Pablo Eguiron Vidarte - Head of Investor Relations José María Álvarez-Pallete López - Executive Chairman Ángel Vilá - Chief Operating Officer and member of the Executive Committee.

Georgios Ierodiaconou - Citi Luis Prota - Morgan Stanley Akhil Dattani - JPMorgan Chase & Co. David Wright - Bank of America Merrill Lynch Julio Arciniegas - RBC Capital Markets Giovanni Montalti - UBS Investment Bank Mandeep Singh - Redburn Partners LLP Dhananjay Mirchandani - Sanford C.

Bernstein & Co., LLC Keval Khiroya - Deutsche Bank Joshua Mills - Goldman Sachs Sam McHugh - Exane BNP Paribas SA.

Good morning, and welcome to Telefónica conference call to discuss January-June 2017 results. I'm Pablo Eguiron, Head of Investor Relations.

Before proceeding, let me mention that financial information contained in this document related to the second quarter of 2017 has been prepared under International Financial Reporting Standards as adopted by European Union. This financial information is unaudited.

This conference call webcast, including the Q&A session, may contain forward-looking statements and information relating to the Telefónica Group. These statements may include financial or operating forecasts and estimates based on assumptions or statements regarding plans, objectives and expectations that make reference to different matters.

All forward-looking statements involve risks, uncertainties and contingencies, many of which are beyond the company's control, and all of which may cause actual results, plan, objectives or expectations to differ materially from those expressed.

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

Now, let me turn the call over to our Chairman and CEO, José María Álvarez-Pallete..

Thank you, Pablo. Good morning, and welcome to Telefónica's first-half results conference call.

I would like to take this opportunity to highlight the changes to our organizational structure announced last Tuesday, to accelerate the pace of business growth, facilitate the achievements of new goals and promote the new values that will shape corporate governance in the coming years.

I would like also to congratulate Ángel Vilá as Chief Operating Officer and Laura Abasolo as Chief Financial and Control Officer. With me today is Ángel. And during the Q&A session, you will have the opportunities to address as with any questions you may have.

I'd like to begin by highlighting the acceleration in organic growth this quarter across revenues, OIBDA and operating cash flow, thanks to the successful implementation of our strategy. Our focused approach is paving the way for our ongoing transformation with efficiencies, synergies and digital agenda.

Our business is more efficient, with OIBDA margins expanding to 32.1%, an increase of 1.2 percentage points year-on-year in organic terms. Moreover, higher quality assets drive our strong competitive position in main markets.

This progress results from targeted investment towards ultra broadband, fostering digitalization, cognitive intelligence and differential value proposition to our customers.

Our balance sheet continues to get stronger, with net debt down €3.7 billion year-on-year and a robust free cash flow in a context of lower cash interest costs and longer average maturities. So to sum up, we are accelerating growth, with organic revenue growth of 4.1% ex-regulation.

Then margin expansion is fueling organic OIBDA growth to 7.2%, which accelerates again at operating cash flow level to 17.5%, thanks to lower CapEx. And in addition, we are reducing net debt by €5 billion year-on-year when including Telxius closing.

So we are in the right direction, as it reflects the average of our 2017 guidance while we reiterate our dividends. Turning to Slide 3, let me summarize the key financials. Second quarter revenues increased 1.9% in nominal terms to reach almost €13 billion, and 3.1% in organic terms. OIBDA topped €4.2 billion, up 6.1%, or 7.2% in organic terms.

Operating cash flow ex-spectrum totaled €2.3 billion, with very robust double-digit growth both in reported and organic terms. I would qualify this as a strong set of group financial. The upgrade of 2017 guidance is best outlined in Slide #4. In the first half of the year, revenues have clearly beat guidance, growing by 2.3% versus guidance of stable.

We think that better trends posted in the second quarter, in addition to profitable growth expected for the second half of the year, allow us to increase this guidance to a growth of above 1.5%, maintaining 1.2 percentage point of negative impact from regulation.

This higher revenue growth is not expected at the cost of other variables, as we maintain our guidance for the rest of the metrics. We continue guiding for margin expansion and lower CapEx intensity. Regarding the dividend, we paid the second tranche of 2016 dividend of €0.2 per share in cash, the last 16th of June.

In addition, we confirm the €0.4 per share in cash for 2017. Finally, we reiterate our aim [ph] to maintain a solid investment-grade rating.

Moving to Slide 5, first half of the year reported OIBDA growth of 5.5% flowed directly to net income increase of 28.9%, reaching €1.6 billion in the first half of the year, driven by sound management of non-operating results. Underlying EPS totaled €0.38, up 32.3% year-on-year. Let me mention that we have adopted a synthetic FX in Venezuela.

This has had a negative impact in revenues and OIBDA, with this Venezuela's contribution to total group being reduced to 0.3% in revenues and 0.2% in OIBDA.

On Slide 6, you can see very robust free cash flow dynamics in the graph on the top left of the slide, accelerating sequentially and year-on-year, surpassing the €1.6 billion mark in the first half, an increase of 98.6% versus a year ago.

Of this increase, as seen on the right, 70% came from operating cash flow, while interest payments and working capital more than offset the drag from taxes and others. For the second half of the year, we expect free cash flow to improve further.

Let me mention that net debt decreased in the second quarter year-on-year despite seasonality and dividend payments, in contrast to trends in previous years. On Slide 7, we show the breakdown of OIBDA growth looking at organic trends and FX. In the second quarter, OIBDA increased by €234 million compared with 2016.

It is worth highlighting that the organic contribution was €285 million in the quarter versus €52 million in the first quarter, so growth has higher quality. FX deducted €51 million year-on-year, as the Venezuelan bolivar was devaluated.

