Good morning, and welcome to Telefónica’s conference call to discuss January-December 2018 Results. I’m Pablo Eguiron, Global Director of Investor Relations.

Before proceeding, let me mention that financial information contained in this document related to the fourth quarter 2018 has been prepared under International Financial Reporting Standards as adopted by the European Union.

From the 1st of January 2018, we implemented IFRS 15 and 9, and all financial information in this presentation is based on this new standard. In organic terms, the effects of the accounting change to IFRS 15 are excluded. 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 forecast and estimates based on assumptions or statements regarding plans, objectives and expectations that may reference to different matters.

All forward-looking statements involve risk, uncertainties and contingencies, many of which are beyond the company’s control. We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators.

If you don’t have a copy of the relevant press release and the slides, please contact Telefónica’s Investor Relations team in Madrid or London. Now let me turn the call over to our Chairman and CEO, Mr. José María Álvarez-Pallete..

Thank you, Pablo. Good morning, and welcome to Telefónica’s fourth quarter and full year results conference call. With me today are Ángel Vilá, Chief Operating Officer; and Laura Abasolo, Chief Financial and Control Officer. And during the Q&A session, you will have the opportunity to ask any questions you may have.

Let me start with 2018 main achievements. First, we continue gaining customers’ relevance, providing them with the top digital experience. Demand from all valuable customers is unabated, and churn management translated into higher customer lifetime.

Second, we are transforming our revenue mix, increasing the weight of high-growing revenues as broadband connectivity and service beyond connectivity. During last year, we again created several unicorns that are already contributing to our growth.

Our third highlight is that we continue to invest to put the best technological platforms at the service of our customers’ needs, positioning us as pioneers in digitalization, simplification, virtualization and artificial intelligence that put us at the forefront of technology in our way towards a cloud telco.

Fourth, sustainable and profitable growth in our DNA. Growth trends accelerated from revenues to operating cash flow, resulting into robust and sustainable free cash flow, as we continued increasing our efficient use of our resources.

Fifth, our net debt has been reduced steadily for the third consecutive year through ample organic free cash flow generation and reshaping of our portfolio via inorganic actions. Finally, our reinforced balance sheet make it incompatible with our sustainable and attractive dividend, in line with our commitment to return value to our shareholders.

Moving to Slide 2. Let me go over the main proof points achieved in 2018 that back up our strategy. Double-digit growth in fiber to the home and cable and LTE access, with stable churn levels. Best-ever customer satisfaction index. 53% of our revenues already come from broadband and services beyond connectivity.

Data revenues topped EUR 7 billion, 24% more versus 2017 in organic terms. We remain leaders in fiber deployment in Europe and Latin America, whilst being number one in network virtualization and legacy shutdown. All these matters is translated into growth. We are growing our revenues, OIBDA, EPS and operating cash flow.

Furthermore, our free cash flow ex spectrum to EUR 5.6 billion, 5.3% higher than in 2017.

It is free cash flow generation, coupled with our return on capital employed-driven focus, that allows us to bring down debt, as much as EUR 3.8 billion reduction from 2017 levels, including post-closing events, while we maintain an attractive or very prudent dividend payout ratio of 42%.

On Slide number 3, we show that this sustainable growth story goes back in time. In the last four years, we have carried out a deep business transformation, simplifying, investing and transforming our revenue mix and customer base towards a more sustainable business model.

As a result of this, our revenues have consistently been growing in organic terms, while our OIBDA margin has consistently expanded. Operating cash flow, the most sustainable source of cash flow generation, has been growing in absolute terms, from EUR 4.4 billion in 2015 to EUR 8.3 billion in 2018 ex spectrum.

Furthermore, and no matter the significant investment effort we continue to undertake, our free cash flow reached almost EUR 5.6 billion in 2018. And finally, we have been able to reduce our net financial debt by almost EUR 9 billion, including post-closing events, and we have been able to do so while paying attractive dividends to our shareholders.

Turning to Slide number 4. We can see growth across main financials, both in the fourth quarter and in the full year. It is worth highlighting the sequential improvement in growth trends observed in the fourth quarter, both in terms of revenues and operating cash flow. That organically grew, respectively, by 3% and 51% year-on-year.

Spain and Brazil, our two biggest operations, are large contributors to this quarterly improvement. Free cash flow boosted to almost EUR 2 billion in the last three months to reach EUR 4.9 billion in the January-December period, even after including spectrum.

On a full year basis, growth has been profitable and consistent as revenues grew annually by 2.4%, OIBDA by 3.5% and operating cash flow by 8%, with OIBDA margin expanding 0.3 percentage points.

In reported terms, headlines are impacted by negative FX swings and regulation, hyperinflation in Argentina and other special factors that Laura will detail later on. However, even on a reported basis, net income surpassed the EUR 3.3 billion mark, an increase of 6.4% versus 2017, while net financial debt declined 5.5% to EUR 41.8 billion.

Turning to Slide number 5. We have ticked all the boxes in terms of last year’s guidance. Revenues increased by 2.4% year-on-year in 2018, ahead of the guidance of growth of around 2% that was upgraded at midyear and despite regulation dragged 1.1 percentage points.

OIBDA margin expanded by 0.3 percentage points, also in line with the guidance, with regulation deducting 1.7 percentage points to OIBDA final growth. Finally, CapEx to sales stood at 15.1%, fully aligned with the guided level of around 15%.

In addition, we accomplished with the goal of additional deleveraging and further strengthening of our balance sheet. We confirm our 2018 dividend with the second tranche of EUR 0.2 per shares to be paid in cash in June 2019. Moving to Slide number 6. Telefónica is a company of smart platforms. Starting from the bottom of the page.

Our first platform ensures the best connectivity. Our leading network in fiber covers already 83 million premises with ultra broadband and 76% of the population with LTE. We are also number one in network virtualization with UNICA infrastructure deployed in 11 countries.

