity. We feel good investing in fiber and in an LTE and frankly as in the next quarter you’ll start seeing that getting into the revenues more clearly in our numbers. I hope I answered correctly.

César Alierta

This César Alierta, I mean -- are seeing the situation in Spain is improving not only in our sector, but in other sectors and we see clearly an improving trend in consumption and we see very improving trend in investment by local companies and in this we are totally sure that every quarter is going to better than the preceding one. And this will be reflected clearly in Telefónica España revenues.

In regards to consolidation of the market, let me tell that Telefónica is a more global Telco operator in the world. What I mean by that that we are the most diversified Telco in the world. We are very well in Latin America and we are very well in Europe. We are where we want to be. And we want to increase our revenues in the market where we are. We have the portfolio we want to have. And the whole focus will be in the markets where we are.

For us I see the consolidation has been already done. We have top alliances with our partners in Telecom Italia and China Unicom that I think are very important in digital ecosystem in which all together we will reach more than 1 billion customers and this is going to be important. So for us the consolidation is done.

Nick Brown - Goldman Sachs

Thank you.

Pablo Eguirón

Thank you. Next question please.

Operator

Our next question comes from the line of Georgios Ierodiaconou from Citi. Please go ahead.

Georgios Ierodiaconou - Citi

Yes hello. My first question will be around the leverage target of €43 billion for 2014, obviously there could be some potential for M&A and I will be interested to hear your thoughts around -- and maybe in some of the other regions you are present. So I am just trying to understand from what I realized part of that reduction will be done for hybrids. Is it possible to give us an idea of the level of hybrid you expect how about the end of the year or if possible give us an indication, what would be the maximum amount the rating agencies will give you credit, if you would issue more hybrid bonds?

And my second question is around there higher CapEx and the strong demand you anticipate across your market. You gave a lot of detail around the different technologies that the investment will go towards. Is it possible to give us a bit of color around, the regional breakdown whether when we see 3G and 4G investments whether that’s in Latin America, when we see fiber, which markets will see most of this investment? Thanks.

Ángel Vilá

Hi Georgios, this is Angel. On your first question, when we set our financial policies. We have a firm determination to ensure compatibility of three interactive targets. First one being to maintain the other equity investments in the operation, fixed rate growth and future free cash flow generation, the second one to continue reinforcing our financial flexibility and having full commitment to our target date and rating levels, and third to have an effective shareholder remuneration.

These, as we have seen in 2013, will be achieved by different means, the first one clearly being organic, organic free cash flow generation and the second one through continued portfolio management and we continue to focus on corporations. And looking at the options that are available to us to optimize the value position in the markets where we are present and optimize the return on capital employed. And third so organic customers generation and organically continue managing our portfolio. And third we are taking financial flexibility it measures us the voluntary script partial, voluntary script dividends that we have announced to-date and some high reductions.

The limit depends a little bit on agencies, but you could consider the figure of $7 billionish as the limit that we would have of high risk as of now we have issued around €2.5 million and you could expect some issuance during 2014 to the tune of €1.5-€2 billionish depending on market conditions.

Georgios Ierodiaconou - Citi

Okay.

César Alierta

Taking your question on CapEx and geographical split. We try to provide some color on slide 16, but basically it is going to be in both regions, remember that for example now we have significant fibre to the whole effort in Spain and in Brazil that we are going to be basically increasing significantly the number of our base station when connected with broadband capacity to the backhaul of more than 65% and this is going to happen in both sides of the Atlantic TV, effort is going to be significant in Spain and Brazil and in other countries of Latin America.

So it would be an idea as with probably some (inaudible) in case of Latin America. CapEx of our sales ratio is going to be higher in Latin America then in Europe, but basically the effort is going to be transitionally done through technology and in both sides of the Atlantic. So I would say that it’s not going to be more bias to one place to do, okay.

Georgios Ierodiaconou - Citi

Thanks.

Pablo Eguirón

Thank you, (inaudible). Next question please.