But if we exclude this, exchange rates continued to add €70 million this quarter, mainly coming from the appreciation of the Brazilian reis against the euro. Turning to Slide #8, we review the composition of this growth with the strength that organic figures have shown.

Total revenues grew a solid 3.1% versus the second quarter of 2016, or 4.1% excluding regulation. Service revenues and OIBDA accelerated versus first quarter by 120 and 590 basis points, respectively, with a generalized improvement across regions in both service revenues and OIBDA.

OIBDA expansion and CapEx decline explain the 860 basis point sequential acceleration in operating cash flow, with all segments growing year-on-year. Thus, I would like to highlight the operating leverage improved returns. Data monetization continued to contribute to revenue acceleration, as you can see on Slide 9.

LTE customer base increased 63% versus June 2016. And average data producer was 59% up, resulting in booming traffic that is threefold compared to last year. The consistent growth in volumes is fostered and further monetized by the developments of integrated data offers that follow a more-for-more approach and increased value for money.

The benefit of this strategy is a clear ARPU accretion, translating into a ramp-up in mobile data revenue growth to 17.8% year-on-year, representing already 60% of mobile service revenues. On the fixed business, data volumes continued to post high growth, showing a huge monetization potential.

As an example, fiber traffic per customer in Spain continued expanding and is now 2.5 times higher than average DSL traffic. On Slide 10, we show the value of creation opportunities we have ahead of us, as we have all through [ph].

First, speed and connectivity is our core competitive advantage allowing us to monetize the ultra-broadband networks deployed. Second, service beyond connectivity offer our customers differential services beside the traditional ones, and TV is the main driver.

Third, cognitive intelligence will add more value to our customers, building loyalty, improving efficiency and opening new optionality. We are currently working to launch AURA in several markets in the next few quarters. On Slide 11, we show our progress in the digital ecosystem.

Video continues to be a key pillar of growth, now and in the future, accelerating revenue growth in the quarter to 4.8% year-on-year, as we consolidate our leading position in Spain and LatAm as one of the main distributors of content in the Spanish language. This success is built on our TV platform and differential bundling strategy.

In other digital services, we are integrating solutions to strengthen our B2B offering and become an increasingly relevant player, with progress made across cloud, security and machine to machine.

Turning to Slide 12, we show progress in Telefónica global resources to adapt our network to traffic growth as well as to provide greater flexibility and foster end-to-end capabilities. Our fiber and cable coverage surpassed 41 million premises, while our LTE coverage reached 68% on average across our footprint, 89% in Europe.

Regarding virtualization, we are currently implementing in four countries our UNICA program, providing the support needed to smoothly adopt and deploy virtualized solutions, enabling the transformation to software-driven networks.

In parallel, end-to-end digitalization, mainly on the back of Full Stack projects, increasingly delivers efficiency and agility. Now please turn to Slide 13. Telxius posted a solid set of results in the second quarter with a strong organic revenue growth of 11.4% and robust OIBDA margin of 47.9%.

Regarding its business performance, towers tenancy ratio over the quarter improved to 1.3 times, while cable IP traffic grew 31% and capacity bandwidth 62%. It's also worth mentioning that marine deployment of MAREA and BRUSA continued as expected. Now, I hand over to Ángel..

Thank you, José María. On to Slide 14, Spain showed a clear improvement of commercial trends and positive momentum in our upselling strategy. Our focus on value and churn reduction allowed us to achieve sound commercial results as follows.

The mix of Fusión subscribers continued to improve, with high-value packages increasing to 24%, while Fusión ARPU grew quarter-on-quarter to almost €85, up 6.4% year-on-year. TV returned to positive net adds, on a widespread take-up of a new Fusión bundle. Fixed broadband gained traction gradually since March, heading in the right direction.

And mobile contract base posted very solid growth of 5%, with a better portability balance. Furthermore, we continued to strengthen our positioning with market segmentation. As such, the new convergent entry-level offer with differential TV content launched in July will foster trading dynamics in the coming months.

Continuing with Spain on Slide 15, service revenues year-on-year trend posted a sequential improvement of 0.8 percentage points, driven by consumer revenues growth and a lesser decline in other revenues.

Revenue is on the right path, as service revenues have already stabilized year on year, excluding the lower TV wholesale of La Liga, an impact that will disappear from mid-august onwards.

Despite tougher comps of personnel savings, ongoing cost reduction led to a 0.9 percentage points improvement in OIBDA trend, and margin reaching 40.6%, up 0.8 percentage points sequentially. Moreover, I'd like to draw your attention to the fall in CapEx, minus 21% year-on-year in the first half.

That comes from our early build of new generation networks; and translates into a superior cash flow conversion, as shown in the 8% of year-on-year growth delivered in operating cash flow. In short, strong cash flow generation is here to stay. Moving to Slide #16.

Telefónica Deutschland is driving solid momentum in the market shifting to stimulating data growth.

O2 Free and O2 brand 15-year anniversary promotions accelerated net additions to 197,000 in contract and 322,000 in prepay in the quarter, a robust LTE increase, sustained traffic and data usage growth with impressive early statistics from O2 Free 15 customers with data usage above 3 gigabytes.

On financials, MSR trend continue to improve in the second quarter to minus 0.4% year-on-year, excluding regulation. OIBDA growth rate accelerated to 3.8% year-on-year. And OIBDA margin expanded 1.9 percentage points, leveraging on incremental savings of €40 million despite commercial investments.

In January to June, operating cash flow growth remained strong at 4%, leveraging synergies and transformation initiatives. Over now to the UK, on Slide 17, where we have once again leveraged on our strong customer focus, resulting in a positive performance across metrics.

We continued to grow our quality customer base, as contract was up 2% year on year, maintaining market leading loyalty levels, and LTE penetration reached 58%. This led to an acceleration in financials this quarter.