And the transformation of the core led to 40% reduction in the past two years in CapEx needs. In the second platform, we progressed deeply in 2018, having 65% of the processes digitalized and managed in real time. 30% of our customers migrated to full stack and 66% to online charging system.

The third platform provides innovative and personalized products and services, with segmented offers in the residential business and complete B2B solutions, delivering up to EUR 6.8 billion digital revenues in 2018, a 24% year-on-year increase.

And to fourth platform, we integrate artificial intelligence and open platforms to improve the way we engage with our customers and make internal decisions. Moreover, our cognitive intelligence, AURA, is now available in six countries. I now hand over to Ángel to take you through a detailed review of the business performance..

Thank you, José María. Fourth quarter confirmed the ongoing operating momentum, with revenues and operating cash flow annual growth improving sequentially.

Revenues accelerated 30 basis points from the previous quarter, with all regions performance improving, with a particular mention to the sequential improvement seen in service revenues in Spain and Brazil.

Revenues in current euros reached EUR 12.9 billion versus EUR 11.7 billion in the third quarter, and revenue growth would have been 3.9%, excluding regulation. Operating cash flow posted as well an outstanding performance, growing by more than 30% in the fourth quarter on a year-on-year basis, while OIBDA grew 2.4% year-on-year.

In the full year, operating cash flow grew by high single digit as CapEx declined 1.3% in organic terms. In Slide 8, we show how we are continuously enhancing our value proposition to make it simple, reliable and efficient for our customers. In the consumer segment, all regions are delivering organic revenue growth in 2018.

We bring onboard more customers who are more loyal and uplift ARPUs by means of superior convergent offers, pioneering now in Peru. And we’ve reached our content in Spain and LatAm through personalized and flexible offers in postpaid with data sharing or OTT video and more data recurrent plans in prepaid.

As such, we are monetizing better our offering and are growing revenue with a larger base of video subscribers, plus 5% versus 2017, to almost 10 million; an increased base of fiber customers, plus 20%; and a larger percentage, 43%, of LatAm mobile customers using data.

In Slide 9, we show a snapshot of our B2B segment, a very relevant piece of business that is also showing very encouraging trends. We have all the capabilities to be a first player supporting the transformation of clients’ businesses.

We have built a Lego-like portfolio based on a digital core proposal with comms, IoT and cloud, and a complete ecosystem of leading digital services to be added on top of it. This is all underpinned by our global reach and making differentiated value proposals for multinationals, corporates or SMEs.

As a result, B2B revenues topped EUR 9.6 billion in 2018, growing at a healthy pace of 3.4% year-on-year and accounting for 20% of total group revenue. Both corporates and SMEs are growing, by 5.3% and 1.8%, respectively. And the contribution of the advanced digital services, namely cloud and IoT, is worth to mention, both increasing at double digit.

All in all, we had a reference with a distinctive positioning to capture the large growth opportunity ahead of us. In Slide 10, you can see how the deep transformation of our business model is starting to deliver relevant savings, more than EUR 300 million in 2018.

We have introduced new ways of working, with 40% of savings coming from initiatives related to customer service in digital channels, as foster use of hubs; 30% from digital experience in sales, thanks to advanced analytics and personalized sales; 20% from simplified and trustful processes in billing and payments, especially in LatAm; and the remaining 10% from process automation such as resolution of incidents and robots factories.

Moreover, in Telefónica, we continue progressing of further digitalization already with an agile mindset. And we expect to deliver more than EUR 340 million of incremental savings at the end of 2019, reaching more than EUR 1 billion of cumulative savings by the end of 2020. Moving on to Spain.

Slide 11 shows how our unique and differentiated offer takes us steps ahead of competition. In 2018, we have grown our convergent customer base by 9% year-on-year; TV customers, plus 6%; fiber to the home accesses, plus 15%; whilst contract mobile customers, plus 7%.

All this under controlled churned levels, whilst increasing convergent ARPU, which despite no tariff update taking place, growth by more than 4% year-on-year in full year to EUR 89. This is more than 50% higher than our closest competitor within the convergent market, fueled by increased differentiation.

We can thus conclude that both our revenue and value share are expanding. This is the result of a very clear strategy, an unmatched network, having passed already 21.3 million premises in the Spanish market, and differential TV offer.

As an example, we are direct owners of Champion League rights, whose audience is increasing by about 90% year-on-year so far this season, that allows us to further raise pay TV uptake, driving ARPU up and churn down. On Slide 12, we can find the financial consequence of what we just went through.

Service revenues grew year-on-year in Q4 to plus 2% once excluding MTR and MVNO negative impacts. This is a remarkable 0.6 percentage point sequential improvement.

Aside from the already mentioned improvement in consumer revenues, namely convergence driven, growth improvement also lies on much better business performance, plus 3.5 percentage points from the previous quarter on record IT sales and flat communications.

We are confident on further tailwinds, namely tariffs update and promos expiry in B2C, IT and digital services in B2B, TV and easing regulation/MVNO impact for wholesale, allowing to accelerate this positive revenue trend into 2019.

We were able to post benchmark organic OIBDA margin of circa 40% in 2018, which, together with declining CapEx, down 5.1% year-on-year in 2018, allowed for operating cash flow annual growth of 0.6% to EUR 3.5 billion, 11% higher in Q4 than in the same period last year.

Year-on-year organic OIBDA evolution slightly worsens versus the previous quarter despite revenue better performance. Growth in net content costs, primarily related to one-offs calendar effects, which will disappear as from Q1 2019, is the main reason behind such performance.

Going forward, OIBDA evolution throughout 2019 should be favored by the above-mentioned progressive improvement in revenues and lower content cost growth. Moving to Slide 13. Telefónica Deutschland continued to show positive operational momentum in the fourth quarter.

The innovative O2 Free tariff portfolio with boost option and the unique O2 Connect continued to stimulate data usage and drive data monetization. During the quarter, the company registered 279,000 contract net additions, 50% up year-on-year. LTE customers amounted to 18.4 million, up 17% year-on-year, with LTE penetration reaching 44%.