Operator

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

Ivón Leal - BBVA

Hi, there. Good morning everybody. My two questions, the first one is in Spain is what do you need to do to stop mobile line losses in the Spain in 2014 and if you foresee that you can stabilize that this year? And the second one is in Brazil, I’ve noticed that there’s a slight improvement on revenue trends on the fixed line in Brazil. So I don’t know if you could show there is a bit what’s going on the, whether it’s driven by fibre or not, and see what’s maybe the outlook for 2014?

Eva Castillo Sanz

Thank you Ivon, let me take your first question. I think it’s quite clear that our contract mix adds and net portability have improved in the quarter, in the fourth quarter. On the back of that successful increase (inaudible) that I mentioned earlier, which has focused again quite a lot on our TV take up and despite quite a strong competition in the market, we feel high subsidies.

So, we are very confident that our mobile trading will continue to improve in following quarters and the main reasons let me explain are the following. First of all, we have been speaking about Spain being a market about conversions and we have a strong position there. We have completed a very competitive portfolio on mobile only and we have addressed all customer needs pretty much. As you know we enhanced our portfolio, our contract portfolio and what we aim is to give more value for the same price. So, we included the 4G, TV and (inaudible), I mean it’s in the packages. I think that overall we have seen a slow or less active a January, but pretty good February.

Santiago Fernández Valbuena

Hi Ivon. This is Santiago on fixed line Brazil, we are happy that the trends that we thought would be in place by now are in place and that is shown in the presentation that we just provided. Looking out this is a slow moving animal, but we now think that we have a squared this circle so to speak by putting together the deployment the sales, the provisioning and the customer service that this required to make mobile and specially fibre a viable product. Fibre still has the best to show, which means that the improvement you’ve seen in the quarter is not entirely related to broadband, I am sorry is related to but not yet to fibre. And so I would say that in terms of fibre the best is still to come. So we are very positive on the outlook for mobile and specially fibre going forward.

Ivón Leal - BBVA

Thank you.

Pablo Eguirón

Thank Ivón. Next question please.

Operator

Our next question comes from the line of Fabián Lares from JB Capital Markets. Please go ahead.

Fabián Lares - JB Capital Markets

Hi good morning. Thank you for taking my questions. The first one in regards to mobile again. I appreciate your answer to Ivón with regards to the improvement in update, but I just want to clarify whether you foresee that despite the high competitive trend, do you believe that as 4G becomes a greater reality with the digital dividend you will have an opportunity to start overtaking rivals as you’re still on net portability loser to other players and you’re still having a difficult time to be a net gainer in lines on a monthly basis at least with the data that we have which is true only up to November. But if you could give some color as to where you think this growth may come from, additional and whether we can more or less begin to think that as of 2015 once Spain kicks into upgraded recovery whether you can foresee that revenue trends would be better?

And the second question with regard to Brazil. I know that you do not favor speaking much about things related to M&A but I was wondering whether you had any additional news flow with regards to the team Brazil situation and the ruling by (inaudible) that you have to make a decision between either introducing a new shareholder in vivo or exit Telecom Italia? Thanks.

Eva Castillo Sanz

Well thank you very much. And going back to the mobile only in Spain. And additional to what I answered to Ivón let’s talk about now 4G becoming a reality it is now for us a 40% coverage of population as now with the 1,800 spectrum as soon as we get the 800 and it is a reality. We believe this is just a matter of deploying and adding into our customer base. There is two components one having the spectrum and two having the handsets. We’ve seen by experience in the other markets as we have in Europe, the UK and Germany that the combination of both the spectrum and 4G handsets make an important business case overall that we will seen in Spain. So we are very optimistic we know that we are deploying faster than some of our competitors in this country which is great but still it’s not under the 800 spectrum which we are expecting as soon as it is released by the authorities.

We have as you know a target of 50% coverage for 2014 and we are confident to get a more 4G contest for customers that that’s been very clearly improving in the UK and Germany. As you know and we probably will explain during the next quarter the [LED] experience is very good, increases consumption of data and obviously helps us to improve our ARPU and uplift. So I think overall, it’s a positive message to give for the next quarter, not just in Spain, but also for the rest of the markets.

