Telefonica Moviles Q4 2005 Earnings Conference Call Transcript (TEM)

| About: Telefonica Servicios (TEM)

February 28, 2006

10:00 a.m. EST


Maria Garcia-Legaz - Director, IR

Antonio Viana-Baptista - Chairman & CEO

Ernesto Lopez Mozo - CFO


David Wright - JP Morgan

Louis Proctor - Morgan Stanley

Bosco Ojeda - UBS

Maria Rotondo - SCH

Damien Maltarp - Cazenove

Terry Sinclair - Citigroup

Paul Harper - Bear Stearns

James Mckenzie - Fidentiis

Jesus Romero - Merrill Lynch

Ben Spincer - Credit Suisse


Maria Garcia-Legaz

Good afternoon, ladies and gentlemen. Welcome to Telefonica Moviles' conference call to discuss fourth quarter 2005 results. Before proceeding, let me mention that the financial information contained in this document has been prepared under international and financial reporting standards. This financial information is unaudited and therefore, is subject to potential future modifications. 2004 financial results were originally prepared under Spanish GAAP and have been translated into IFRS for comparison purposes only.

This presentation may contain announcements that constitute forward-looking statements, which are not guarantees of future performance and involve risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of various factors. We invite you to read the consolidated statement including the first page of the presentation which you will find on our website. We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators. If you have not received a press release or the formal presentation for the conference call, please contact us in Spain at 34-91-423-4027.

Additionally let me mention that today's conference call is being webcast at With us today are Mr. Antonio Viana-Baptista, Executive Chairman, and Ernesto Lopez Mozo, CFO. It is now my pleasure to turn the call over to Antonio Viana. Mr. Viana, you may begin.

Antonio Viana-Baptista

Good morning or afternoon, ladies and gentlemen and thank you for attending Telefonica Moviles conference call. I am pleased to share with you the strong results achieved in '05. It was a challenging year for Telefonica Moviles, due to the integration process of the 10 assets acquired due to BellSouth's technological migration in eight countries and intense competition in our main markets.

In this transition year, we have delivered solid customer growth, adding more than 16 million customers across the Group while maintaining our leading positions in key markets.

We were particularly pleased by the strong momentum of our business in the fourth quarter, which sustained revenue growth and significant advances in profitability across our markets. This translated into superior top-line growth, driven by an impressive 40% year-on-year increase in service revenues, coupled with a robust profitability and strong cash flow generation despite the higher CapEx devoted to set the basis for future growth. As a result, the board will propose a gross dividend of EUR0.205 per share, 6.2% above that of 2004. to be paid in July.

If you look at slide 4, it provides more detailed information on our results. As we anticipated, the growth rates throughout the year have not been linear, with a significant improvement particularly in terms of OIBDA in the second half of '05.

In the fourth quarter, OIBDA year-on-year growth reached 45%, outperforming revenue growth, leading to a 27% cumulative growth for the year 2005. Net income growth has shown the same improving trends since the beginning of the year with a 38% year-on-year increase in the fourth quarter, despite the full write-down of the remaining value of our participation in IPSE for a net value of EUR89 million.

In 2005, we posted the highest net income in Telefonica Moviles' history, reaching over EUR1.9 billion, 13% higher than in 2004. Excluding the impact of the IPSE write-down, net income would have exceeded the EUR2 billion mark with a 19% year-on-year increase.

Despite strong commercial efforts in our markets and significant investments, we have generated high operating cash flow, which reached over EUR3.5 billion in 2005, 19% more than a year ago. This reflects our rational management of resources.

Please note that during 2005 we have enhanced our GSM network capacity in Spain, while expanding the rollout of the UMTS network. By year-end, we have more than 5,000 UMTS base stations already installed.

In Latin America, we expanded our GSM coverage in countries like Mexico, Argentina and Chile, with additional increases in capacity. Also in 2005, we rolled out brand new GSM networks in Colombia, Ecuador, Nicaragua, Panama, Uruguay and Peru.

This sound set of results was achieved by leveraging on highly diversified business portfolio, which clearly differentiates us from other players. As you can see in slide 6, even within Latin America, we benefit from a wide asset mix with an increased contribution from the operations in the Andean and Southern regions, and a notably lower dependence on Brazil.

I would also like to mention the positive contribution from our operations in Central America, which offsets the losses from Mexico. We are recording positive OIBDA contributions in other regions where we have presence. This is also a clear difference from other operators.

Another differentiating factor is our presence in markets that are growing above expectations and offer additional growth prospects. In Spain, despite high penetration, we continue to grow our customer base, while all our Latin American operations posted double-digit customer growth rates. Colombia and Argentina were the fastest-growing markets in 2005. In Chile, penetration has already exceeded the 70% mark. It illustrates the additional growth potential we see in the region for the coming years. I would like to highlight the case of Mexico, which still offers one of the highest growth prospects for the future.

If we move to slide 8, we can see that in the current environment of profit warnings by our peers, I would like to stress that we have met all our 2005 guidance, despite tougher competition in our markets. Revenue growth exceeded our targets and the guidance criteria, it grossed over 37%, well above the 33% to 36% range forecasted.

We have also reached our demanding OIBDA guidance, beating market expectations. OIBDA growth reached 23.4% in 2005, in line with our targets. We had already anticipated that given our strong commercial activity, we were more likely to finish the year on the low end of the OIBDA guidance. CapEx guidance was also met. Assuming 2004 at constant exchange rates, CapEx reached EUR2 billion, in line with our guidance.

So let's now review our operations and move to our performance in Spain. The Spanish market continues its strong momentum compared with other European markets. 2005 was marked by high commercial activity in an increasingly competitive environment where a number of portability actions continued to grow. In this context, Telefonica Moviles Spain recorded over 5 million gross adds, 23% more than in 2004. The 30% increase in the contract segment is outstanding and reflects the Company's focus on high-value customers.

We also reinforced customer loyalty initiatives, encouraging handset upgrades and further commitment from our customers. Handset upgrades in 2005 were 23% more than the year before, with an even higher increase in the volume of contract upgrades. Prepaid to contract migrations continued to be strong, despite the high volumes already recorded in previous years.

As slide 10 shows, loyalty actions -- including the new pricing schemes -- launched during the year have allowed us to contain the churn rates. We saw positive trends since reaching a peak in the first quarter of '05 when competition intensified in the market, due to the increased focus on number portability. Attractive on net products have proven to be a key tool to control churn. Customers with these pricing plans have a churn rate between 45% to 50% lower than those with other plans.

As a result of strong gross adds and churn containment, we recorded a 5% customer year-on-year growth. Our focus on the high-value customer is reflected on the faster growth rate of contract segments, both residential and corporate. This positive performance was driven by the different commercial plans targeted at the corporate segment where we continue to maintain an undisputed leadership. As a result, contracts reached more than 54% of the total customer base.

Slide 11 shows the results of the Christmas campaign. Total net adds were 257,000. We posted a strong performance in the corporate segment, with 400,000 net adds. Corporate net adds were up 17% year-on-year. Handset upgrades increased 11% versus the fourth quarter of '04, while prepaid to contract migrations were similar to the fourth quarter '04 levels.