Average data usage of O2 contract LTE customers was up 47% year-on-year to 4.1 gigabyte per month. Customers on O2’s most popular tariff, O2 Free M, reported an even higher average data consumption of 6.5 gigas per month.

With regards to key financials in the quarter, revenues are up 2.6% year-on-year, mainly supported by strong seasonal handset sales, up 24.2%. OIBDA was 4% down year-on-year, mainly due to capital gains from the sale of asset in Q4 2017, lower incremental synergies and regulatory impacts.

For the full year, CapEx increased by 1.7% year-on-year, driven by the now largely finalized network integration and ongoing LTE rollout, also reflected by significant quality improvements achieved in the latest published network tests. Company generated operating cash flow of EUR 868 million. Turning to Slide 14.

Telefónica UK maintained its market-leading position with 32.6 million mobile accesses. The ongoing success of custom plans has been one of the key drivers of O2’s strong commercial performance.

The company also continued being the UK’s favorite mobile network, with sector-leading loyalty evidenced by the lowest postpaid churn in the market at an unchanged 1%. Telefónica UK delivered the 10th consecutive quarter of MSR growth and was up 2.9% year-on-year.

In the quarter, accelerated OIBDA growth of 23.8% year-on-year resulted in margin expansion of 3.8 percentage points year-on-year and a stellar performance once again. At the same time, we continued to invest in our network, for example, through a rapid deployment of the awarded spectrum.

For the full year, CapEx is up 7.1% year-on-year organically, while operating cash flow strongly firmly improved by 16.5%. Moving to Slide 15. Vivo ends 2018 with an outstanding commercial performance, capturing valuable growth opportunities, thanks to a combination of superior assets.

In contract, mobile net adds reached 3.6 million in 2018, increasing 7% year-on-year, and maintaining similar churn levels versus those seen in previous quarters. In prepaid, and as planned, the new commercial offering started to post positive results in Q4, improving year-on-year revenue trend by 5 percentage points versus the previous quarter.

Along with an improved macroeconomic environment throughout 2019, we are confident that this positive trend will continue going forward. Regarding our fixed operations, we continue accelerating the transformation of our business, having covered 30 new cities with fiber to the home technology in 2018 already reaching 8.7 million premises passed.

Average takeup ratio on improved network stood at an outstanding 42% for premises passed in 2017, leading to a solid ARPU growth in fixed broadband and pay TV of 11% and 4%, respectively, during 2018.

On Slide 16, we can see revenue reversed its trend in Q4, returning to positive year-on-year growth, thanks to the already mentioned improvement in prepaid and the remarkable growth seen in contract, plus 7%, fiber, plus 27%, and IPTV, plus 59%, in revenues.

Furthermore, the ongoing simplification efforts and the benefits of the digitalization initiatives translated into the 12th consecutive quarter of year-on-year OpEx reduction.

It is worth highlighting that, in cumulative terms, Vivo has been able to bring down its OpEx base by 4.5% since 2016, which compares with cumulative inflation in the same period of 13%, making this effort even more remarkable. As a result, organic OIBDA margin surpassed 39% in Q4, the best OIBDA margin ever for our Brazilian operations.

Finally, free cash flow reached an unprecedented level, growing 30% year-on-year to EUR 1.5 billion in 2018, in spite of intense capital deployment with CapEx over revenues of 19% in 2018. In the South Hispam region, on Slide 17, we continue growing in value despite a tough competitive environment we are facing, mainly in Peru and Chile.

Contract accesses rose 5% year-on-year, posting positive net adds for the fifth consecutive quarter. Fiber connections increased 50% after accelerating their deployment with 2.1 million premises passed in 2018. Pay TV accesses grew 8% year-on-year.

And it is worth highlighting the sound performance in Peru and the launch of this service in Argentina in October. This commercial performance, coupled with efficient OpEx management and the benefits of digitalization, resulted in a healthy growth of 9.6% and 8.1% in revenue and OIBDA, respectively, during 2018.

Moving to Slide 18, we’ll review North Hispam operations. In Mexico, financial performance continued to be strongly affected by regulation and by the sharp pricing pressures seen in the market as a result of strong competition. However, we were able to grow in both contract and prepaid in Q4 after recent changes in offers in both segments.

On the other hand, Colombia continued showing a stellar performance, with accesses growth in its main services, especially fiber, where connections more than doubled versus the previous year. This sound commercial performance and implemented efficiencies led to OIBDA growth by 28% year-on-year in the fourth quarter.

As a result, and despite Mexico headwinds, operating cash flow in the North Hispam region increased by a remarkable 18% year-on-year. Excluding Mexico, 2018 revenue and OIBDA grew 1% and 2.7% year-on-year, respectively. On Slide 19.

Telxius continued growing its asset portfolio in the quarter, showing good traction in towers and gaining commercial momentum in cable. The tower portfolio added 291 new tenants in Q4 and improved the tenancy ratio by 0.03% – 0.03 year-on-year.

In the cable business, it is worth mentioning the ongoing capacity sales in both BRUSA and MAREA, resulting in agreements such as the one signed in MAREA cable in January 2019 with Amazon Web Services.

Regarding the fourth quarter, revenues increased by 5.5% year-on-year and OIBDA did so by 6.3%, mainly driven by the tower business and on the back of efficient cost management. Thus, OIBDA margin improved by 0.4 percentage points year-on-year to 46.6%.

Full year CapEx declined by 6.3% year-on-year after the completion of the new cables that came into service in 2018, resulting into operating cash flow growth of 33.9%. I will now hand over to Laura to take you through the details of the financial position..

Thank you, Ángel. Please turn to Slide number 20 to see in more detail the effects impacting the quarter. These factors reduced OIBDA and net income by EUR 472 million and EUR 651 million, respectively.