Revenues were up 2.6% year-on-year, OIBDA 3.9% and operating cash flow 5.3%, despite the fact that our accelerating LTE rollout is driving an increase in CapEx. Moving on to Brazil now on Slide 18, we have posted another set of strong results this quarter, accelerating profitable growth.

In mobile, our best-in-class service quality, significantly increasing our 4G and 4G+ coverage, drove stronger adoption of data services, and as a result, mid-single-digit ARPU growth. On top of that, it also allowed us to capture almost 60% of new contract customers in a context of more intense competition.

In fixed, we continued to focus on fiber deployment, passing new cities and complying with our plan to expand our reach. Thus, we achieved new record-high FTTH and IPTV net adds. And ARPU is reflecting the shift to upgraded networks. On Slide 19, you can see how this strategy is flowing into the P&L with results once again well ahead of the market.

Top line service revenue was 2.3% up year-on-year, with solid mid-single-digit MSR growth and fixed revenues recovering momentum. Moreover, consistent cost control, coupled with continued capture of synergies are reflected in the improved profitability, with OIBDA increasing by 7% in Q2 and operating cash flow by 17% in the first half of the year.

In Hispanoamérica, as shown on Slide 20, customer upgrade to higher-value services is the main driver behind ARPU growth. Thus in mobile ARPU growth jumped to 21.1% year-on-year in the second quarter, with positive trends both in prepay and contract.

In the fixed business, fiber and cable connections grew 46%, driving fixed broadband and pay TV ARPU to increase by more than 9% and 12%, respectively. The continued expansion of our 4G and fiber networks, coupled with a relatively low penetration levels, represent a strong support to continue maintaining this quality growth.

Moving to Slide 21, we can see how these positive trends are reflected in revenue and OIBDA growth, ramping up to 15.5% and 20.9%, respectively, and flowing into a 43.2% operating cash flow growth in the first half of the year.

These positive trends illustrate the outstanding performance in Argentina, the steady positive contribution from Colombia, the recovery in Mexico and some signs of improvement in Peru and Chile against a backdrop of intense competition.

Let me also remark that positive growth rates are visible in both organic and reported terms despite the devaluation in the exchange rate of the Venezuelan currency this quarter. Let's move now to the financial metrics on Slide 22.

We keep on steadily lowering our net debt-to-OIBDA ratio, down to 2.86 times as of June 2017, which could be further reduced to 2.78 times including the Telxius stake sale. Strong organic free cash flow generation is the key driver of this leverage improvement. Including the Telxius deal, net debt is €5 billion down year-on-year, a 9.5% decline.

We expect further deleverage until year end, thanks to stronger free cash flow in the second half of the year. On Slide 23, let me highlight the strong liquidity position above the €21 billion mark, built to face comfortably next 2 years of maturities.

The effective cost of debt in June 2017 stood at 3.22%, 72 basis points lower than at the end of 2016. I will now hand it back to José María to recap..

Thank you, Ángel. To finish, please move to Slide #24 for our final conclusions. Today's strong set of results demonstrate our excellent position for delivering sustainable long-term growth. As such, our organic growth is accelerating across the board, on sustained commercial momentum.

We can focus on high-quality connections and our more-for-more actions. This allow us to strengthen our differentiation based on two key pillars, network leadership and quality assets, thanks to upfront CapEx efforts made in previous years. Furthermore, our EPS is growing very nicely.

And the free cash flow profile is clearly improving, driving a remarkable organic debt reduction. Finally, we are upgrading our guidance for the year. Thank you very much, and now we are ready to take your questions..

[Operator Instructions] We will take an opening question from Georgios Ierodiaconou. Please go ahead, your line is open..

Yes, hello. I've got two questions, one regarding Spain and one regarding Peru. In Spain, you showed the mix of the customers in Fusión between the three different tiers. And obviously, looks like the lower end is the one that is losing weight.

I just wanted to see if it's possible to get an idea of the churn levels you are seeing between the different tiers and whether there is a big difference between the lower end and the other 2 tiers.

And then secondly, whether you are seeing some down trading as you continue to offer more-for-more on one side and then have some promotions in the market on the other side. And then my question around Peru is, as I can see the margin is now in the mid 20s.

And we all know it's a very competitive mobile market, and indeed you still seem to be losing a lot of contract customers. But I'm under the impression that competition in fixed is more balanced. So I was wondering how low could these margins fall given that around half of your revenues come from the fixed line services.

And is it a point we've reached now, where in mobile effectively the margins are at very low levels?.

Thanks for your questions.

In terms of churn levels in the different segments of the Fusión customer base, what I can tell you is that in the mid to high end churn in the second quarter, the numbers, is in the high and midterm churn is 70% of the total churn on the lower levels, which means that churn is much lower in the high, mid and then in the lower segments, which is natural.

And we think that that will keep improving going forward. That would put more value in the equation. And in terms of your question around Peru, the evolution of Peru has different performance in the mobile and in the fixed. In mobile, competition remains very high. And also, this quarter we had the effects of the El Niño and some flooding effects.

Prepaid is under a significant amount of pressure and also postpaid. You know that we have launched very recently a repositioning of our prepaid offer. And we are starting to have some positive signs of recovery, mainly in terms of the level of recharges, which is the level of active customer base that you have.

So we are starting to see some signs of improvement. On the fixed line side, commercial trading remains very robust. Service bundling with Pay TV accesses have been growing 5% year on year. And TV ARPU, to give you an example, is up 13% year-on-year. These broadband accesses are 2% up year-on-year. And we have been having positive net adds of 15,000.

