Good morning and welcome to Telefonica's Conference Call to discuss January to June 2021 results. I’m Adrian Cincinnati from investor relations. Before proceeding, let me mention that the financial information contained in this document has been prepared under International Financial Reporting Standards as adopted by the European Union.

These financial information is unaudited. This conference call and webcast including the Q&A session, may contain forward-looking statements and information relating to the Telefonica Group.

These statements may include financial or operating forecasts and estimates or statements regarding plans, objectives and expectations regarding different matters.

All forward-looking statements involve risks and uncertainties, including risks relating to the effect of the COVID-19 pandemic that would cause the final developments and results to materially differ from those expressed or implied by such statements.

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 slides, please contact Telefonica’s Investor Relations team in Madrid or London.

Now, let me turn the call over to our chairman and chief executive officer Chief Operating Officer, Angel Vila. I would like to turn the call over to Mr. Jose Maria Alvarez-Pallete..

helping society thrive, leading by example and building a greener feature. In terms of building a greener future, we have launched an industrywide eco-rating scheme to identify the enviromental impact of mobile phones.

In addition, Virgin Media O2 has just issued its first green bond raising GBP1.3 billion to support the fiber rollout and the use of renewable electricity. I would also like to highlight the Financial Times has nominated Telefonica as a climate leader.

With respect to our leading by example pillar and in line with our commitment to creating a more equal society, we have updated our new diversity and inclusion policy and announced a target of at least 33% of women in management positions by the end of 2024.

Thanks to our program, we are one of the best companies to work for women in Brazil, and we have reached a collective agreement with unions to adopt flexible working in Spain.

And finally, with regards to our contribution to society, Telefonica has not only extended its network, connecting more people, but also has promoted education and employability to reduce the digital divide. For example, in April, we opened a new 42 Campus, our second free programming campus with no age limit and opened 24-hour seven days per week.

Also in terms of offering a new solution for society, we have found IndesAI, which aims to drive digitalization via artificial intelligence in Spain and have launched Vida V in Brazil, a health marketplace to make telemedicine more accessible. All of the above contributes to the achievement of U.N.

sustainable development goals as can be seen in our new report and sustainable world, a connected world. I will now hand over to Angel to go through a detailed review of our business performance..

Thank you, Jose Maria. On slide five, we will review the performance of our Spanish operation, which is turning around its revenues and showing annual growth for the first time since late 2019. The market rationalization that we have been promoting since Q4 2020 is bearing fruit.

Following a somewhat muted commercial activity over the last quarters, all accesses showed a month-on-month recovery throughout the quarter with positive net adds in fixed broadband in June. The early ending of the football season had a negative impact on conversion ARPU.

This impact, however, is expected to reverse in the coming months, and we expect better ARPU in the second half. Furthermore, conversion churns continues to come down and customer satisfaction has reached a new record high, 33% in June.

Revenues, hence, were back to growth in Q2 for the first time since Q4 '19, thanks to improved trends in service and handset revenue, helped also by solid IT and partial recovery of roaming and the new portfolio.

OIBDA trend also improved versus Q1, though it was less marked than in revenue due to the lower margin of IT and handsets and the delay in full roaming recovery. Looking forward, we anticipate margin improvement from the next quarter underpinned by better trading, improved ARPU and further positive roaming impact.

Finally, and in what we would call a very rational option, we secured the spectrum needed in the 700 megahertz band at very favorable terms, which will help us to accelerate our 5G deployment and improve operating leverage.

Moving to Germany on slide six, where we have seen operational momentum accelerate in the quarter with O2 ARPU now back to growth year-on-year in Q2. At the same time, we continue to get strong results in mobile network tests and have 5G available in over 80 cities.

In May, we also signed a national roaming agreement with 1&1 Drillisch, continuing our partnership and securing long-term revenue streams.

In this quarter, both revenue and OIBDA year-on-year trends have improved to plus 5.7% and plus 10.3%, respectively, with CapEx growing back by 6.9% year-on-year in the first half, continuing to ramp up through the year.