In detail, the special factors are restructuring costs, mainly in Spain, two, impairment in Mexico, three, hyperinflation in Argentina, and four, capital gains and losses and other factors. As you can see in Slide number 21, net income surpassed the EUR 3.3 billion mark in 2018, growing 6.4% versus the previous year.

We continued to manage successfully non-operating results as our operating income declined by 4% in reporting terms, while net income year-on-year growth was mid-single digits. Underlying earnings per share reached EUR 0.81 per share in the year, growing 9% versus 2017. Let me now update on Slide 22 how we are managing FX headwinds.

Forex continued to deduct growth in revenue and OIBDA on a year-on-year basis, but this impact has been reduced in the fourth quarter. In addition, during this period, hyperinflation adjustment in Argentina was positive.

In 2018, FX drag amounted to EUR 4.3 billion in terms of revenue, EUR 1.5 billion in OIBDA, while negative impact was significantly reduced to EUR 0.5 billion in free cash flow. Regarding net debt, the effect was the contrary and FX lower net debt by EUR 0.2 billion.

On top of that, let me remark that organic OIBDA contribution remained solid and consistent. On Slide 23, we can see that free cash flow reached almost EUR 2 billion in the last quarter, growing by double digit. In 2018, it totaled EUR 4.9 billion after including the UK and Spanish spectrum auctions.

Excluding spectrum, it topped EUR 5.6 billion, up 5.3% year-on-year. As you can see on the upper right hand side of the slide, main free cash flow driver is the improved business performance, along with lower financial payments. On a per share basis, free cash flow reached EUR 0.96, though it would have to stay at EUR 1.09, excluding spectrum.

Free cash flow from our European operations before financial payment amounted to EUR 0.85, comfortably covering dividend, high risk and total interest payments. Let’s move now to the financial metrics on Slide 24.

This slide shows how we continue to progress on our deleverage path, relying on a strong free cash flow generation, coupled with inorganic measures, such as the disposals of Telxius and tariffs and the operations of Telefónica in Central America.

Therefore, we saw a remarkable net debt reduction figure of EUR 2.4 billion in 2018, continuing with previous year trends, and increasing to EUR 3.8 billion, including post-closing events. As such, our net debt figure as of year-end 2018, including post-closing events, stands at EUR 40.4 billion.

On Slide 25, we highlight Telefónica’s extensive access to capital markets in 2018 and year-to-date, taking advantage of historically low rates. It is worth highlighting that in January 2019, we issued a green bond, the first globally in the telecom market.

By accessing long tenors, we have extended our hybrid debt life to nine years, while we keep a comfortable liquidity position, over EUR 20 billion, exceeding next two years of maturities.

Our interest payment effective cost in the last 12 months stood at 3.41% as of December 2018, being an attractive average rate level and four basis points lower than September 2018. I will now hand back to José María..

Thank you, Laura. Let me now outline the guidance for 2019. We aim for sustainable and profitable growth; revenue and OIBDA organic growth of around 2%, despite regulation. CapEx ex spectrum acquisition will be around 15% of sales. For 2019, we are proposing a stable, sustainable and attractive dividend payment.

This consists in EUR 0.4 per share in cash payable in two tranches, the first in December 2019 and the second in June 2020, subject to the adoption of the corresponding corporate resolutions announcing the specific payment dates. Like this year, calendar year payments around – amount to EUR 0.4 per share. To finish, please move to Slide 27.

2018 was a year of continued focus and investments in transformation, which allow us to lead the pack in terms of digitalization, virtualization and artificial intelligence. So connectivity has been the foundation for upgrading our customer base and offering the best customer experience, with a clear drive towards ultrabroadband connections.

All this translated into sustainable and profitable organic growth, leading OIBDA margin and further deleverage, driven by robust free cash flow generation. We are confident into 2019 when we expect to continue delivering growth and returns, leveraging on our differential assets and global capabilities.

Networks are getting smarter and ready for the future, reinforcing our world-class network infrastructure and IT systems. Monetization of our leading propositions will be key. Digitalization savings will give flexibility to reallocate resources across on footprint and management base. Our return on capital employed will allow us to increase returns.

Thank you very much for your attention, and we are now ready to take your questions..

[Operator Instructions] We will now take our first question from Georgios Ierodiaconou from Citi. Please go ahead..

Hi, thank you for taking my questions. I have two. The first is just maybe if you could give us some clarity on the moving parts of cash flow for 2019. I know you already highlight the post-closing events, but there’s been some tax decisions. I was wondering whether those will have any effect on the tax actually paid in the next couple of years.

And then the other moving parts around the net interest payment with Kabedal [ph] around worth highlighting just to get an understanding of what to expect 2019. And then my second question is around the operating performance of the group. Obviously, in the past, you are guiding for margin improvement progressively, not so this year.

I understand there are higher content costs in Spain and TEFd gave us some guidance yesterday on some other headwinds they are facing.

But if you could give us an idea of why some of the cost savings you are doing are not offsetting these and which markets will be the ones that may offset declines in margins in Spain perhaps and in Germany? And then if I could just ask a clarification on that. We’ve seen very dilutive performance of margins in Peru in the fourth quarter.

If that is something that could turn around in 2019. Thank you..

Thank you, Georgios. Let’s just start with your question on free cash flow. As you know, we do not guide specifically nor formally on free cash flow.

What I can tell you is the fact that we have achieved two consecutive years of very strong free cash flow, which has been the main driver for deleverage, about EUR 5 billion ex spectrum, both in 2017 and 2018; and in 2018, almost EUR 5.6 billion, growing 5%.

If we go into 2019, based on the guidance provided, which is consistent revenue and OIBDA growth and stable CapEx over revenue, you should expect again a strong operating cash flow performance. That’, coupled with optimization of interest and cash payment costs, should flow again into a very solid free cash flow, excluding spectrum.

And the most important, comfortably exceeding dividend payments, labor commitments and the hybrid coupons payments. Those again, it’s going to be a main driver and the more sustainable for the continuing deleverage. Going to your specific question on interest payment, I could tell you that it will still sit comfortably below 4%.