So that means that we are seeing a robust trend on wireline and some signs of improvement on the wireless side. It is true that OIBDA is significantly down year on year. And the margin has been falling significantly.

But if we are able to stabilize the prepaid segment and we keep working on the postpaid segment, we should be able to have a positive performance in the - a better performance in the second half of the year.

Please bear in mind that in the second quarter of 2016, we recorded a positive impact from the reduction of a tax provision, and that has been now impacting the year on year comparison in OIBDA. Finally, in terms of the down trading in Spain, promotions are, namely the last one that we launched on the low end, are starting to foster gross adds.

And then we are also following the value strategy, which means that we are improving the mix from the standalone to convergence. And the upselling convergence from low to mid, high segments is also keeps also working. So we are not seeing so far, it is early times, because of the recent promotion, different levels of migration on the chain.

So we don't have signs to be concerned on that side so far..

If I could ask a very quick follow-up, I know it's only been a few weeks, but since you launched the new promotions, have you seen a broadband improvement or are you still losing broadband customers?.

We have seen an improvement, but again, it's early days. It's just two weeks away from the promotion. But, yes, we have been seeing an improvement..

Thank you..

Thank you, Georgios. Next question, please..

We will take our next question from Luis Prota of Morgan Stanley. Please go ahead. Your line is open..

Yes, thank you. My first question is on Spain. And I would like to get some more color on the market dynamics and how these could evolve going into the second half. I've seen that Fusión customers have come down Q on Q 4,000, which is first time happening, and also decline in broadband net additions, lower growth in fiber.

Are you really seeing a lot of competition or just stepping back from the market? Or also revenues were growing a bit less than expected in the consumer segment, so I wonder whether that did count? So if you can elaborate a bit on the dynamics this quarter and how this could progress into the second half, could be useful.

And the second question is on the potential IPO of assets like Colombia and Argentina that have been coming out in the press. I don't know whether you have plans for that. And also the recapitalization of Colombia, whether there are any new news on that? Thank you..

So thanks for your - thanks for your question, Luis. In terms of Spain, let me start by saying that we are seeing a sequential improvement in revenue evolution. And we are seeing better trends in commercial trends, with a few exceptions, and also, which is also very important, share reduction in almost all segments.

Remember that Fusión is already a highly penetrated product in our base, which means that 85% of broadband customer are under Fusión, 84% of TV customer and 70% of contract customers. And it's also growing in value. Ultra broadband fiber is up 38% year on year, TV 70% year on year, and high value packages 24% year on year.

Also worth highlighting that Fusión ARPU is up 6.4% year on year to almost €85 per in average. And churn is down, Fusión churn is down to 1.3%. I will also to highlight the mobile access' evolution.

And it's the best performance we have had since the third quarter of 2010, with net adds of almost 70,000, excluding machine to machine; and churn down to 1.3%. What I'm trying to tell you is that the market consolidation plus the environment is helping us with this more-for-more strategy.

We think that the B2C improvement that we have seen in this quarter should keep growing in the next quarters. And we also aim to keep improving on the B2B segments. The wholesale impact will be fading away progressively, as the year-on-year comparison will ease away. And therefore, we think that we will keep improving.

And we'll keep evolving towards revenue stabilization, service revenue stabilization in Spain. And also, it is worth highlighting that handset revenues are significantly down, as we - it took us a while to eliminate the structural subsidies out of the equation in the Spanish market.

And therefore - and as also hardware revenues gives at least very low margin. We will not push much on that side. So we have a better and more positive outlook this quarter in revenues. And we think those - that evolution could keep going for the next quarters..

Hello, Luis, regarding our Argentina first. In the second quarter of 2017, Telefónica's Argentina revenue, OIBDA and operating cash flow growth accelerated due to increased consumption and better regulatory environment. We believe our business in Argentina is currently undervalued.

And the opportunities that the market offers have not priced in, as valuations applied in the sum of the parts are very low, despite the fact that performance is very good and we are already repatriating cash from the country. Having said these, we do not comment on market rumors regarding any potential IPO there.

Regarding Colombia recapitalization, the process of recapitalization of ColTel continued progressing on recent months. The government continued advancing.

On June 30, a law was approved by the Colombian Congress to allow the government to subscribe the capital increase in order to prepay the obligations with the Parapat in accordance with our shareholding. The next step in the process is approval of a decree and other internal government approvals.

Once the decree is approved, shareholder meeting can be held in order to approve the capital increase. However, there has been a recent news, result of an arbitration initiated by the ministry of information and communication in connection with the potential reversibility of certain assets.

On the mobile - under mobile former [ph] concessions, we believe that this arbitration is not conducive to investments in the telecommunications sector in Colombia. We are analyzing the implications of that arbitration award and the legal measures available to us at both local and international levels.

And, obviously, yesterday news could potentially affect the process, although it's too early to say what would be the potential impact..

Okay. Thank you..

Thank you, Luis. Next question, please..

We will take our next question from Akhil Dattani of JPMorgan. Please go ahead. Your line is open..

Yeah, hi, good morning. Thanks so much for taking the questions. I've got two questions, both related to Spain, please.

Firstly, just on the new €45 Fusión offer that you've launched and I guess, just as a follow-up to the prior question on this, if I look at the slides that you provided on the mix of customers, it looks like it's about 27% of the base, a bit on your low end.

I guess it would just be useful to get some color in terms of how you're thinking of what the impact of this is, both in terms of down-trading from the current €55 plan to the €45, how you think that kind of drives your add mix.

And when we think about the move to that, obviously, there's been a lot of emphasis in the market around MásMóvil, should we think about that as having been a relevant factor for you driving this change in pricing? Or do you think there were other factors behind why you've done that? And then the second question is really around your other than wholesale segment.