Unidentified Company Representative

Hello Fabián, regarding the question on potential M&A in Brazil, the first thing that we want to say is that in Brazil we’ll have a very strong position. We continue leading the market, especially in the higher value mobile segments, where we are having spectacular share of net adds, months-after-months.

It’s a very attractive market, it also competitive and would require such potential investments going forward. In this context, you know that we are firm believers in the benefits of end market consolidation, which can be a win-win for operators and citizens alike and we have demonstrated this belief quite a few times in the last year, but for this type of transactions to materialize, it is necessary that lots and lots of stars align themselves and this is definitely difficult and complex. And again, we have the strongest position in Brazil as we stand.

Unidentified Company Representative

Thank you, Fabián. Next question please.

Operator

Our next question comes from the line of Frederic Boulan from Nomura. Please go ahead.

Frederic Boulan - Nomura

Hey, good morning gentlemen. Thanks for taking the question. A couple of points, first of all, one on the UK, if you could clarify the impact of the refresh accounting on your EBITDA in the fourth quarter? And secondly more broadly if you could talk about a little bit of your free cash flow expectation for 2014 versus what you produce this year considering your increasing margin investments, increasing CapEx, so where do you see group free cash flow going ex-Venezuela and after a minority dividend, so you have to pay dividend? And I would like to come back on your decision to offer (inaudible) so what is kind of rational for maintaining dividend, headline dividend at 0.75 if it’s a significant portion of that, in the end, we ended up being in shares. So if you could come back on the rational little bit that would be much appreciated. Thank you?

Eva Castillo Sanz

Well, Frederic, I think you know all the data that we have provided on the trading activity, continues to be in a very successful proposition to the market and we have continued gaining traction a quarter-over-quarter, reaching as you know the $1.1 million transactions since launch. I think that one of the most positive effects is that 56% of contract more commercial activity has been done under refresh while in previous quarter was 53% and 20% in the second quarter.

We have an impact on revenues as you know which is positive on operating revenues, which comes from higher handset revenues. And I think that when you look at OIBDA and the impact on OIBDA as I mentioned last quarter, we cannot disclose that impact because it is commercially sensitive.

In any case just to highlight the acceleration of hardware revenue flows into the bottom line, as mentioned earlier and although there are many moving parts for the calculation of the impact in OIBDA, quarter-by-quarter it becomes more difficult to give a precise figure. Again we are mentioning and stressing that going forward the affect of refresh will be unwinded along 2014, which we mean that will go back to a normalized rate and I think I would recommend and remind that will start comparing on a like-for-like basis. And just to remind you, it will be compared to when we started in April 2013.

Unidentified Company Representative

And with regards to dividend, I want to tell you that we are fully, fully committed to our dividend Ángel was saying, was mentioning before, the scrip dividend in November is voluntary, and I want to underline voluntary. So, shareholders want to take it in cash, will take in cash, shareholder want to take in shares, will take in shares. And the reason to be voluntary in scrip, because there are many, many shareholders that because of fiscal reasons, they prefer to taking shares than in cash. So it’s a decision (inaudible) but the decision is voluntary and the one that one want in cash, we have in cash and the one that having shares, we’re having in shares.

Unidentified Company Representative

Thank you, Frederic.

Frederic Boulan - Nomura

Thank you very much.

Ángel Vilá

There was a question about 2014 free cash flow. We do not give Frederic as you know guidance of free cash flow, but I can give you some directional indications that you can take in making your calculations.

Regarding OIBDA, well this can be derived from the guidance that we’re giving. And one would have to take into account that (inaudible) is the consolidated, Ireland at some point will be also the consolidated, E-plus at some point will be consolidated in our guidance. So, those stage of parameter factors need to be included in the estimate. CapEx will be intensified, but we have also given some indication in the guidance. The remaining lines to get from operating cash flow to free cash flow would be spectrum. Here as I said in the presentation the big spectrum outlays are behind us. And you can estimate something which is lower than this year.