Regarding your question on the tax refund and what the notification we have received from the Central Economic-Administrative Tax Court in January 2019, at this point in time, it’s not possible to quantify the set amount of the expected refund.

But most likely, there will be a tax refund related to overpayments made by the company in the years 2019 and 2020, and that obviously will flow through free cash flow as well. And regarding the closing of Central America and impacts in cash, Guatemala has been signed and closed simultaneously.

However, the remaining four operations are pending regulatory approvals, and therefore, we’ll have a cash flow from those operations until the transaction is formally executed..

Taking your question on the guidance globally and namely on OIBDA, let me start by saying that we are – we expect to grow at a similar pace than in 2018. And in fact – and regulations should drag less this year than in the previous year. Remember as well that we tend to be prudent. Last year, we started with a guidance of 1%.

So in comparable terms, we are guiding for more growth year-on-year, so to say. And then we upgraded to midyear when we are – we’ve seen our operational performance. Why are we guiding for OIBDA in absolute terms and not following the margin? First, because we want to have a flexibility to invest in those markets where we see growth opportunities.

But as an overall reflection, we are guiding for around 2% growth in revenues and around 2% growth in OIBDA, which basically tend to drive a stable margin evolution. And that’s decided because we want to be prudent, and at the same time, we want to keep flexibility to invest for further growth in the markets where we see this opportunity.

And now let me hand it over to Ángel for his specific answers on the countries that you have mentioned..

Hi, Georgios, I’m going to address your several questions on, if I understood right, on Spain, Germany and Peru margins. Well, Spain in the fourth quarter. First, I want to highlight that it’s back to growth. The revenues have been accelerating sequentially and they have been accelerating year-on-year.

We have achieved for the full year an OIBDA margin of 39.8%, which in the fourth quarter has been of 38.9%. This was affected and this had been flagged in previous conference calls by higher content costs, by the B2B strength and also by the reduction in MVNO wholesale revenues.

But what I would want to say is that the decline in organic OIBDA that you see in the fourth quarter compared to the third quarter, one third of that would come roughly from higher football costs with a full quarterly impact of the new Champions League cycle, but two thirds would come from others, basically accelerated amortization of MotoGP rights, which we’ll no longer own and have some calendar impacts in this fourth quarter that would not be repeated in additional quarters.

Going forward, what we see is, for our Spanish operation, that we can maintain an OIBDA margin at broadly similar levels as this year. Due to the content cost calendar, the first half margins will be closer to what we saw in Q4, but they will trend up in the second half.

And in any case, what we are aiming at is to grow in Spanish OIBDA for 2019, would be a slight growth, but growth nonetheless in the Spanish business in OIBDA in 2019, what we have not seen in prior years. Moving to Germany. They announced results yesterday.

You have seen the actuals, the OIBDA performance, which was conforming to their guidance, with an increase ex regulation. And they have guided OIBDA on a broadly stable to slightly positive ex regulation for 2019.

And with respect to Peru, what we are seeing is the impact of a still strong competition in the mobile segment, strong commercial activity in the Peruvian market. We have, in Peru, been able to maintain on the fixed business, and on the pay TV, the strength that we had in the previous quarters.

We are now launching four convergent offers in Peru, but we continue to see competitiveness in the mobile segments, so commercial intensity. And also, commercial intensity that has some handset financing packages that are also impacting the OIBDA performance..

Okay. Thank you..

Thank you, Georgios..

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

Thank you. I’ve got two questions, please, both of which in Spain. So when we look at the revenue trend for the non-convergent revenues, we did see a deterioration in Q4 when compared to rates declining in Q3.

Would you mind giving just a bit more color on that, maybe some comments on the direction? And following up on your comments on Spain on 2019 EBITDA, which are very helpful. As you mentioned, we will see the higher football costs obviously continuing in the first half.

When it comes to actual cost savings which could help offset that, can you talk about whether there will be some additional rates of cost reduction beyond what you’ve already seen in 2018 to help offset some of those content cost pressures? Thank you..

Thank you, Keval. Our B2C business accounts for 53% in the fourth quarter of total service revenues, and it’s growing at a rate of 1.1%. For the full year, it accounted to slightly a bit more of 54%. And the growth, you have it on Slide 12, of 1.3%.

73% of these B2C service revenue is Fusión, which is growing at – very nicely at 7.1%, and the non-convergent revenues are declining at 12.3%. Here, the weight of the non-convergent revenues is getting smaller as we move forward.

And here, you have still the impact of some single-play pay TV customers that we’ve had a decline and we still have some base. Some of those stand-alone customers are migrating to convergence and this process is still underway. With respect to the evolution of other elements of – or the elements of our OpEx or cross-function, there are several pieces.

On the one hand, the evolution of the content cost that we have been flagging in this call and in previous calls. We have entered into the third season of the previous La Liga cycle and we have the first year – or the first season of the current Champions League cycle. On the other hand, we have been not renewing some other contents in our offer.

So this mean that the net content cost is peaking, taking into account all content will peak in Q4 this quarter. Compared to this, we also have additional efficiencies. We’ll continue to have efficiencies in distribution channels. And here, we are seeing the benefits of digitalization that we are flagging in the presentation.

We continue to have incremental savings from personnel redundancy program. They will achieve full run rate in 2019. And we are seeing fewer people returning after the suspension, so this will result in a slightly higher run rate than the one we had announced before. We have efficiencies from running the full fiber or close to full fiber network.

The maintenance cost of fiber versus copper is less than 50%, so fiber versus copper. We continue to switch off legacy. We have closed down 182 corporate center switches. We expect to close 700 additional switches by 2020. We’ll continue to migrate from our systems to full stack.

So all in all, again, we have confidence in an ability to grow OIBDA slightly in Spain in 2019..

That’s clear. Thank you..

Thank you, Keval. Next question please..