You mentioned earlier in the call that we should expect a decent recovery through Q3 and Q4 as the wholesale TV drag washes out.

Could you just remind us of some of the bigger ticket items that are likely to impact as we look at the next couple of years? And I guess what I'm mindful of is you've got on the negative side the Yoigo contract washing out, but again offsetting that you've got the new wholesale contracts on fiber you've signed with Vodafone.

So I just - I guess, it's a really broad question as to how do you think, post this year, that wholesale in other revenue stream develops? Thanks a lot..

Thanks for your question. Regarding the first one, around the new tariff that was launched three weeks ago, our main target was to reactivate the gross adds at that level, because we are having good results in upselling our customer base.

And therefore, if you compare the quality of the Fusión customer base this quarter compared with a year-ago, you will see that it has improved. But we see the opportunity of having a competitive - an upgraded and competitive, in the new environment, low-end offer.

And that's why we have launched this €45 tariff, which allow us to fight and capture some activity on the low end. And certainly as there are new actors, as Más Móvil, just you mentioned. I think that we can be competitive, because remember that we have the best network, the best content and the best distribution channel in Spain.

So we think that we can reactivate the low-end activity for Telefónica without triggering down trading in our customer base. And the proof of that is that, in the first three weeks - and again, it's too soon to conclude.

But in the first three weeks of launching that tariff, we have not seen major activity on customers moving from the €55 into the €45 offer. Again, three weeks is not a good sample, but we think that so far, it proves that we can be more active on the low-end segment without triggering significant downturn - down selling in our customer base.

In terms of Más Móvil, it has been certainly a disruptive element in the market. It is focused on low cost instead of value, so we don't see immediate risk to market evolution in the mid to high end, it's capturing market share but not that much revenue share. And it's also faced several challenges in the current market structure.

The market is oriented to value with differential assets. And remember that Más Móvil has no TV. Subscribers are more loyal on the back of convergence and totalization, with lower churn. And they have a smaller market growth in fixed broadband and mobile.

Within that, by revamping our entry-level portfolio, we will have significant possibilities going forward to reactivate our growth in Fusión without affecting the quality of the base. In terms of the wholesale revenues, we include there, as you know, the TV and the MVNOs part.

I was mentioning before that the football impact that has been affecting us, because we have no revenues from La Liga since the third quarter of 2016, will be progressively fading away.

But remember that we are having also right now not just the Vodafone contract, which is one of the affecting positively, but also good performance in NEVA [ph] and roaming revenues. So we think that we could have a relevant upside coming from the NEVA growth in the midterm, it's going to be progressively.

And that will be compensating progressively the decline in the traditional unbundling of the local access.

So we will give you more color in the next quarter of this change of mix in the wholesale revenues, but we think that the bulk of the impact coming from the football rights will start to fade away, starting in August, and therefore we should have an easier comparison year-on-year in the next quarters..

That's great. Thank you..

Thank you, Akhil. Next question, please..

We will take our next question from David Wright of Bank of America. Please go ahead. Your line is open..

Yes, I think actually a lot of it was covered in the last question, but I just wondered whether I could get a little more granularity on wholesale fiber, because it seems like that is one of the big opportunities to drive cash flows on next year.

The agreement with Vodafone, please, when exactly does that kick in, in terms of the new rates being offered to them? And how are you expecting the actual fiber wholesale rate to evolve over time? My understanding is the DSL unbundling is around €9.

What should we expect the fiber level to be, please? And when could we really expect the Vodafone agreement to catalyze an acceleration? Is that the right way to read it? Thank you..

Well, thanks for your question. I will try to give a little bit more of color. Yes, in the wholesale segment NEVA is growing very fast. It's 2.6 times more important this quarter than a year-ago. The growth is accelerating, but it is just 14% of the total amount. The Vodafone agreement, as you know, is a five year commercial agreement.

It will give them access to our fiber network, it's already starting. And it will be accelerating progressively, but it's still very low figures included in this quarter. In terms of the mobile side of the wholesale revenues coming from MVNOs, Más Móvil is still with Telefónica in 2017, because it will be migrating progressively.

And as a final piece of color, let me tell you that excluding La Liga, order revenues will be flat year-on-year. So I think that going forward, we should see a better performance of the wholesale segment.

And I think that in the coming - and with respect of the rise of the bundling of the local access - of the local loop, and the €9 at the corporate line that price will be settled in - I think, in the first quarter of next year. And that's expectation that we have and should be significantly higher than the €9 that you are contemplating.

But it is still unclear when that - the price of the local NEVA is going to be established. So overall, with the new rates coming from the fiber access, the progressive improvement coming from the Vodafone agreement, and softening of the impact of the football rights, we should expect a better performance of the wholesale revenues going forward..

That's great, José María. Thank you..

Next question, please..

Our next question comes from Julio Arciniegas of RBC. Please go ahead. Your line is open..

Yes. Hello, thank you for taking my question. So my first question is regarding the mix of consumers, that you've got the mix of the low-end has decreased from 29% to 27%.

Can you give us some color of the dynamics? Is this mix reducing due to higher churn in the low-end? How should we think going forward after basically the company has launched some attractive offers in the low-end, spinning down? That's my first question.

And the second question is that, if I look in the results of our - of your main competitors in terms of broadband KPIs, they have grown, but they haven't been great. The rate of growth has been lower. Do you see any risk that they are going to become a little bit more active, more aggressive in the low-end to try to boost growth again? Thank you..

Thanks for your question. I will try to give you a little bit more color. Well, first, taking the quality base for Fusión. We see it improving, and in fact, we keep working on that. So the target that we have launched is mainly devoted to attracting customer, where we see value on the low-end, not to preserve our existing customer base.