With respect to working capital, we are aiming to something which is in line with the positive impact that we had in this year. And with respect to financial expenses, the trend of (inaudible) and the trend of the cost of (inaudible) would imply that there would be a decline in the upper single-digit or low double-digits. With respect to cash tax, we have concluded 2013 with 28.8%; you should see going back to our guidance of 25%, 26%. And there will be less dividends to minorities because we don’t have any more, for instance the Czech Republic minorities. This is all the color I can give you, I guess should be enough.

Frederic Boulan - Nomura

Okay. Thank you very much.

Unidentified Company Representative

Thank you, Frederic. Next question please.

Operator

Our next question comes from the line of Singh Mandeep from Redburn Partners. Please go ahead.

Mandeep Singh - Redburn Partners

Hi guys, it’s Mandeep from Redburn. Thank you for taking the question. I had a couple of questions please. First of all, on your new organizational structure and the operating model, you’ve talked 1.5 billion of gross cost savings. Can I ask if there will be any restructuring charges associated with achieving those cost savings? That’s the first question. The second question is really on your deleveraging profile with post-closing events you’ve said 42.3 billion of net debt and you’re guiding to be below 43 for the end of ‘14. Given that in absolute terms given FX and (inaudible) and so on, the absolute EBITDA number for ‘14 will be lower than ‘13. Is this the end of deleveraging for the company and is net debt to EBITDA actually going to be rising from here? Thank you.

Ángel Vilá

With regard to your first question in terms of the figure that we have provided of synergy, this is a gross figure synergy and therefore it is not included in any potential restructuring. A significant part of that figure is about network both OpEx and CapEx 55% to 65%, IT is around 10% to 15% and the rest is about support and commercial.

We don’t have right now details of what could be the impact on that in terms of restructuring cost; we are working on a process by process basis. We will give you more color during the quarters to come, but let me [stress] that this is our gross figure rather than a net because we think that we should include into the calculation that run rate of that at the end of the year. But again, we will be providing more color to a specific project around the next quarter, so you can see the different place in which we are working.

Let me stress the fact that a significant part of that number is going to come from more [efficiency] in doing more things together in terms of common platforms, common purchasing of technology and a more coordinated deployment of technology and those do not include or do not imply workforce reduction.

Mandeep Singh - Redburn Partners

Thank you.

Ángel Vilá

With respect to leverage and deleverage profile, we are setting the target of €43 million net debt by the end of 2014 and we remain fully committed to our target of leverage 2.45 which is a mid-term target that we are maintaining across the last few years and our rating levels.

As I was saying before, we plan to at least be organic free cash flow generation and I start giving color on how to look at it in a previous response. And then you can also factor what could be the impact of current already announced non-organic situation. So for instance, if you look at the figure of at year-end of €45.4 million, the closing of Czech Republic and Ireland (inaudible) in January could be use this led by €3.1 million.

The moment when we need to pay for 40 plus we will increase that €4.1 million, but we have said that we really show mandatory compatible that for modelling purposes you can, but we already said when we owns a deal this could be around €1.2 million, €1.3 million.

So all-in-all closing the current transactions including acquisition of E-Plus does not increase, but slightly decreases our debt level. And since all the OIBDA from E-Plus would come along the ratio we’d improve.

On the other hand, we have had or we would account for the Venezuela devaluation, as I said before, we’ll increase our net debt €1.2 billion and then we will continue managing our portfolio. And you can make some simulations on the per share (inaudible) that is of €0.55 in due to be paid in November and you can get to how we construct our targets.

Mandeep Singh - Redburn Partners

Thank you very much Ángel.

Ángel Vilá

Thank you. Next question please.

Operator

Our next question comes from the line of Jerry Dellis from Jefferies. Please go ahead.

Jerry Dellis - Jefferies

Yes. Good morning. Thank you for taking my question. I had two questions, page 30, on the pace cost reduction in Space going into 2014, there is a two big drivers of cost reduction last year were commercial and personnel, looks at a pace of commercial cost reductions at a 21% for the fourth quarter down from 31% full year, also remind for (inaudible) collective wage agreement rent at the end of 2013, so I wonder were this give any guidance on the sort of direction of commercial costs in Spain in 2014. And where we stand in respect of potential wage inflation and perhaps what will be the pension payment going into 2014?