Our next question comes from the line of Mathieu Robilliard from Barclays. Please go ahead..

Yes. Good morning. Two questions, please. First, in terms of the macro environment in Latin America. You highlighted that you expect an improvement in Brazil. I realize all countries are different, but if you can maybe give us a sense of what you expect for the main countries in Latin America in 2019.

Basically, what is embedded in your expectations? Second, with regards to asset sales, so you’ve sold most or all of your Central American operations or you’re in the process of doing it, which is great.

And I was wondering, is that it for asset portfolio restructuring? Or in theory, conceptually, you would still consider or still working potentially on other disposals in the region? Thank you very much..

Well, taking – thanks for your questions. In Latin America, starting by Brazil, we see a strong Brazil growing forward – I mean, going forward. In terms of macro volatility, Brazil, we expect it to grow in 2019.

And depending on the level of reforms that the government current recently appointed is going to be able to pass through the Congress, this growth can even be accelerated.

Remember that Brazil has a significant amount of foreign reserves, more than $380 billion of foreign reserves, and therefore – and has also been created during the last 15 years a really strong middle class. And therefore, internal concession has become another driving force of stabilization of the economy.

So overall, in Brazil, we think it can be a positive surprise in the markets in terms of decent growth, robust GDP growth. And it should help to stabilize the region because at the end of the day, Brazil is the heart of Latin America. In Argentina, we see volatility, mainly based on inflation-driven processes.

We think that the reforms that the government is doing should finally help to have some stabilization. So, we have a better outlook for Argentina in 2019 than in 2018, and therefore, a better performance in terms of GDP. A strong growth in Peru and Chile, a strong growth in Colombia as well.

So overall, we expect to have a more robust macro environment in Latin America this year compared with the previous one. And certainly, we think we should have less volatility in terms of FX, and namely, certainly, much less headwinds in terms of FX translation into our accounts. So to try – and then Venezuela is a very big uncertainty.

So, I’m not going to be able to comment on the Venezuelan situation. It’s pretty binary.

So overall, our expectations embedded in our budget for this year is macroeconomic growth in the region, driven by a strong Brazil, less FX volatility, and therefore, less impact, and therefore, less dilution of the growth translated into euro terms for Telefónica. And then moving into the portfolio management.

As we have stated since three years ago, we are trying to be very consistent. We are not making any divestment just for the purpose of just taking debt down. It needs to make financial sense. We are not going to be destroying value by divesting.

We have classified our assets into categories, assets meaning geographies, infrastructure and products and services. And we have projected return on capital employed of each of those for the next three years.

And therefore, we are benchmarking these return on capital employed derived from an organic management with any potential divestment opportunity or inorganic opportunity we may have. And it’s in that framework that you should framework the Central American discussion.

We have been able to generate more value by integrating those in some of our competitors and grabbing part of the synergies that are going to be derived for this integration, and therefore, creating value.

Are we targeting more portfolio optimization based on return on capital employed? Certainly, yes, as well as we keep investing very heavily in our own networks and monitoring very closely any in-market consolidation that we can have and derive for ourselves.

So the answer is yes, return on capital employed portfolio approach certainly going forward and more capital – and more portfolio optimization to come..

Thank you very much..

Thank you, Mathieu..

Our next question comes from the line of Joshua Mills from Goldman Sachs. Please go ahead..

Hi, guys. Thank you for taking, two questions from me. The first is on your Spanish wholesale business. And I wondered if you could just kind of walk us through how to think about growth in this segment as you move into 2019 because clearly, it was under pressure in Q4. I understand there’s a couple of one-off items there.

But it’d be good to get a sense of whether the underlying broadband wholesale revenues for the business are growing. I think you talked about a tougher comp year-on-year in the press release.

And then if next year we’ve got higher TV wholesale revenues, maybe a bit lower MVNO, but if broadband can continue to be upsold, is this going to be a positive contributor to the top line performance in Spain? And then secondly, just on Brazil.

So it would be great to have an update on the regulatory situation there following PLC 79 headlines since – whether or not you think that there is potential resolution to the concession setup in the market today within the kind of time frame in 2019 and whether you think that, that in itself is an opportunity to create more value in your second biggest asset? Thanks very much..

Thank you, Joshua. Let me – of course, we do not guide on all these revenues, but let me talk a little bit about what we see as strengths for the revenue – a separate revenue in Spain and I will, in particular talk, about wholesale, no? As you know, the B2C, which is more than 50% of our service revenues, has been consistently growing.

We are seeing increases in volumes and ARPUs. And we have some tailwinds going forward regarding to more – for more tariff updates and some end of promotions. So we think that these trends will result in tailwinds in B2C. Regarding B2B, we are growing in the last three quarters. The IT growth is compensating the comps evolution.

We are selling more digital services in IoT, cloud security. So, we see also positive trend. And then in the wholesale and other, there are going to be changes in the revenue function. The MVNO loss that we saw this year will fade out during 2019. We have recently signed an agreement with MásMóvil that will also help on the mobile side.

We have accretive migrations from copper to fiber wholesale, which will continue. And the contract resale dynamics will be relevant because we’re going to be – we have more content to resell to third parties. Will this mean that the wholesale and other line will become positive? Probably not, but far less negative than what we’ve seen this year.

So all in all, this should translate in service revenue acceleration in Spain in 2019.

And with respect to the approval from the concession to authorization in Brazil, there are – what we see or our Brazilian colleagues see is that there are increased chances with current political conditions that, that can be taken for approval sooner rather than later, although we don’t have any specific calendar..

Thanks. Can I just ask one thing on wholesale? So we’ve talked about MVNO losses fading out. You’ve got the upselling from copper to fiber, and TV revenues are higher.

So what is it that we’re missing that means revenue wouldn’t grow? Is there just declining kind of transport and roaming revenues that we need to think about as well?.

Well, you have the rate of movement from the wholesale from copper to fiber. Part of that is moving to different types of unbundling of fiber. So, you have what is the called the NEBA to move the migration.