And the proof of that is, that again too soon to say, but in the first three weeks of the offer, we have not seen major change of dynamics in customers migrating downwards. So we think that we could - we should be able to keep building on the quality base of Fusión going forward. And the proof of that is the ARPU expansion.

Again, let me try to give you a little bit of color on the ARPU expansion main levers. Out of the 6.4% increase year-on-year or which is roughly €5.1. On the positive side you have - we have the tariff upgrades, the More for More strategy; the upselling to higher-value packs, but we have also some dilutive effect from promos.

And the promos are mainly devoted to give a taste to our customers of the superior product, and then a significant part of them is staying on that - on the higher packages. And then we also have some diluting effect from the old mobile add-ons that should be progressively fading away.

So just to tell you, as a result, that we keep working on improving the quality base, and that links perfectly with the second part of your question.

It is true that we are seeing some less gross adds in - or net adds in some of our - so mostly gross adds in some of our competitors, but it is also true that all of them - the bulk of them are also based on upgrading their customer base, on improving their customer base. And I think that's a positive sign of rationality in the markets.

So we do not see major changes in the market dynamics in Spain. And it's something probably towards more rationalization, but again we will keep you posted on the reaction of our own customer base and from the market to our recently launched tariff..

Thank you very much..

Thank you, Julio. Next question, please..

Our next question comes from Giovanni Montalti of UBS. Please go ahead. Your line is open..

Hello, good morning. Thanks for taking the question. Very, very quick ones. On towers, would you consider as an option the contribution of additional towers to Telxius? I mean this was one of the strategic pillars at the time of the IPO. I was wondering, if this could be still a lever for you.

And on South America, is there any, let's say, progress, are you more optimistic about the possibility to reach some more, let's say, extensive sharing agreements, especially with your top competitor there? And very last one, if I may, on wholesale volumes, I see that disconnections from your fixed network in Spain are improving materially both quarter-on-quarter and year-on-year.

Should we expect this trend to continue, obviously also thanks to the Vodafone share agreement? And is there any room to reach some similar comparable agreement reaching some parts of the country with Orange? Thank you..

Hello, Giovanni, regarding Telxius, on the one hand, we are progressing very well in the process to close the transaction with KKR. We've got all but one of the approvals that we needed. And we're expecting to do the first closing in Q3 or very early Q4 and the second closing in Q4, so that's progressing well.

The strategy, of course, is to grow the vehicle by contributing more towers. It's Telxius is already increasing its tower perimeter. It's working a lot in build-to-suit towers for Telefónica units and other parties. And also, we are contemplating contributing some of our portfolios of towers into Telxius.

So yes, we expect it to grow its number of towers. And as José María said during the presentation, we are progressing in the layout of the new submarine cable systems..

Taking your question on network-sharing agreements in Spain - I mean Brazil. The answer is yes. We have already some very interesting agreement in place, like in Colombia with Millicom, but we think that this is a filling which we can do much more.

In places where infrastructure deployment is not going to be a competitive advantage, I think that it makes all the sense to share more elements of the network in order to accelerate deployments. And I think that the interest of all - of everybody are aligned, the customer, the society and the different players.

So yes, as we speak, we are having different conversations, including our largest competitor in the region. We don't have concrete news to share with you at this stage, but yes, we are open. We think it makes all the sense.

And in terms of the wholesale volumes, we have a - the reading that you have is correct, but - and also remember that, out of the total number of wholesale accesses, which is 4.3 million, just less than 600,000 are coming from fiber.

So we do see a significant opportunity again in places which makes all the sense to offer this kind of agreements to extend those kind of agreements to other players. So the answer is, yes. We are open to extend those agreements to other players..

Thank you very much..

Thank you, Giovanni. Next question, please..

Our next question comes from Mandeep Singh of Redburn. Please go ahead. Your line is open..

Hello, thank you for taking the question. I have two questions, please. One, sorry to come back to Spain, I know, you had a lot of minute details, so far. I think in the presentation you said that service revenues were growing at plus 0.2%, excluding the impact of wholesale drags - or the TV drags rather.

Just sort of, I think Akhil asked about this earlier as well. Once you move into Q3 and Q4, obviously that diminishes, but [Uago Pepaphone grow] [ph].

I mean is plus 0.2%, i.e., something north of positive, a reliable indicator for what service revenues could look like in the second half of the year just bearing in mind the various moving parts? Are we on an underlying basis back to positive? That's the first question.

And the second question is just if you could perhaps give us a little bit more color on the sort of hybrid call date for next year and sort of strategy around hybrids, please? Thank you..

Thanks. I'll answer your question on the expected evolution of revenues in Spain, let me reiterate we do not provide guidance on the different business divisions, but having said this, we expect revenue trends in Spain to continue improving in the next quarters. We remind that total revenue will continue to be affected by lower handset sales.

And as you know, those have very little impact on OIBDA, but if you ask me about service revenues evolution, the message is that service revenues would be already stable in the second quarter, when you exclude the negative impact from the lower wholesale sales of La Liga rights, as I mentioned before.

And that, this negative impact, will disappear from August. For the next two quarters, we expect that service revenues should continue to improve and will remain relatively stable in year-on-year terms. We'll give you more color in the third quarter, when we see the actual result of the €45 tariff..

Regarding hybrids. We have an outstanding amount of €6.5 billion equivalent recorded as equity, accounting wise. This amount includes the US$500 million issuance in Colombia. The first date of first call will be, I think, in September next year. Of course, we cannot make a definitive or irrevocable commitment to redeem the notes at the first call date.

It should be noted that at the first date, the securities are expected to lose their entire equity credit from S&P, which is a strong incentive to replace them with an instrument of similar seniority or equity. So we would be focusing on replacements to keep the equity component..

Okay. Thank you very much..