And then second question, if you could just on (inaudible) on yesterday’s press result they would call the highlighted other week macro backdrop, and you said mobile service revenues declined sort of 2% from 7% in recent quarters, was that sort of Q4 trend rather and then I will add to that, the rights of commercial cost which kept the margin up in Brazil last quarter, should we see that is sustainable through the rest of the year? Thank you.

Eva Castillo Sanz

Related to the first question I think that you know that we have already improving track record of delivering more than $2.4 billion of OpEx times CapEx reductions since 2011 and we have as you mentioned earlier significant cost savings in 2013 from various areas included commercial savings and redundancy plan, and part of the simplification and sourcing activity.

So with that already in our journey, let me tell you what we expect going forward. Having that we will continue managing our cost based in a very efficient way and we have room for [maneuver] still there. We obviously will have some situation quarter-over-quarter depending on market database and that’s related to your question on the commercial cost.

But looking at what happened in the last quarter of the 2013; we applied the increase in commercial cost just very tactically driven by the market situations. When we took apart few efficiency in 2014 it is basically based on three pillars. First of all, on the content simplifications and we have done quite a lot during the last two years, we have been working to reduce claims, we have to time down to less 0.5 million from 2 million claims in 2012 and you know that. These reductions of activity have allowed us also to ensure call center.

At the moment, we have 70% traffic already ensure and we brought them back to stay in an almost 85% of the positions already transferred to their regions, without cost increase and improving the quality which was one of our aims. This year, our objective is to simplify and also optimize this structure.

Secondly, we are looking for optimization of the distribution model, with the aim to increase profitability and exclusive stores and improved customer experience. We are reducing more than 20% our point of sales from 2,100 to 1,300 to 1,600 on hosting the online channel which is as you know have been all across Europe.

In Spain specifically moving from a 7% online activity in 2013 to more than 20% in 2014, we will have further savings from in sourcing activities and we will continue working over $1,300 million of outsourced cost to achieve similar savings as we obtained in 2013.

Specifically, when you about pension plan on the wages I don’t think I can answer that question, but on the pension plan we see half part of what we initiated last year, I think I can give you roughly it’s going to be a €150 million between still the program that we had started a few years ago and also the pension effect. So, hopefully I answered your question.

Jerry Dellis - Jefferies

Yes. And then in terms of margins and then commercial particularly in Brazil we are happy the way things are developing it’s not easy. And the headwinds from the macro side are essentially not helping. But as I think [Angel] mentioned in a previous question we are probably taking the bigger part of this rise in the market. We have more clients. We have better quality clients as the contract the way it is increasing, but we’ve been able to capture higher ARPU and higher contract and data revenues than we had. This of course comes at a price and depending on what the competitors do we’ll sometimes have to step upon the accelerator. But we think that we are standing sustainable position and we do expect that this lead is probably going to be held if not increase as the year progresses.

Pablo Eguirón

Thank you Jerry. Next question please.

Operator

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

Justin Funnell - Credit Suisse

Yes, thank you. If you can hear me? Just following up on that last question the macro effects in Latin America. Just wondering if you could speak a little bit more what you seeing, obviously Brazil but also some of the other markets, what’s going on the ground in Argentina, how is it affecting your business in some of the smaller markets you’re seeing a macro headwind across the region or is it actually just a couple of markets?

Secondly with the progress in Mexico on the regulatory change, it’s good to see the turnaround in Columbia. How close are we now to seeing the same thing come through in Mexico? Then finally on fibre in Spain, I think most of these extra homes pass you’re going to be doing on your own or what you think just (inaudible) would be positive these extra fibre homes as well, little bit (inaudible) would be largely yourself just doing it? Thank you.

Santiago Fernández Valbuena

Justin in terms of the FX and the macro environment that we see it from the ground. We just two general statements, without talking about Venezuela and Argentina which are special situations that have to be analyzed on a case by case basis I would say one thing and it is that the weakness of the Latin American currencies had a lot to do with capital flows and very little to do with competitiveness and the products and services market. So it’s impossible to say when things will reverse, but we do expect some kind of new regulation to happen in the not toppled countries. And when the capital markets settle as they eventually always do we think the true value will out and that the product and services markets will take again to lead. This is to say that headwinds are likely going to be with us, but still it is unlikely to come down in the next couple of quarters as we have events both from the political and from the economic scene but we do expect that despite that volatility the overall trend will continue being supportive.