The local or non-local access to that fiber have different prices, and this migration with the wholesale agreement we’ve reached with Vodafone, Orange and so on is gaining more weight to the local one. And also, there is sales provisioning on fiber.

So, it’s accretive migration, but the rate is clearly an improvement, but probably will not be enough to turn that line into positive. However, the trends that we see in B2C and in B2B compared to this improvement in wholesale should result in a clear acceleration quarter-on-quarter on the revenues in Spain in 2019..

Great. Thank you very much..

Thank you, Joshua. Next question please..

Our next question comes from the line of Julio Arciniegas from RBC. Please go ahead..

Yes. Good morning and thank you for taking my questions. Today’s football in Spain is exclusive to Telefónica and Orange. And I believe that OTTs are planning to offer football for the next season. How do you see the risk of losing this exclusivity on facing competition from OTTs? And my second question is also related to this topic.

I guess, Spanish football is available from OTT. There is a restop [ph] or retail cost. Let’s say, Orange might stop acquiring the football rights from Telefónica.

Can you give us some color on how the contract between you and Orange works? Can they basically walk out on any moment from the wholesale agreement for football or they have to stay for the three years? Thank you..

Thank you, Julio, for your question. First thing I would like to say is that pay TV penetration in Spain is lower compared to other European countries. So, there is room for – a lot of room to grow in pay TV in Spain. You’re right, by regulation, we must make our premium content and this includes the football available to other players.

And there are some OTT players that are considering entering with different sports, the Spanish market. For instance, DAZN has acquired the rights to broadcast MotoGP, the UK Premier League and the basketball’s euro league. We looked at those contents, but we were not willing to pay more than what was justified by a rational economic analysis.

And given the knowledge that we have of the base of viewers, we were not willing to pay those type of prices.

In any case, if an OTT were – or a pay TV telco player wants to get access to our premium content, they need to comply with certain requirements and share the cost of the football rights according to the regulatory formula that was set by the antitrust authority when we acquired Digital Plus. This formula has two parts.

One is a minimum guaranteed cost and then a cost per subscriber. The minimum guaranteed cost is calculated taking into account the share of fixed broadband, the share of pay TV subscribers and sets certain minimum cost levels.

So in the case, for instance, of somebody like DAZN, if they launch their service with MotoGP and other contents, which we think they have announced they will do in the month of March, the pay TV customers that they would have according to those services would be counting towards the formula.

Also, if at some point, there was to be some coordination of commercial efforts between an OTT and some of the telco players, their shares of fixed broadband and their shares of pay TV would be added up in order for the calculation of the guaranteed minimum cost.

Having said this, we have seen in the past interest of OTTs that have offered even all pay TV football with limited success. beIN Connect, that was owned by Mediapro, had this type of service and they didn’t manage to grow their customer base. There are some technical factors linked to time delays, the quality of image, some technical constraints.

But again, there are very clear set rules for this content to be provided to the players that may request it. And second, we have a healthy pay TV market in Spain with upside still in penetration. Regarding your question on Orange, every player has the right to request on a yearly basis the soccer rights from us.

So we have Orange, who we can see more players – or less players asking for those contents in the seasons ahead..

Okay, fantastic. Thank you very much..

Thank you, Julio. Next question please..

Our next question comes from the line of Jakob Bluestone from Crédit Suisse. Please go ahead..

Hi, good morning. Thanks for taking the question. I’ve got two questions as well. Firstly, just staying on Spain. Could you maybe just share with us a little bit your expectations for the sort of competitive environment in Spain? So do you see pricing continuing to improve? I think you’ve already announced some price hikes for the first quarter.

But just sort of more broadly, how are you seeing competition trending? And then secondly obviously a very good performance in the U.K. So again, if you could maybe just share a little bit your thoughts on the outlook for that business..

Thank you, Jakob. On the Spanish competitive environment, following a third quarter that had very high level of commercial intensity, the Q4 was much cooler. The dynamics went back to normal. It was a quieter quarter. It was quieter quarter for us and for the whole market.

The competitive intensity softened once we’ve removed the football-related promotions. This was followed by competitors removing their most aggressive retention promotions. We have seen a significant portability slowdown to minimum levels in Q4, especially around Christmas and Black Friday campaigns reappear, but with shorter discount periods.

And the Christmas campaign had suffered promotional activity than in previous years. And what we see so far in Q1 shows again a rational market. Both Vodafone and Orange kept acquisition promos, but softer than the ones offered during the summer and MásMóvil is merely extending their promos in 2019.

By segments, what we’re seeing is that in the high-end, we are seeing More for More moves. And remember that this is the segment that makes the most of our B2B – B2C revenues, sorry, in Spain.

The mid-to-low end is also rational, even MásMóvil and Yoigo have in their new portfolio launch from February 2019, More for More in some of their tariffs, no? So the market is cooler and is rational, and somehow, if we could say, it’s polarizing. We continue to focus on that high-value customers, which is the pillar of our business sustainability.

And here, we are seeing rational and More for More we figure from digital players. Regarding the U.K., sorry. The U.K. has delivered another set of very strong results, continued customer growth with 284,000 contract additions in the quarter. The total mobile base is 32.6 million, has the sector-leading loyalty churn of 1%.

So we have seen revenue and OIBDA growth in the quarter. It’s the tenth consecutive quarter of mobile service revenue growth. There are two very substantial metrics. It’s – Telefónica U.K. achieved this year the highest revenue in a decade and its highest-ever profitability ratio.

Of course, there are some factors here that are due to the business that are not going to be recurrent. For instance, the adjustment on annual license fees or some settlements we have reached with some commercial partners. But still, a very strong performance in the U.K. business, and we are confident in the outlook of the business going forward..

Thank you..

Thank you Jakob. Next question please..

Our next question comes from the line of David Wright from Bank of America Merrill Lynch..

Hello guys, thank you for taking the call. If I could just add a little question on the U.K. There, you obviously have the outage in December.