Regarding number portability, in the fourth quarter of '05 we continued to post a positive net balance, but the total balance does not tell the whole story. For us what is relevant is the mix between prepaid and contract. We lost 61,000 prepaid customers but gained 71,000 in the contract segments. That is 22% more than in the fourth quarter of '04.

The picture for the whole year of '05 is similar; a net loss in prepaid and a net gain in contract. These results reflect our focus on acquiring prepaid clients through traditional commercial initiatives, rather than through number portability which is much more expensive.

Moving to slide 12, new pricing packages launched along the year delivered sharp increases in voice usage. The total billable traffic posted a 19% year-on-year growth in '05, while our net traffic rose 30% year-on-year on the back of the [MoviStar] community effect promoted by the new plans. The strong traffic more than offset price cuts. Both outgoing and incoming ARPM decreased around 11% in '05.

We also saw encouraging signs from data services users, particularly from non-traditional person-to-person SMS. Revenue from downloads increased its rate over total data revenues to 17% driven by the demand for games and music. We are especially pleased with the performance of Ringback Tones, which generated revenues over EUR10 million in 2005.

Finally, we have around 260,000 UMTS customers. As we have mentioned in previous calls, our main priority regarding UMTS is to deploy a high quality network to provide an outstanding user experience. Telefonica Moviles Spain has a track record of high quality service in 2G as you can see on the next slide.

Recent results from a survey carried out among wireless users in Spain at the beginning of this year confirmed this track record and we need to maintain the same high-quality standards in 3G. 3G network quality metrics have shown a significant improvement in the last 12 months, and our goal is to offer the same quality and the same consumer experience as in 2G by the end of the year.

3G commercial uptake is also driven by handset portfolio availability and handset prices. As you can see in the slide, price has come down significantly over the last 12 months, but continues to be well above 2G devices, which continues to be more attractive to our customers. As a consequence, we believe that the kind of subsidy that we have taken for 3G handsets has been the adequate approach, and right now this is the moment where we believe we can foster the sale of 3G handsets. All of this has led to a healthy ARPU growth both in voice and data, as you can see in slide 15.

If we moved to slide 16, total revenues grew close to 8% in '05, beating the original guidance. This superior top-line growth compared with our peers in Europe is driven by a positive evolution of service revenues, which posted 7% year-on-year growth.

Let me explain the details behind this performance. Revenues from customers saw a reversed 9% year-on-year growth in 2005, or close to 11% if we exclude loyalty points. This performance was driven by the increase in customers and the solid growth in traffic, partially offset by lower outgoing prices.

Regulated revenues from interconnections were flat versus 2004 on the back of a stagnant fixed to mobile traffic, lower rate of off net traffic and a cut in termination rates. Revenues from roaming in saw a moderate growth in 2005 while posting a decrease in the fourth quarter, impacted by the acquisition of [Amena].

I'm very pleased with the performance of customer revenues, which really show the results of our commercial strategy. Other components of service revenues are more dependent on external factors, but we will continue to deploy new initiatives in order to maximize incoming revenues.

I would like to highlight that Telefonica Moviles Spain continues to post strong operating profitability within the industry. Total OIBDA for Spanish operations represented an estimated share close to 60% of the total OIBDA for the industry in Spain. OIBDA margin in 2005 reached 46.7%. Excluding the impact of commercial costs, the underlying OIBDA margin remains strong at 66% on service revenues, on the back of a strict cost control, despite the impact from UMTS network deployment. As a result, Telefonica Moviles Spain recorded a healthy operating cash flow which reached EUR3.4 billion in 2005.

Let us turn now to our operations in Latin America on slide 17. Our focus is not customer market share per se, but share of revenues, share of OIBDA and share of operating cash flow. The results we are delivering are consistent with our strategy. Our operations in Latin America are self-sustaining.

In a year of very strong customer growth, integration and very high CapEx, operating cash flow in the region reached EUR200 million positive. This figure represents an over EUR600 million shipped, compared with the negative results achieved a year ago. Other players claim to post high customer growth in Latin America, but we are the only one capturing growth with positive operating cash flow in all regions of operations, except for the Northern region, due to Mexico. Latin America is coming of age, and we feel very positive about the increasing cash flow generation from our operations in the area.

Slide 18 shows the sound customer growth recorded in 2005. Organic net adds in Latin America exceeded 14 million subscribers. The last quarter of the year was particularly strong in terms of net adds. with over 4.9 million. Out of total gross adds, 51% are in GSM, well above the third quarter '05 levels translating into lower subscriber acquisition costs.

On a pro forma basis in 2005, we increased our customer base in Latin America by 25% to 70.5 million sets. All the operations posted double-digit growth rates with impressive performance achieved in Colombia, Argentina, and Venezuela.

This strong customer growth has been coupled with robust top-line performance and enhanced profitability. On a pro forma basis, and assuming constant exchange rates, service revenues growth was very similar to customer growth, while OIBDA performance was even better. This allowed us to post higher margins than a year ago, despite the challenging conditions in some of our markets and the fact that we have been involved in an integration process with some additional related costs.

I would like to stress the positive performance posted in the fourth quarter of '05 with an OIBDA margin of 25%, similar to the levels achieved in the third quarter despite the higher commercial activity typical in Christmas. The margin expansion in the area becomes even more clear when comparing the fourth quarter of '05 with the fourth quarter of '04 like-for-like peers. Margin expanded by 10% points, despite a 15% increase in commercial activity.

In 2005, the reported OIBDA margin reached 23%, which represents a 7% points advanced from '04. This margin enhancement was achieved on the back of the benefits we are already obtaining from the regional management of operations, economies of scale and integration synergies. We are proud of the progress made in the integration process of the 10 companies, in record time. We are advancing faster than anticipated, with OpEx and CapEx synergies exceeding initial estimates. Savings obtained in 2005 were over $170 million compared to an estimated $100 million provided in April.

Slide 21 shows some examples of the savings obtained in 2005 from the regional management of operations and enhanced scale, including GSM equipment and handset purchases.

We also obtained clear benefits from the launch of the MoviStar unified brand in our Spanish-speaking markets in Latin America. I would also point out the OpEx and CapEx savings from sharing our platforms, IT networks in the region. These are coupled with other intangible benefits derived from the better competitive position of these operations, due to an enhanced high-quality product and service portfolio.

Another area where benefits are clear is time to market. We deployed six new GSM networks in a record time, proving our execution capability. Peru is the ultimate technical abyss. We have rolled out the GSM network in just two months.

I would also like to mention new initiatives launched last December to deliver to our customers the advantages of being part of one of the largest wireless communities in the industry. Mundo MoviStar is one of them. This new concept initially includes very attractive international on net areas for our customers within Spain, Colombia, Ecuador and Morocco. It also offers the opportunity of buying a prepaid package in Spain and have it delivered to France or relatives in their home country in the next day. In a few days, we will also launch international recharges for these countries.