Thank you, Mandeep. Next question, please..

Our next question comes from Dhananjay Mirchandani of Bernstein. Please go ahead. Your line is open..

Yes, thank you very much. My question is on consumer revenues in Spain, which account for about half of Spanish revenues.

Now the Fusión revenues, which are about two-thirds of consumer revenues, grew by 10%, and yet the segment posted a moderate 1% revenue growth year-over-year, so it's rather obvious that the decline is coming from the non-Fusión revenues, a 1/3 roughly, which were declining at 13%.

But could you please help us understand how voice line loss trends in the consumer segment are evolving, and more importantly, where these customers are going to?.

Thanks for your question. You are right. The 54% of total - of service revenues is in the B2C segment, and out of that, the bulk is Fusión. The main drivers of the growth of Fusión is one-third subscriber growth, and two-thirds the ARPU increase.

And in the non-Fusión, they are declining 30% year-on-year, which is smoothening its evolution compared with previous quarter. But it's also been affected on the non-Fusión side and revenues for the former Digital Plus customers, which is - which again the year-on-year compassion should be easening in the next quarters.

So it's not just the traditional lines. It's also the former Digital Plus customer. Those contracts are either migrating into the fiber product or even going to some fiber competitors, offers from the competitions.

I don't have it here, the exactly number of how those customers are represented, but I guess that we are trying to attract most of them to our fiber offer. So to summarize, the non-Fusión declining minus 30%, softer decline than a quarter ago, it is not just the traditional lines.

It includes also the Digital Plus customer, whose bundling is also progressing and therefore should be fading away in the next quarter. And out of the traditional lines, parts are coming to our fiber offer and parts are going to the competitors..

Thank you.

May I ask a follow-up question or a second question, please?.

Please, go ahead..

So Orange today announced its average revenue per converted account of about €58. Your Fusión ARPU, which arguably is a similar indicator, was about €85 for the quarter, so that's a 45% premium.

I mean, how do you explain this threat or justify this premium? And what are you doing to address what looks, at face value, like a pretty disproportionate exposure to a potential re-pricing risk in the market?.

Well, the explanation that we have for the quality of our Fusión base is, first, we have the best fiber network in Europe. There is no country in Europe that has a similar fiber network that the one that we have been building in the last years.

And by the way, keep an eye on operating free cash flow generation in Spain, because as we have - we are reaching a significant coverage of fiber in Spain, CapEx intensity should be progressively going down. But the price premium is justified because we have the best network. We have the best platform in terms of functionality and DVR.

We have the best contents. None of our competitors have a similar level of contents that the one that we have in spite of regulation that forced us to offer premium content to our competitors. And also, we think we have the best distribution channels. So - and we have started first to up-sale our customers.

So I guess that, in the case of the competitor that you mentioned, you are including all the customers that they have, including the adjusted customers. And therefore, they would - I would not be surprised that they will start to offer upsell offers to their customer base.

And therefore, that could - their ARPU could expand and shorten that differential. So I think that there is a mix of effects. And if you ask us if we are concerned, let me point out that churn in Fusión customer is very - is significantly controlled. So for the time being, we think that this is a sustainable market evolution.

We think that there is significant incentive for our competitors to upgrade their customer base by offering their customer better products through their network. And then finally, let me highlight that, again, churn in the different levels of Fusión is highly controlled. Fusión churn overall is 1.3%. It's down 0.1 percentage point year-on-year.

Postpaid churn on the mobile side is 1.3%, it's down. TV churn is also down, so for the time being, it looks like competitors and customers are appreciating that we have a significant competitive advantage in terms of all the different features that I mentioned before..

Thank you very much..

Thank you. Next question, please..

We will take our next question from Keval Khiroya of Deutsche Bank. Please go ahead. Your line is open..

Thank you. One question - I've got one question on Spain and one question on Brazil, please. In the second half of last year, you did have another price increase in return for giving free football included in some of the bundles.

And do you see much of a drag on Fusión ARPU in the second half as this price rise annualizes? Or did it not have much of a net benefit given some TV customers would have no longer paid for the football? And then secondly, on Brazil, this time four years ago, I think we were getting - starting to get excited about potential consolidation in the Brazilian wireless market.

Do you expect Brazilian consolidation to return on the agenda at all? And would you be in favor of it if it were to happen? Thank you..

In terms of your first question of the packages and the football, we are not seeing major changes in the composition of the packages going forward. So I will try to understand better your question off-line and give you some color through the IR, because we have not seen major changes on the football side, on the contents.

We have launched Fusión off-deal [ph], in trying to pull the - to try to differentiate ourselves through movies and series as an alternative, and our customers are reacting well to that, but we are not seeing major changes in the composition or the appetite of customer based on the football.

And in terms of consolidation, on the consolidation agenda in Brazil, I will hand it to Ángel to give you a little bit of color, but we think it makes all the sense if that was to happen..

Thank you, José María. In - again in Q2, Brazil maintained a very healthy revenue and OIBDA growth trends, with margin expansion, posted double-digit operating cash flow growth, which increased synergies generation. We've had a record share of mobile net adds, especially in contract. So we are delivering very nicely.

We do not see the need for inorganic movements. However, as always, we would analyze in-market consolidation opportunities if they make sense and they create value..

Thank you. May I come back to my first question, just to be clearer? My question really related to the price increase you put through in July of last year where you included football in some of the TV packages. And obviously, this will then start to annualize in Q3 of 2017.

Will there be much of a drag on the second half Fusión ARPU from the annualization of this move you did in the second half of last year, or is it not too much of an issue?.

Let me try to give you a little bit of quote [ph]. It is true that we have a price move that we mentioned last year, but it is also true that we have been having other offer upgrades this year in April, in February and also recently in August.