It clearly doesn’t look to have impacted that very strong set of numbers, but I just wondered whether the – you are seeing in Q1 or in the last couple of months any indications of a little bit of a churn spike, whether there are any sort of financial penalties that you’re going to have to accrue in 2019.

If you could just give us a little bit of color on that and then, I think you’ve mentioned sort of ongoing deleverage for 2019.

I guess, given it’s obviously very sensitive, very commercial, that, that is a comment ex-spectrum, or is that just a comment including spectrum as well? With the asset sales, should we expect deleverage to continue? Thank you very much..

Thank you, David. On December 6, we lost part of our network.

This was due to a software leak from one of our suppliers who publicly acknowledged that the software provided by them was to blame and it affected other networks across the globe, no? What the – we saw this as an opportunity to learn some lessons and to minimize the risk of this happening ever again, no? So – and we took actions in order to manage the situation with our customers.

And this did not result in any worsening or any spike in churn. For some of our customers, we credited – or for customers in SMB and the pay monthly customers, mobile broadband customers, we credited two days of monthly airtime. For the pay-as-you-go customers, we gave a 10% credit and on a top-up.

Also, for the pay-as-you-go mobile customers, we gave some discounts from bolt-on purchases. And to the enterprise and MVNO customers, we also credited two days of airtime challenges. The overall impact of these benefits for our customers versus the commercial settlement that we reached with our supplier is broadly neutral.

And what we see is that this event underscores also the importance of having a diversified supplier strategy, but no spike in churn; financial impact, broadly neutral. It’s been already reflected in 2018 accounts..

Hi David, as you know, we have a commitment on solid investment grade and we do not give any specific target on amount of net debt or ratio. Having said that we also usually talk about free cash flow ex-spectrum given the confidential nature of this, but as you’ve seen in our deleverage path in 2018, it has been achieved even with the spectrum.

And if you look at the deleverage path since June 2016 up to now, which has been almost EUR 12 billion, that has, of course, been achieved including the spectrum. So where we talk for 2019 of our net debt continue reducing, that is including the spectrum that we will have in 2019 as well..

Okay, that’s great.

Laura, just while you’re on, could I just ask a one very simple question? Is there any working capital movement of any note we should be expecting in 2019 just for our modeling?.

Not too different from what we’ve seen in the last couple of years, no? In 2018, as you’ve seen, working capital contribution has been very low, but it’s been more because of non-recurrent events from the judicial review in Brazil, no? And you should expect a little bit of contribution of working capital in 2019 as well, but not a great amount either..

Thank you guys..

If I may, I would like to complement. Laura has stated that since June 2016, we have been taking down debt, including the post-closing event, roughly EUR 12 billion. EUR 12 billion is roughly the value that we will be getting out of the transaction of the U.K. – or to U.K. being sold to Hutch and blocked by the European Commission in April.

So basically, we have been in two years reducing basically the same amount that we were supposed to get out of that divestment, and we still have the U.K. inside, which is performing extremely well, best revenues in a decade, highest profitability ever and a significant free cash flow generation.

So we like to consider that the effort that we have been doing that has been so far mainly organic has been very strong and take us to a different position. So – and you should expect us to keep going to the same direction..

Thank you very much..

Thank you David. We will have time for the last and final question please..

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

Hi, thank you for taking the questions. I have two questions. So just digging into Spain a little bit, if we take out IT services and handsets, I mean, IT services seems to have quite a big spike. Presumably, it’s a lower margin contribution compared to traditional revenues.

Then if you take out IT services and handsets, then there’s not really much sign that Spanish revenues are growing. So despite the high inflation in football cost, that doesn’t appear to be being matched commercially in the other part of the business.

I mean, is it just an acceptance that too much money was paid for those rights? Secondly, just looking at sort of Colombia EBITDA up 32% year-on-year in local currency terms; U.K., up like over 35%, I mean, beyond obviously the operations being run and managed and performing very well, is there anything else that’s sort of going on? Any sort of accounting benefits? Anything that we’re not sort of seeing in the headline numbers, please?.

Thank you, Mandeep. On your first question, we couldn’t really hear very well, but if I understood right, you were saying that handsets revenues are an important element, which actually it is. For us, it’s part of our strategy. We think that device relevance is critical for sustainability of the business.

And this is a device and handset sale which comes with a positive margin. So this is not linked to subsidies. This is not money-losing revenues, which have positive margin in OIBDA. Service revenues, and then you were touching, I think, on Spain and the content cost, service revenues in Spain are back to growth.

They are growing in a way that we have not seen in the previous years. This is the result of the improvement of our customer base. When you look at Fusión, we’re increasing the number of Fusión customers. We’re increasing the ARPU of Fusión customers.

We’re increasing or improving the mix of customers that have packages that include content cost, that include TV. We are seeing stabilization, not worsening, stabilization quarter-on-quarter and year-on-year of the Fusión churn at the low levels that we have.

We have been – before we acquired the content cost, we have been doing lots of numbers about the economics of software and we think that our strategy has – is showing the results and is proving right.

With respect to any accounting tricks or I don’t know exactly what – how you worded it on the OIBDA figures in some of our operation or in any of our operation, we don’t play and we disclose whatever elements which are not recurrent, one-offs or whatever. So no tricks on – it’s a funny thing at this point..

Yes. If I could just follow-up, sorry, I didn’t mean to imply there was any accounting trickery. I just thought the performance is almost too good to be true. So I just thought there may be a bit some accounting changes or sort of stuff like that, but that’s fine. Thank you for following-up..

No. For instance, with the U.K., I think I’ve been quite open in and we’ve been transparent in the release and the presentation, annual license fees and two settlements with some commercial partners. I think I’ve said it three times in this conference call. Thank you very much. And in Colombia, there is nothing to talk about..

Thank you..

Thank you Mandeep..

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

Okay. 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 Relationship department. Good morning and thank you all..