We have also announced an agreement with Research in Motion to create the largest community of BlackBerry services in the region. These are just the first of a series of steps we plan to deliver in the coming months, exploiting the community effect of MoviStar.

Let me now highlight the key takeaways from the recent performance of our major operations in the region. In Mexico, our focus continues to be solving the problems we face in key areas to achieve healthier gross adds and reduce churn. The preliminary results make us feel comfortable with the direction in which we are working.

I would also like to highlight the better than expected results obtained in Central America, with the strong operating cash flow generation helped by the regional management of the operations. OIBDA from these countries in 2005 reached EUR158 million, while operating cash flow was about EUR68 million.

In Colombia, we have seen a strong operating momentum after the launch of our GSM service, coupled with better operating margins. In Venezuela we continue to post a robust performance and high cash flow generation. In Brazil, Vivo focused its commercial efforts on key markets and key segments, managing cash in a rational way. Our operations in Chile are setting a benchmark for the future performance of operation in Latin America. Finally, in Argentina we continued record strong customer growth, while we have improved margins.

Let's start with Mexico. In previous conference calls, we mentioned the key areas where we would have to take additional measures to achieve healthy customer growth. Let me share with you the specific actions taken in the fourth quarter and the results already achieved.

Regarding customer service, we have reviewed and enhanced the different business processes, leading to a significant drop in the number of calls made to our call centers. In December, almost 100% of the calls were answered in less than 30 seconds. Another much improved metric is the number of claims solved in less than 24 hours. For network quality and customer perception, we have seen a 36% drop in the number of claims in only four months, while the level of completed cost has improved a lot. This has translated into a significant increase in traffic in the last four months of '05, and we feel quite encouraged with the traffic signs that we see at the beginning of this year.

Finally, we continue to make progress on the reshaping of our distribution channel. We have so far canceled agreements with close to 200 distributors, and they have brought in close to 50 new dealers. The new agreements we are signing are with larger and financially stronger distributors than our former ones. All these processes continue, and we will share with you our progress on a quarterly basis.

Within our existing capacity to achieve a strong volume of healthy sales, we are recording a progressive increase in our pace of growth. Average gross adds in the fourth quarter, excluding the month of December, were 360,000. In January '06, gross adds have been slightly above previous months. But more important than the volume of gross adds is the quality of this growth. With the data we have so far, there are clear signs of the better quality in the new customers with higher activity levels and the better performance of revenue metrics.

On the other hand, churn is also showing a positive evolution in the last months, leading to a volume of net adds in the fourth quarter that tripled the third quarter figures. I would like to mention the over 10% increase in revenues recorded in the fourth quarter, versus the third quarter of '05. This, combined with lower commercial costs, resulted in OIBDA losses in local currency in '05 similar to '04 levels in line with our guidance.

Moving to Colombia, on slide 26. Since the GSM launch in July, we are recording a strong commercial momentum. Net adds in the fourth quarter more than doubled the third quarter levels with GSM gross adds representing 88% of the total in the fourth quarter of '05, allowing for a significant drop in subscriber acquisition costs quarter on quarter.

In parallel service, revenue growth has strongly accelerated in the fourth quarter of '05, reaching 36% in the quarter and 30% for the whole year in local currency terms. I would like to stress the 23% OIBDA margin posted in the fourth quarter similar to the third quarter figure, despite the 44% increase in commercial activity. As a result, OIBDA margin for the year reached 15%.

Let me remind you of the normalized operating margin targets we shared with you in April. We estimated it to be in the 40% to 45% range for '05, and we have clearly exceeded it. During '06 we will expand our GSM coverage while reinforcing our distribution network, which should enhance our competitive position in the country.

Regarding our operations in Venezuela, they are already the second-largest contributor to the group OIBDA, with EUR585 million in 2005. We are very pleased with the robust operating and financial performance posted this year. Even in euro terms, service revenues growth has been solid, while the strong top-line growth has been coupled with an outstanding profitability. OIBDA margins stood at 41% for the full year of 2005, leading to a 60% year-on-year growth in OIBDA in euro terms. In parallel, we are reinforcing our customer care efforts. We are also committed to launching the most advanced and innovative services in the country. Last December we launched EVDO, a new e-mail service in Venezuela.

If we move to Brazil on slide 28, during the Christmas campaign we saw a change in strategy by our competitors, increasing their focus on mid to high-end customers with less emphasis on the low-end. Vivo has continued focusing on key customers and key markets, increasing our efforts to retain high-value customers. The results of this strategy is shown by the positive performance of contract net adds and the sustained customer growth in Sao Paulo. Despite fierce competition, Vivo maintains strong market share in its key areas of operations with close to 50% shares in Sao Paulo, Centro Oeste region and Rio Grande do Sul.

In line with Vivo's focus on high-value segments, let me highlight the positive performance of outgoing contract ARPU in 2005, as you can see in slide 29, increased 6% year-on-year. In 2005, Vivo service revenue rose 5% year-on-year in reais, on the back of strong outgoing voice revenues and a sharp increase in data revenue, which were partially offset by a relevant decrease in incoming revenues.

If we move to slide 30, higher entry barriers compared to the 2004 Christmas campaign and the lower commercial activity led to a lower rate of commercial cost over service revenues in the fourth quarter of '05, when compared to the fourth quarter of 2004. Nevertheless, higher provisions related to the communications not attributable to customers had a negative impact on margins. The Company is implementing new network security measures and has signed agreements with other players in Brazil to limit this risk. Excluding the impact of these provisions, the OIBDA margin would have been 27% in the fourth quarter of '05 and 29% for the whole year, in line with our guidance of high 20s for the full year.

To conclude, let me highlight that in a very tough year and despite our strongest CapEx effort, Vivo posted positive operating cash flow. Its share of OIBDA and operating cash flow in Brazil continues to be well above that of competitors.

I would like now to highlight the strong operational performance posted in Chile. In a highly penetrated market, we have recorded an outstanding service revenue growth outpacing our customer growth. This has been coupled with a better operating profitability. OIBDA in 2005 reached 41% year-on-year growth in local currency to EUR235 million, while operating margins have shown a positive trend along the year, leading to a 36% margin for the full year of 2005. The fourth quarter of '05, margins stood at a 43%, but you should consider that the commercial activity during the quarter for the whole market was not very strong.

Finally, in Argentina, we recorded a 45% year-on-year growth in a highly competitive market. On a pro forma basis and in local currency, service revenues showed a robust performance. Despite the strong commercial effort, OIBDA increased by 65% in 2005, leading to a 2% point advance in the margin to 15%. I would like to stress that the normalized margin recorded in 2005 was over 40%, 5% points above the forecast provided in April. I will now hand over the presentation to our CFO, Ernesto Lopez Mozo.

Ernesto Lopez Mozo

Thanks, Antonio. Financial results were 5% lower than in 2004. This was achieved despite our debt being 69% higher this year than in 2004. Regarding the exchange rate differences, we had a positive impact of EUR125 million in 2005. During the year, we have been reducing exposure to Latin currencies. At the end of the period, we remained with exposure mainly to the Argentinean peso of around $800 million U.S., and to a lesser degree, Colombia peso $125 million, and Guatemalan quetzal $100 million U.S. Let me remind you that we are considering the cash collateral for [inaudible] license, currently EUR335 million as a reduction of net debt.