This has resulted in continued strong cash generation with OIBDA minus CapEx margin expanding by one percentage point in the first half of the year. Moving to the U.K., on slide seven, where I'm delighted to say that the JV between O2 and Virgin Media completed on the 1st of June.

Since then, Virgin Media O2 has moved at pace to start integration with senior leadership in place, B2B cross-selling started and fast product development on the consumer side.

During this time, there has been continued commercial momentum and focus with a total base of EUR54.6 million, plus 7% year-on-year on the back of solid base growth from across the company.

Network rollout continues at pace with 5G now live in almost 200 towns and cities, and project lining adding 89,000 new premises passed in Q2, helping to grow the company's gigabit network to 7.2 million premises passed and remaining on track for completion of the gigabit upgrade by the end of 2021.

The JV has also reaffirmed its target to deliver annual synergies of GBP540 million by mid-2026, with a net present value of GBP6.2 billion.

To give an overview of the underlying performance, we have included the pro forma results for Q2 here with revenue probably stable year-on-year with improving trends in both fixed and mobile, OIBDA plus 5.8% year-on-year on the back of continued cost control and commission savings, and delivering solid cash profitability with OIBDA minus CapEx growing by 2.5% year-on-year in the first half of the year.

Moving to next slide. As the U.K.'s largest gigabit broadband provider, today we are taking the opportunity to bolster our long-term network strategy by upgrading to fiber to the premise or fixed network of 14.3 million cable premises, after taking into account the existing 1.2 million fiber to the premises to full fiber with completion in 2028.

We see a huge opportunity in the U.K. with low fiber penetration of around 20% compared to Spain around 80% where we can utilize our fiber expertise as well as creating options to potentially pursue the broadband wholesale market in the U.K., together with other B2B and B2C opportunities.

Regulatory scheme in place is a plus, so the time to invest is now. By utilizing the company's fully ducted network, the upgrade will be one of the U.K.'s most efficient fiber rollouts, costing around GBP100 per premise passed versus GBP60 per premise for upgrade to a full DOCSIS 4.0 cable network.

So a very modest increase in network cost during the upgrade with no additional funding needed. In addition, revenue benefits are expected to accrue to BM O2's consumer enterprise and wholesale businesses from the fiber to the premise upgrade. Moving now to Brazil on slide nine.

Vivo's unique value proposition resulted into sound access growth in the most valuable segments, namely contract and fiber connections. Transformation to a fiber company will be further boosted by FiBrasil, which is already up and running and will help us reach our target of 24 million fiber-to-the-home premises passed by 2024.

On the financial side, we posted very solid results, significantly accelerating growth trends in revenues to 3.2% year-on-year in Q2. Better MSR and fixed revenues that are close to stabilization explain the enhanced top line performance.

This improvement at the top line, along with efficiencies, drove OIBDA to return to positive growth at plus 3% year-on-year. CapEx allocation continues to support cutting-edge technologies that fit our top line with 83% of its total related to growth and transformation.

And finally, ESG commitments continue to expand, generating positive impact for all stakeholders. Thus, Vivo reached the 11th position in Merco's ranking of the most responsible companies during the pandemic in Brazil.

On slide 10, we show the progress of our fiber vehicles, which allow us to create growth opportunities and value, while accelerating deployment plans and addressing increasing demand for high-quality ultrabroadband. In Germany, UGG is progressing well in the rollout of its network and has already connected the first municipalities.

The first retail plan was connected in June in record time, less than four months since the start of construction. Additionally, both FiBrasil in Brazil and InfraCo in Chile received all necessary regulatory approvals with both companies already operational after their transaction's completion at the beginning of July.

We have also announced a new fiber vehicle in Colombia with KKR holding 60% of InfraCo and Telefonica Colombia, the remaining 40%.