Eva Castillo Sanz

Going into the fiber question in Spain, let me update that at the moment we have 3.5 million households passed which means 5 million premises and our commitment is to have 7.1 million passed homes in 2014 which mean close to 10 million. These include our commitment on agreement with our partners (inaudible) and that didn’t include any extension at the moment. Thank you.

Justin Funnell - Credit Suisse

Thank you.

Pablo Eguirón

Justin. I think we have time for just one final question.

Operator

Our last question comes from the line of [Simon Duff from MMG]. Please go ahead.

Unidentified Analyst

Hi, just got a quick one on LatAm debt and one on Spanish and (inaudible). On LatAm debt, can you quantify the amount of debt issued out of Latin America on a non-recourse basis at the moment, and how that compares to previous two times operating free cash flow policy there. Can you just talk a little about the hedging policy around that debt? And on the Spanish (inaudible) agreement, can you clarify whether or not has 4G, LTE access at the moment and whether you would or could consider refusing the access if they don’t have it?

Ángel Vilá

Hi Simon, regarding the first question, our benchmark in Latin America, is to have two times free cash flow with interest fetching in the countries where one can fetch, in Venezuela and Argentina, we cannot fetch in those positions and in the rest of countries at this point, we have maybe access that the Mexico on Columbia with respect to this benchmark. And in Brazil we are below 8, with a basket approach to fetching the Brazilian real exposure, but we maintain the same benchmark across the region that we had under that we are committing to.

Unidentified Analyst

Okay. And the absolute amount is?

Ángel Vilá

€7.8 billion equivalent.

Unidentified Analyst

7.8. Thank you.

Eva Castillo Sanz

Once again for your question and I think that there are some (inaudible) asking for the access in our case we will be closely work with our partners and specifically (inaudible) I think we cannot disclose the information, I think this is sensitivity commercial information.

César Alierta

Okay. This is César Alierta, I want to see make my final comment, just in line with the first comment I made it. We are totally committed Telefónica that a digital world is there and we are committed soon and we made an organization because we want the delivery in digital world (inaudible) that you committed digital offices. Our whole business is gone to be metalized to drive the revenues (inaudible) but I want to make a couple of comments, which I think are extremely important. Every country in the world, every country in the world wants to make the digital world a fast, because it not only for economy but for everybody. (Inaudible) digital where reality you need to make it possible by industry and I am going to be (inaudible).

In 2013 in Europe, we the telcos, we invested €60 billion, €60 billion. We employed 1.5 million people. We paid €6 billion in expecting and we pay a lot of taxes. And our premiums collogues, the [OTDs] invested in Europe 30 million versus 60 billion. They don’t employ anybody, they don’t pay any taxes, they don’t pay any expenses. And the same number for Europe are in Latin America.

So it is clear that the world has changed, it is clear that the revolution, we have in many parts of the world is related to (inaudible) which was important thing and that was irrelevant. We know that that is now the relevant factor. What it means, it means that clearly a fair level playing field in which only telcos are regulated in deals, and users are not regulated is going to finish very, very, very, very soon. This is going to make a tremendous difference in the revenues or in the value chain and it will be becoming in the near future. And when I say that Europe is going to make a (inaudible) digital market and this is going to be a (inaudible) field is because I see is going to happen in very soon because everybody sees that and that will happen in Latin America and the rest of the world.

And in Telefonica we do the decision to be a very relevant player in business digital ecosystem in which the roles are going to be fair level as well as is going to be regulated on the same way and this will make possible the fantastic digital world, is this not changed, there will be no digital world in the world.

Well, thank you very much for attending our conference call. And I hope to see you in the near future. Thanks a lot.

Operator

Telefonica’s January to December 2013 results conference call is over. You may now disconnect your line. Thank you.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!