In the next slide, regarding the evolution of net debt, I would like to highlight the turnaround in working capital materialized this quarter and during the full year has served to reduce net debt. Already disclosed in previous quarters, but given its impact I would like to remind you of the net financial investment of EUR1 billion incurred mainly for the acquisition of [Bosel] assets in Argentina and Chile at the beginning of the year. Also, a EUR836 million dividend payment took place in June. And finally, ForEx appreciation has increased a total net debt amount by around EUR800 million.

Regarding taxes paid, taxes paid in Spain amounted to EUR450 million and took place in the first quarter. At the end of the year in the balance sheet, we reflect cash credit towards Telefonica's fiscal group of EUR1.5 million. Also, on the other hand, in current liabilities, we include EUR1.8 million, but we have deferred tax assets of EUR1.8 million as well. These are due to provisions on loans to subsidiaries that become tax credits once we capitalize, we sell or we liquidate companies.

In the next slide, we have a look at the main lines. First, we have seen an important increase in amortization derived from changes in perimeter, but especially from intangible assets due to purchase price allocation -- an amount of EUR298 million from both our corporate and Telefonica Movil Chile.

This quarter we have also registered that the EUR6 million from purchase price allocation of minority shareholder acquisition carried out by (inaudible) selling in 2004. This point was agreed at the end of '05 by our former and current policy in terms and corresponds to our full-year effect. Net losses from associates reflect the [New Central Telecom] full write-off due to the decision of the Italian government to withdraw its UMTS license. The net effect of taxes is EUR89 million. And also remarkably, Medi Telecom posted a net income contribution of EUR8 million. Now let me hand it back to Antonio for the outlook.

Antonio Viana-Baptista

Okay. So let me now share with you our outlook for 2006. We expect to deliver our solid organic top line results combined with a healthy OIBDA margin and strong cash flow generation on the back of our highly diversified portfolio of operations, which provides us with a significantly different growth profile compared to other wireless players.

Assuming constant exchange rates and excluding changes in consolidation, we forecast consolidated revenue growth to be in the 9% to 12% range, while OIBDA is expected to be within the same range in terms of growth rates.

Strong growth and enhanced profitability from Latin America, where we will fully leverage our integrated management model and will further exploit the benefit of our largest scale and synergies from the integration processes, should offset the competitive and regulatory pressure in the Spanish market where we would also benefit from '02 synergies.

Consolidated CapEx in 2006, excluding licensees, should be below 2005 figures, leading to a strong growth in operating cash flow generation. In Spain, given the competitive intensity of the European market in general and the particular conditions of the Spanish market, the outlook for 2006, in terms of competition, is tough. In parallel, we expect a progressive 3G uptake during 2006 based on our wider handset portfolio and price reductions, an area where the increased scale of the Telefonica Group following the '02 acquisition should deliver positive results. The better quality and wider coverage of our UMTS network combined with the enhanced user experience that HSDPA brings, should support an accelerated growth of our 3G customer base.

We will also continue working very closely to capture scale economies and synergies with other Telefonica Group companies based in Spain, be it in the wireless space of the Group. In this context, we expect Telefonica Moviles Spain to sustain a healthy top line performance with revenue growth forecasted in the 3% to 6% range. We see customer revenue outpacing total revenue growth on the back of continued customer base expansion and healthy usage from our customers. This will be partially offset by ongoing pressure on incoming revenues from cuts in termination rates and lower roaming revenues.

Please note that in the first quarter of '06 year-on-year growth rates will be impacted by the new pricing plans launched in April of 2005; and, the higher commercial activity during the first months of 2006. Therefore, the comparison in terms of growth rates will be probably less favorable in the first quarter.

Telefonica Moviles Spain OIBDA margin is forecasted to show a moderate decline versus 2005 levels. Finally, CapEx should be below EUR800 million for the whole year. In summary, we expect Telefonica Moviles Spain to present better operating and financial performance relative to its peers in Europe, delivering a healthier top line and OIBDA margin in a very challenging environment.

In Latin America the macro outlook for 2006 looks favorable. Our strategy in the region is to capture the growth in fast-growing markets, leveraging our improved competitive position in those countries where we have recently launched GSM services, or where we are making an important effort to enhance network coverage.

Revenue growth should continue to be strong on the back of sustained customer growth and increased usage, while we expect higher OIBDA margins compared with 2005. We expect Latin American markets to keep growing at a fast pace, though we forecast a slowdown in the incremental penetration growth rate in the region. The lower customer growth compared to 2005, coupled with the increased rate of GSM gross adds, should result in lower commercial costs.

In addition, we will continue advancing on the integration process of the assets acquired to BellSouth, while reaping the benefit of regional management. All this will lead to an enhanced OIBDA margin in the region, with improved margins in most markets on an annual basis, as it has already been shown in the fourth quarter of '05. Finally, our focus on profitable growth should deliver a strong cash generation with a growing contribution to consolidated cash flow.

So let me just close with the final remarks that you see on the conclusions page. We saw a strong set of results in 2004 on every line, with robust cash flow generation. We met all the demanding 2005 guidance that we had provided. We achieved a very high-quality bottom line with self-sustained operations both in Spain and in Latin America.

Telefonica Moviles Spain clearly outperforms its peers, be it in any comparison in the case of Spain or in the case of other European markets. Delivering execution capabilities, we are showing very clearly that we are delivering the synergies from integration and regional management of operations ahead of plans, as indicated of Latin America; and that is leading to the fact that Latin America is coming of age in terms of operating cash flow delivery. Telefonica Moviles 2006 sound growth prospects stands out within the industry in a challenging competitive environment.

I thank you for your time in listening to the presentation, and now we will be glad to take your questions.

Question-and-Answer Session


Thank you. (Operator instructions) Our first question comes from David Wright.

David Wright - JP Morgan

I would like to dig a little more into the Spanish guidance, if possible. First of all, if you could give us some guidance on ARPU within that general revenue guidance, and perhaps too if you could give us some indication of where you expect termination rates to move during the year? Can you just give us some indication as well of whether this new guidance sits within your Barcelona guidance of a longer-term margin over 45% on 2004; 2008 compound revenue growth of 4 to 6. That is my first question, if possible.

Secondly, in Mexico I guess with all due respect, another strong Q4 but perhaps in 2005 and 2004, we did not see that momentum continued. You did give us guidance on Mexico last year. Could you possibly give us some guidance for OIBDA for that business in 2006? Thank you.

Antonio Viana-Baptista

David, thank you for your questions. I have to recognize that the kind of format that we are providing guidance is slightly different from previous years. We believe it is more adequate and that to some extent provides us with more flexibility in order to implement our commercial strategy. So we will stick to that.

Regarding your questions on Spain, I think that in the case of ARPU, we are not providing guidance on ARPU. Not that we see any major difference, but we are not providing guidance on ARPU evolution.