So there will be - the evolution going forward will be a mix of all of those, and so it is not just - the year-on-year comparison is going to be negatively affected by the prices that were done in the second half of the previous year, but they will be positively affected by the price uplift that we have done so far this year.

And we see still room for this More for More strategy going forward, before the year-end..

That's clear. Thank you..

Thank you, Keval. Next question, please..

We will take our next question from Joshua Mills of Goldman Sachs. Please go ahead. Your line is open..

Two questions on Spain, please. So first is just on the tradeoff between offering customers speed and content within your Fusión base. If you look at the Fusión subscribers taking 100 or 300 meg broadband packages, there's been a big step-down in the net add growth this quarter.

My question is, is that because people are sacrificing a bit of speed, maybe churning down to 50 megs, in order to keep onto content, much more if discounted before and now isn't? And in that context, how do you think about Sky's announcement this morning that they'll be looking to do an OTT service in Spain? The second question is just on CapEx.

Now I know it's difficult to read too much into phasing, but Spanish CapEx is down 20% year-on-year in the first half. Do you think that there's scope to deliver a greater than 1% CapEx-to-sales saving in the domestic market? And the 1% reduction in CapEx itself is obviously what you're guiding to at a group level.

And what's driving that lower CapEx effectively? Thank you..

Well, taking your question on the mix of features that we put in play in order to build this More for More strategy. You are right. It's a mix of speed on the fiber network capacity, on the mobile side, number of mobiles included in the bundle, and certainly content. So we play - and also the technological features of the platform.

So we try to build different attributes, speed and capacity on the wire and wireless side, number of mobile lines included, technological features of the platform like cloud DVR or latest seven days recording or access, so it's a mix of those.

And the customer chooses between the different features, so the more we build into that, the more versatility of the offer we have, but again a proof of that is the mix of the customer base. If we put more value, it might be a different combination, but the result of that needs to be that we keep and already know our customer base.

And that has been happening in the last year. I mean our customer base is of better quality this quarter than a year ago, and there is a mix of effects out of that. And we will keep building that. And remember that the network capacity that we have and the network speed that we can offer to our customer is just starting.

And we just deployed the fiber network, so we have significant room to grow in terms of the capacity and the speed of the network. And your question about a potential over-the-top players offer in Spain. We have already here the largest players.

And we see that more as an opportunity than anything because that would increase the usage of our - of the fiber network. So we think that there is room for our customer to choose between different options. But finally, we have - let me get back to the previous question. We have the best fiber network in Europe.

We have the best platform, and therefore we should be able to offer our customer a very attractive proposition going forward. So in order to give you a summary, I think that you are right. Speed is one of the elements. Capacity on the mobile side is another, as we keep deploying LTE.

Content and the features of the platform should allow us to keep upselling our customer base. And in terms of the CapEx, we are already reaching levels of penetration of fiber in Spain that are 8 times or 10 times than the ones that you could see in the UK or Germany. So Spain has become the best country in Europe.

And I think, it's the third in the OECD in terms of network - ultra-broadband network expansion. And therefore, CapEx intensity should keep going down in the future.

And that's why I was trying to drive your attention into the free cash flow generation in Spain, not just revenues, which are very important and will be a significant focus for us going forward. But free cash flow generation of Spain, because that will be a key lever for the group going forward..

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

Our last question comes from Sam McHugh of Exane. Please go ahead. Your line is open..

Yes, good morning, guys. I just wanted to follow-up on that last question of - actually on Netflix. And they obviously launched at the end of last year. Sky said that they're launching in the second half of this year.

Have you seen any impact from Netflix on the kind of consumer appetite for some of your TV bundles? And how are you trying to factor in the NOW TV launch in terms of how you're thinking about the low-end Fusión product? Is there a greater risk that people will just take skinny bundles? And then just more broadly, can you remind us of your plans for original content, kind of whether the cost is OpEx or whether it's being capitalized? Thank you..

Sorry. We didn't get the first part of your question.

Could you please repeat it?.

Yes.

Can you hear me now?.

Yes, we can..

Yes. So I was just saying sort of Sky confirmed they're launching NOW TV in the second half of the year. And we've had nearly a year of Netflix post launch.

Have you seen any impact from Netflix? And just how do you factor in this growing OTT availability into your thinking around the low-end bundles? And is there a greater risk of people taking just a Fusión #0 offer with more OTT video?.

And the second one? Sorry..

The second one was just on whether - the content costs. Remind us of the plans and whether they're OpEx or being capitalized..

Thank you..

Well, thanks, Sam, for the question. I don't - we have already, as you were mentioning, Netflix and other over-the-top players in Spain. We are not seeing a major shift in the evolution of our customer base, so far. And then remember that Netflix is already very active for a year now in Spain.

And our customer base keeps - Fusión customer base keeps improving. So I think that over-the-top players are seen, so far, in Spain by consumer as a complementary service to the bundled TV. And remember that we have today a significantly better catalog in terms of series and movies than any over the top in Spain.

So I think that we still have a better offer than any of them. And as a result, I think that our - at least our customer base are seeing them as a complementary product than a replacing product. In terms of the second quarter, we are seeing just the opposite even though with Netflix already here, net adds in high and mid are up 6 times year-on-year.

So we do not see that cannibalization, namely on the high-end or mid-end customer base. And in terms of content, it is all flowing through the OpEx side, so we are not capitalizing any content element in Spain. So it's fully reflected at OIBDA level..

Thank you very much..

Thank you..

At this time, no further questions will be taken..

Thank you very much for your participation. And we certainly do hope that we have provided some useful insights for you. Should you still have further questions, we kindly ask you to contact our Investor Relations department. Again, thank you very much all of you, and good morning..