Regarding your question on margins compared to the Barcelona guidance that you mentioned, all we are saying is that we are not providing guidance on a specific margin. We see other operators in Europe claiming that margins may decrease by 1 to 2 percentage points and that we prefer to maintain flexibility on a commercial basis, in order to protect value in the Spanish market.

I would just like to remind that Telefonica Moviles Spain is quite a unique kind of company to the extent that it is the company that has a bigger gap when you compare market share from the first operator to the second operator in any market in Europe. And at the same time, has a bigger gap in terms of OIBDA margin when you compare the first operator to the second operator.

So the art is about keeping the balance within these two things in order to maximize value to shareholders. It is a difficult balance. It is a balance we are trying to optimize at every moment, and it is a balance that we're trying to do it while capturing the most valuable customers in the Spanish market. That is exactly what we're doing on a daily basis every time. So we prefer to maintain this kind of flexibility regarding the guidance.

On your question on interconnection, we believe that the termination rates that we're having here in Spain are already well aligned within the average of the European markets. It is likely that they will decrease, and that all we would welcome from the regulator would be that we could get more of a medium-term perspective, in terms of trying to see that not on a year-by-year basis but more on a two to three years. We would like that to happen.

Obviously the other thing we would like to see is that now that Amena is owned by a large company like France Telecom, we see no reason why they should get a preferential treatment compared to us in terms of termination rates. We think that that is totally inadequate that a company like France Telecom to some extent is being protected by the Spanish authorities, on their way of competing in Spain. They are already grown-ups, so they should play the same way as we are doing.

In the case of Mexico, the reason for not providing guidance on OIBDA is the fact that we want to give flexibility in terms of understanding, how fast can we grow? One thing is certain; we will not sacrifice the quality of growth for the speed of growth. What we are seeing in this first two months, we are happy with the kind of results. It seems like -- and that goes back to your point in terms of whether the momentum will continue -- it seems like the kind of growth in service revenues is well aligned with the growth that we were achieving in terms of customers, which talks highly about the quality of the customers that we're capturing. We are not willing to sacrifice getting at the higher pace in order to sacrifice quality of growth. If we can grow faster with the same quality, you bet we will do it.

With respect to our vision, we have no reason to believe that in '08, '09, why should not we aim for having a 20% market share in the Mexican market? We still aim to that. We still believe that that is a very reasonable vision. The pace at which we will get there will clearly depend on the quality of our growth, and that is what we are monitoring, as I tried to explain in the presentation on a very close basis.

David Wright - JP Morgan

Would it be a business that you would expect to move OIBDA positive in 2006?

Antonio Viana-Baptista

We are not committing to OIBDA numbers for Mexico in 2006. It will be reasonable to assume, obviously, that number should be better than this year, yes.

David Wright - JP Morgan

Thank you.

Antonio Viana-Baptista

Thank you, David.


Our next question comes from Louis Proctor.

Louis Proctor - Morgan Stanley

I have two questions. The first is again on Mexico. Could you provide us with the churn rate, the average churn rate of the fourth quarter? Also the monthly churn rate in December, if possible?

If you could elaborate a bit on the potential impact that you see from the MVNOs, and maybe give us some light on the position taken by the regulator, in terms of how everything is going to be great between operators and MVNOs? Thank you.

Antonio Viana-Baptista

So in terms of the churn rate for the fourth quarter, the churn rate was still high if you take the whole quarter, in the case of Mexico, at 5.5%. This was especially due to some of the cleanup in the distribution channel that took place during November. If you just take the figure for December of '05, the churn rate is at the 4%, and the churn rate for the first months of this year is really below 4%. So we feel comfortable with that. We had to do the kind of cleanup that was attached to reducing some of the key distributors, and now we feel comfortable with that. Bear in mind that you have to compare that with the churn rate of the dominant player there that has around 3.5%, if I recall correctly.

On your issue on MVNOs in the case of the Spanish market, we keep on defending the same position, which is the fact that any MVNO agreement should be the result of a bilateral agreement between the two parties. That we should be able to negotiate with potential MVNO operators on the basis of judging whether it is interesting for us, whether they bring us some value-added be it in terms of distribution, be it in terms of content, be it in terms of anything that adds value to our customers or that allows us to reach a customer community that we are not able to reach otherwise. To that extent, we're willing to consider that possibility, but that has to be very clear that is just pure bilateral negotiations.

We also believe that the more competitive the market is, as now with prices coming down, the less space it leaves for very aggressive MVNO operators. To the extent that prices are coming down fast in the case of the Spanish market. To that extent, I'm sure obviously that all MVNOs, if they would like to work with someone, they would obviously prefer the operator that will provide them with the best quality network.

We are monitoring carefully the evolution of these situations. I think it is likely to assume that the MVNOs in the second half of this year can show up in the case of the Spanish markets, and we do not have a dogmatic approach to this issue. We have rather a pragmatic approach as long as it creates value both to our customers and to our shareholders.

Louis Proctor - Morgan Stanley

So, as a follow-up, do you think that MVNOs are going to create value instead of destroy value?

Antonio Viana-Baptista

I think that MVNOs we would only be willing to talk to potential MVNO operators as long as they will provide us with some extra facilities. Be it additional distribution capability, some content that would make us closer to some specific community of customers, whatever. If that will strengthen our position compared to other operators, we will be willing to consider that in a scenario, where I consider that probably MVNOs are bound to appear in the second half of the year in Spain.

Louis Proctor - Morgan Stanley

Okay, thank you.

Antonio Viana-Baptista

Thank you, Louis.


Our next question comes from Bosco Ojeda.

Bosco Ojeda - UBS

I wonder if you could elaborate on the potential conflicts of interest that are arising as a result of the O2 deal? For example, on the consolidation of the Free Move and also on how you would account for the synergies? And also related with that, if you could comment on your dividend policy and the balance sheet? What is the basis for setting up these dividends and where do you see that going forward? Thank you.

Antonio Viana-Baptista

Thank you, Bosco, for your two questions. I'm not aware of any conflicts of interest that are occurring between us and O2 or us or anyone else at the Telefonica Group. I think that it is much more a win-win situation rather than a situation that would be unbalanced.

I believe that when you talk about the Free Move, I think that what really triggers the change in terms of Free Move is on the one hand the entrance of France Telecom into the Spanish market. That is the first point. And the second point is the fact that the European Commission has took the decision of putting in a condition for us to abandon Free Move. But I would say that probably the entrance of Orange into the French market is clearly the trigger that mostly affects our roaming business.

I do believe, on the contrary, that O2 has a very sound customer base that will probably be able to share that competitive offers for some of the customers that travel most frequently to Spain; as are the British, the Irish and the Germans which provide some of a large chunk of tourism that comes either on a permanent or on a temporary basis to Spain. So I think that for us, this should be quite an advantage rather than any sort of disadvantage.

Regarding other synergies, and we may talk about potential synergies in terms of a handset procurement, I only see advantages there to the fact that we will probably now have within the Telefonica Group a much larger chunk of 3G handsets than what we had before, and that really plays in terms of getting more competitive prices. And it is probably easier to align that within the Telefonica Group than aligning that within a space, which is by definition much tougher to manage like an alliance.

Roaming, as I mentioned before, is another area where we are already working actively with O2. Infrastructure, purchasing and infrastructure technology is something that we are already sharing our experiences with O2, and that is also again a clear win-win situation whereby we will probably both of us get better deals from suppliers, move faster in terms of deployment of new services than before.

In terms of services to multinational corporations, the fact that the Telefonica Group is now present in such important markets as Germany or the U.K. will obviously only play in favor of us protecting those accounts in the case of the Spanish market. Which by the way already has two global players, if I may call it that way, or two original players, like Orange and Vodafone.

Obviously in terms of streamlining or optimizing processes on what we do and what O2 does, I think it is only a win-win situation. So I only see upside on this front, and I think that there is not a conflict of interest at all on that front.

In terms of the dividend policy, we stated clearly what is our dividend policy. This is a growth company, and we have been showing very clearly this year what kind of growth can you expect. Within that growth company, we also thought it was adequate at a given point in time, to provide shareholders with a dividend that we said we will provide that dividend in order to make it grow above inflation rates. Accelerating the growth rate of the dividend like this year to 6.2%, I think it's quite significant. Do not expect us to provide a very high dividend yield. That is not the name of the game. We don't believe that is an adequate thing. We prefer keeping our flexibility.

We have been dedicating a lot of time this year to reducing debt. If you have seen the numbers in terms of debt reduction, we reduced almost EUR800 million of debt, which is quite a serious effort on that. And I think that the payout is quite decent. We're talking about the payout of 46%, if I recall correctly, which is quite a decent payout.

Bosco Ojeda - UBS


Antonio Viana-Baptista

Thank you, Bosco.


Our next question comes from Maria Rotondo.

Maria Rotondo - SCH

I have two questions. Regarding Latin America, you were insisting or saying that your focus is on revenue share or OIBDA share, operating cash flow share, which I fully agree with you. But I don't know if you can give us an idea of what has been your market share evolution in Latin America, in terms of revenue share? Because when we look at the customer numbers compared with other players, we see in some of the market that you have been losing market share. So it will be very interested in knowing the evolution in terms of revenue share.

The second question refers to the Spanish market. Maybe one of the most important developments according to Orange now, when we look at the French market, we have seen already the launch of quadruple offers with wire line, broadband and mobile calls. What would be the strategy in the Spanish market in that sense? Because I believe you have a wire line license, so I don't know if you could explain to me that. Thank you very much.

Antonio Viana-Baptista

Thank you, Maria, for your questions. Let me start on Latin America. I think it is tough to calculate an overall revenue share in Latin America. But just this year, with the acquisition of the BellSouth companies, I think it has proven to be a very wise decision. Although at the time it was quite a risk to increase your exposure. We managed that risk very well, and I believe that the kind of growth that you have seen in those companies is quite remarkable.

You look at Venezuela, and it is quite a success story. You look at Colombia, and it is quite a very good story. I think it is obvious we are not growing yet at the same pace as our other competitor in Colombia, due to the fact that we are deploying our GSM network. We still do not have the same coverage nationwide. As a consequence of that, we cannot be selling GSM handsets all over the place in Colombia, but we're getting there. We are confident with the way things are operating.

I think that the case of the merger of the operations in Argentina and Chile in such a short notice is quite a success story. Normally what happens there when you are merging two operations is that you get focused into internal issues rather than focusing in the market, and there's a risk of losing some market share. And then you look at the numbers, you see that we have been performing quite well.

I think I would not have subscribed to any document a year ago that would have told me that we would get this kind of growth in countries like Argentina or Chile having the integration processes in due course. The same thing would apply for Peru or for Guatemala where we had two companies per country.

So I think that we got a pretty decent growth in terms of our share of revenues. Other operators may have a stronger growth in terms of revenues, namely in the Mexican market. That may be the case for others, but the important thing also is that we're doing that while taking care of the funds that our shareholders commit to us. That is very important. Because you look at the operating cash flow in Brazil and you compare it to the other players, and probably I would not feel very comfortable talking to you guys, if I would have 19 million customers and a huge deficit in terms of operating cash flow. I could say the same thing for Argentina. I could say the same thing for Colombia. So I believe that we are being prudent in terms of using the funds of our customers.

We know Latin America. We have been there for years, and we know the risks of operating in Latin America. As a consequence of that, we need to be prudent. We believe we are being prudent. We are trying to focus on specific segments of the market, segments that create more value like the high end of the market, like the enterprise segments of the market, and we feel comfortable with the kind of growth in terms of revenue that we are getting.

On your questions on Amena or Orange strategy, you've got to ask Orange what they intend to do. We still have to wait and see. We have, as you said, a wire line license. We do not have the intention of activating that wire line license for any type of services. What we do have is, we have within our Group the most powerful wire line company in Spain, and as a consequence of that, we are working together with them in order to take maximum advantages of potential synergies.

Let me give you an example. What we're doing is we are talking to the sales force of Telefonica Espana and saying, hey, here is a list of customers and a long list of customers that our customers of Telefonica Espana on the wire line front and that are not our customers, why don't we do a joint offer to them? Why don't we go there and visit them on a one-by-one basis? And that is increasing very significantly our potential in terms of reaching mainly the SMEs market in the case of Spain.

On the other side, what we are offering is we are offering to Telefonica Espana the possibility of using our distribution network and our experience in selling in hyper markets and other services like that, selling their own products like ADSL through our own distribution networks. So that is the kind of synergies that we're looking for. The same synergies will apply in terms of sharing a common view in terms of the network deployment and of sharing CapEx in terms of some of the key areas that we can do with Telefonica Espana.

Maria Rotondo - SCH

Thank you very much.


Our next question comes from Damien Maltarp.

Damien Maltarp - Cazenove

Two questions. The first one, just looking at your balance sheet, it looks like there is quite a big move in your long-term provisions. At least at the end of the third quarter, you a had long-term provision of EUR1.2 billion. That has dropped to just EUR0.2 billion. It is about a EUR1 billion difference. I was wondering if you could just give us some more details on what that movement reflects, whether it has been released to the cash flow statement or to the P&L?

The second question is on domestic margins, could you give us a bit more detail on where you see the pressure potentially coming from? By that I mean, you talked about roaming; you talked about competition from MVNOs. You also talked about 3G. Can you perhaps give us an indication of where you see -- which is probably the main driver of margin pressure? Is it your handsets subsidies on 3G, for example, is it loss of roaming revenues? Thanks so much.

Antonio Viana-Baptista

Thank you, Damien. The first question will be addressed by Ernesto.

Ernesto Lopez Mozo

Well, basically with the long-term provisions, you have to take into account that we have taken the provisions for the write-down of this [inaudible]. We had the previous provisions before hand, and that was from the summer of '02 when we took those provisions. So basically now when we write-down, we'll unwind that situation. We're taking that provision, the cash collateral that I mentioned, something like EUR130 million, we have provisioned our loans to something like EUR 350 million, and also we have provisioned the participation we had in the equity. So that is the main movement in the provisions.

Apart from that, now under the new accounting rules instead of having provisions and the other line items, we have to provide a net balance. So that explains the remainder of the move. All this is explained in very thorough detail in the shareholders' report that will be published.

Antonio Viana-Baptista

On your question on domestic margins, well, I think you mentioned some of the drivers that can put or maintain margins under pressure. Obviously one of them is that more competition is driving ARPM down, and that occurred at a strong pace in the last year of around 11%. I believe that that will not be as strong in the coming year, and I think that what we have demonstrated is that we need to be creative enough in terms of our price plans in order to pinpoint the decreases in prices where we can expect positive elasticity.

We believe that we have much more experience now on that than what we had a year ago. We know where to hit in that front, and we are very happy with the kind of results that we're getting there. But obviously some more pressure on ARPM is still likely to continue, although I believe at the lower pace.

The case of the handsets, it is obvious what are you are saying. The more you enter into the UMTS progressive migration, and I believe that the kind of charter that we have seen in terms of the handsets or what we're trying to illustrate there is that we have been prudent enough in terms of how to play that game. If we would have subsidized a lot of handsets like the ones that you see in the chart, and if we would be subsidizing heavily bulky handsets like the ones we have on the Christmas campaign -- that is in chart 14 I believe, in '04 Christmas campaign, my customers would not want to keep that kind of handset right now. So I would have been generating all the frustration on my customers while subsidizing heavily handsets that now would be rotating clearly.

Even if you look at the first-half handsets, you see the same kind of trend. And now you're starting to see handsets that in form and functionality are similar to 2G, adding to that the functionality obviously of a 3G at a more decent price. But probably that will mean that we will have an average cost per handset in 2006 that may be higher due to a change of mix than what we were having in 2005.

Obviously the more you have revenues from handsets sales, that obviously translates into a lower margin in terms of OIBDA divided by total revenue. So that also affects margin. Add to that the fact of potential entry of MVNOs in the course of this year and to some degree in interconnection, and I believe that those are the main drivers that will maintain a competitive environment similar to what we have now, in terms of the tough pressure on margins that we're seeing. Nothing drastically different, but I believe that we will maintain this sort of situation.

If you take into consideration on top of that, that the first quarter of last year we were not being very aggressive on a commercial standpoint and probably will have a more aggressive stance for the whole of the year of 2006, so you can derive yourself your view on the margin evolution in Spain.

Damien Maltarp - Cazenove

Thank you. Can I just go back to the first question just as a point of clarification? I think what you are saying is that the reason for the provision or the moving in provision did not have a meaningful impact on your OIBDA line at all? Is that correct?

Antonio Viana-Baptista

No, I mean actually, as I said in the line where I was basically reconciling the low OIBDA through net income, we are reflecting the remaining provisions that we took a hit for under the income from associates. Therefore, there is no reflection in the OIBDA number.

Damien Maltarp - Cazenove

I think that is clear. Thanks.


Our next question comes from Terry Sinclair.

Terry Sinclair - Citigroup

Good afternoon. Two questions. We have had probably the record in additions in the whole of the Spanish market over the last year, and I wonder if you can comment on the period in which that is sustainable and the extent of double counting in the Spanish market?

Secondly, you have commented on what is really a very impressive net proportion in Spain in terms of traffic. I just wonder if that was one of the reasons why the CapEx guidance in Spain is a bit higher than the actual for '05? In other words, do you have to spend because you have much so much traffic on it?

Antonio Viana-Baptista

Thank you for your questions. On the Spanish market, I believe that the kind of performance we have been having on a commercial side has nothing to do with any sort of double counting. It has to do with the fact that we are targeting very clearly specific segments of the market. We have been targeting very clear contract segments, segments with a higher value in terms of the market overall. We have a great performance in terms of residential contract and a very good performance in terms of the corporate segment where obviously penetration is growing fast.

Also, on the emigrant segment of the Spanish market, which is becoming a more and more relative segment, we are also having a very good performance. That is obviously has to do also with a kind of emphasis we have been putting in terms of on net traffic and in terms of these community effects where we want to put more and more emphasis.

I think that for Spanish customers the important thing is that they are part of the largest Spanish community, and for our emigrants it is more and more important that the MoviStar is present in Spain be it in their home countries. So, as a consequence of that, our on net, our community effect is getting more and more important.

On the issue related to the guidance for CapEx, it has not to do with what dimension in terms of on net traffic. It has to do with the continued deployment in terms of UMTS. In a moment where we still have on top of that to expand our GSM network mainly because of the additional frequencies that we got from the Spanish authorities in order to provide the extended GSM projects in the areas of Spain where there was lacking coverage.

We mentioned that in previous conference calls and we also said that the numbers for -- if I recall correctly in the last time we mentioned that for in Barcelona, we mentioned that the kind of CapEx you could expect for Spain would be EUR750 million in '05 and EUR850 million for '06. Now the number we're saying is that probably the CapEx for '06 will be in the range of EUR800 million, not because we are reducing the pace in terms of deployment, but because we're getting better conditions from our suppliers, and we are leveraging on the scale of the whole Telefonica Group for that purpose.

Terry Sinclair - Citigroup



Our next question comes from Paul Harper.

Paul Harper - Bear Stearns

Just two quick questions. Will the measures to stop the fraudulent use of mobile network in Brazil be implemented in time to stop a similar provision being necessary in Q1? Will any provision at all be necessary in Q2 do you think?

Then just secondly, on slide 13 you showed 3G core completion compared to 2G. Can we extrapolate that the 3G quality will equal that of 2G within the first half of this year, or is that going to take a bit longer to achieve?

Antonio Viana-Baptista

Thank you for your questions, Paul. Regarding the provisions in Brazil, can you expect that the measures that are being put in place will be enough to avoid that sort of provisions for Q1? The answer is yes. The answer is yes. We believe that the kind of things that are being implemented in Brazil at the different levels of operations in tackling not only the handset side, but also the potential for our customers to roam on secured networks even in areas where we do not have coverage with the agreements we have reached with other operators, I believe it is in the interest of everyone in the industry to have a safer environment and to preclude fraudulent phoning in the case of Brazil. So we have a positive view on the way that that situation is evolving already in the month of January and February.

On your question in terms of the quality of 3G completion versus 2G, whether you can expect a similar set of quality, that is exactly our target, and that is what we're doing for 2006. Our view in terms of that is that I want to provide to my customers the best consumer experience while using 3G.

In order to do that, rather than deploying UMTS base stations wherever possible in Spain, what we are doing is densifying the coverage of the major urban areas in Spain, or of the major traffic areas, if I may say so in the Spanish market, in such a way that my customers will permanently be on a 3G environment. As a consequence of that, the number of dropped calls will be clearly reduced and comparable to 2G.

I think that when you look at the chart that we provided there, what we were exactly trying to illustrate is the effect of what we're doing -- that is on chart 13, if I recall correctly -- and what we're doing exactly by densifying our network is to have a much similar kind of consumer experience in terms of dropped calls or uncompleted calls on 3G versus 2G. We are working on that, and we are optimistic on reaching similar levels of quality within this year.

Paul Harper - Bear Stearns

Thank you very much.


Our next question comes from James Mckenzie.

James Mckenzie - Fidentiis

I have just got a quick question on the balance sheet. Firstly, I don't know if you could take me through the tax credit situation again, and the way that you said that those tax credits would actually crystallize?

Secondly, I note that in the distribution of debt, over the course of the fourth quarter you have shifted very much out of euros and taken out what look likes slightly bigger positions in dollars and Latin American currencies. I wonder if you could explain your thinking behind that?

Ernesto Lopez Mozo

Okay. Regarding the tax situation, as I said, we have our tax credit within the Telefonica fiscal group that is EUR1.5 billion, and we also have short-term liabilities, short-term liabilities around 1.8 billion, right? They are very similar, and we will be using the tax credit against those liabilities along the year that are based on consolidation growth. That means that probably we should expect some premium in terms of taxes, but in terms of utilization of those EUR1.5 billion, we should be able to use it in two, three years probably.

We have additional tax credits that are classified as deferred tax credits, something like 1.8 billion, that basically is provisions on loans. So let's say that we have loans to Germany, to Mexico, to Italy, so those are considered deferred tax assets because you can only take the provision as a tax credit once you sell the loan, you capitalize or liquidate the Company or whatever. So we should expect along the year, some movement in terms of those provisions from IPSE, let's say, but not yet in terms of Germany.

Regarding the Latin American currencies, the main movement has been issuance of Mexican bonds, right, that have been done by our subsidiary there. Also, at the beginning of the year, some additional was played here, and therefore we basically hedged the Mexican pesos at attractive rates. I believe that having long-term rates in Mexico around 8% are quite attractive. That has been the main move.

The rest has to do with ForEx impact. I mean when you have the Brazilian real inflating so much or even the Mexican peso, you have an effective insulating your liabilities there.

James Mckenzie - Fidentiis

Okay become and in terms of the dollar debt it looks like the dollar debt which I believe is all Argentina, that seems to have increased quite substantially in the fourth quarter. Would that be right?

Ernesto Lopez Mozo

No, I take on that effect, there has been the movement of the dollar versus the euro, but that should not be anything additional there.

James Mckenzie - Fidentiis

Thank you.


Your next question comes from Jesus Romero.

Jesus Romero - Merrill Lynch

Most of my operational questions have been covered, but Antonio, if I could ask you a couple of questions on potential investments. It seems like after the delay in the IPO Free Italia, is likely to get funding, and some of the things we have been hearing is that potentially the owners of Acelera could be interested in selling the license to the three operators in Spain. I wanted to ask you if you think that is possible and if you think that the regulator would allow that?

And then a couple of questions on Latin America. Do you think -- are you interested in the Medi Telecom assets? I don't know if you can say anything on that and the same on the BT stake in Vivo? Thank you.

Antonio Viana-Baptista

Thank you, Jesus. Always difficult questions, but we give the answers. Listen in the case of Acelera, well, we also tried to sell our licenses in the case of Italy or Germany, and unfortunately we had to do the write-off. The thing is at this point in time, we're not engaging into any sort of conversations on that front.

In the case of MediCom, we're not engaging into any sort of conversations in that front. And in the case of BT's stake, I don't know of any BT stake in Vivo that is up for sale. We are very committed to our assets in Brazil. We believe it is clearly the leading company in Brazil and that we're willing to develop it. But at this point in time, I don't know of any assets of BT that is up for sale, and as a consequence of that, we will not make any comments on that front.

Jesus Romero - Merrill Lynch

Thank you.

Maria Garcia-Legaz

We have time for one other additional question.


Our last question comes from Ben Spincer.

Ben Spincer - Credit Suisse

A couple of quick questions on [inaudible] if I may. Indications in Barcelona are that low end GSM handsets could cost $20 in 2007, $15 in 2008. Where do you see penetration heading in the region and over what timeframe? Related to that, where do you see the trend in CDMA handsets, prices going forward?

And then just finally, several times on the call you have highlighted the benefits of scale of the GSM overlays in terms of CapEx subscriber acquisition costs, profitability. Could you just reaffirm your commitment there for CDMA in Venezuela and Brazil and the rationale for that commitment? Thanks.

Antonio Viana-Baptista

Well, thank you for your questions. Yes, at the 3GSM Congress in Barcelona there was some mentioning about GSM handsets in the $20 range. Right now they are still not there. We're still at levels around $35, which is quite an improvement, and I think that the price reduction is continuing, and we see suppliers with that sort of commitment.

As a consequence of that -- and I believe we mentioned that when we spoke about Chile, when Chile has already 71% penetration, I see no reason honestly why in '07 or '08 you may reach 70% penetration across the whole region. I think that is quite reasonable. That is probably where we're aiming at, around probably '08.

The question is, on the quality of the customers and the question in countries with sort of an imbalanced distribution of wealth, whether you will be in a position of capturing the richer part of the community, be it in terms of the corporate market, be it in terms of the individual market. Obviously if you're able to do that, then you're able to serve the other parts of the population on an economical basis.

On your question regarding CDMA handsets, obviously this is a question that we are permanently monitoring. I believe that also the cost in terms of our CDMA handsets is coming down. There is still a gap of, I would say maybe in the range of $7 to $10 per handsets on the low-end. But what you are witnessing is for the kind of markets that we are interested in, the shift in terms of the mix of handsets is moving more and more towards mid-range handsets. On those mid-range handsets, you don't kind find that kind of a difference. You find that you have right now quite an adequate array of handsets available, and you don't find that kind of difference in terms of price. We feel comfortable, for instance, with the kind of handsets that we're having in Brazil.

Now obviously we have been having that experience in terms of all the GSM networks we have been deploying. We are permanently monitoring the cost of deploying new networks and the marginal cost of capturing additional customers be it on CDMA, be it on GSM. So this is a dynamic kind of analogy that we are doing right now and that we have to do permanently, but we feel comfortable with our position at this point in time, in the case of the Brazilian market and even more in the case of the Venezuelan market where the other main competitor is also on a CDMA.

Add to that the fact that in some of these markets we are able to offer 3G equivalent services based on EVDO only in cases like the main regions of Sao Paulo or in cases of Caracas for instance where that is providing for an increased usage on the side of our customers.

Ben Spincer - Credit Suisse

Thank you.


This concludes our Q&A session. I would like to turn the call back to Mr. Viana-Baptista for closing comments.

Antonio Viana-Baptista

Right. So I thank you all for your questions. Obviously if you have any additional questions, our Investor Relations department will be available to discuss any issues you may have. I look forward to meeting you soon or otherwise to meet you at the Telefonica Investors Day that will take place in mid-May in Valencia. Thank you to everybody. Bye-bye.


Ladies and gentlemen, thank you for your participation. This concludes today's conference, and you may now disconnect your lines. Thank you.

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