The company has a target of around 4.3 million premises passed in three years with 1.2 million brownfield premises from Telefonica Colombia contributed at a multiple of approximately 20 times enterprise value to OIBDA and a net debt reduction at group level of approximately EUR0.2 billion. The closing is expected for Q1 '22 after approvals.

We have a strong infra portfolio that gives us optionality. We will continue to focus on pushing growth and value creation opportunities through our infrastructure assets and capabilities across our footprint.

On slide 11, Telefonica Tech revenue growth accelerated to plus 26.6% year-on-year to [indiscernible] in Q3 -- in Q2 on an increasing revenue base and again, meeting its market growth. Tech services are driving the return to growth of the group B2B revenues, plus 4.5% year-on-year in the April to June period.

In Cyber & Cloud, higher value revenues like managed services, professional services and own partners platform, which account for more than 50% of these revenues, continued to deliver double-digit growth. While in IoT and Big Data, IoT connectivity revenues representing more than 50% improved their growth rate to 8.1% in the first half year-on-year.

From a commercial perspective, we signed an agreement with TM ONE Cybersecurity Solutions for Malaysian B2B. And in Spain, we adapted our cloud comms portfolio to facilitate new ways of working, and we reinforced our SMB offer.

In this arena, we are proud to mention that we were awarded by Microsoft as the best Spanish partner of the year in the digitalization of SMEs category for helping them maintain the business in the pandemic.

In Q2, we acquired Altostratus in the cloud business, and we incorporated ACENS in Spain to the perimeter of Telefonica Tech to continue reinforcing our professional capabilities. Finally, Telefonica Tech has just announced the acquisition of Cancom UK, reinforcing our position in U.K.

and Ireland with an end-to-end advanced cloud and security provider of significant size, relevant partnerships and highly skilled professionals serving customers from both private and public sectors. I will now hand over to Laura for a review of our Hispam operations and the financial position..

Thank you, Angel. Let's move to slide 12. During the quarter, we continue to modulate our exposure to the Hispam region. However, accelerating growth and for the first time in 15 quarters, we posted year-on-year revenue and OIBDA growth simultaneously in reported terms in Hispam America.

On the commercial side, accesses increased year-on-year for all main products. In contract, all main markets posted positive net additions while in FTTH net additions accelerating, driving a record performance for the company in Q2.

In the fixed business, the new fiber vehicle announced in Colombia, together with InfraCo in Chile is a clear example of our strategy to lower capital intensity, crystallize asset value while accelerating expansion plans.

On slide 13, we show how net debt has come down by EUR nine billion or 26% since December 2020, thanks to the sale of Telxius Towers and the VMed O2 U.K. JV, coupled with a strong EUR910 million free cash flow generation. Net financial debt stood at EUR23.2 billion as of June or 26.2% post estimated distribution of proceeds to Telxius minorities.

Including post-closing events, net debt could be reduced to EUR25.8 billion. Net debt-to-OIBDA ratio went down to 2.57 times, that is 0.2 times below '20 ratio. Our liquidity cash amounts to EUR26.9 billion, and our average debt life has increased to 13.7 years, placing us in a very comfortable position as we have covered maturities beyond 2024.

Telefonica maintains a proactive and innovative approach to financing in 2021, raising EUR5.3 billion in total, including financing and the German fiber JV and the first green bond at Virgin Media O2 JV.

We are evolving our financing strategy with increased weight of debt in LATAM currencies as shown by the long-term financing rates in local currencies by our subsidiaries in Chile and Colombia. To note, Coltel signed two sustainable linked bilateral loans, being the first Telefonica Hispam company to sign sustainability-linked bilateral loans.

The effective cost of interest payment over the last 12 months stood at 2.69% as of June 2021, due to debt reduction in debt-denominated European currencies and its cost. I will now hand back to Jose Maria to recap..

Thank you, Laura. To recap, first, In the second quarter, we completed two significant steps in our long-term sustainable growth strategy, the completion of the Virgin Media O2 JV in the U.K. and the sale of Telxius Towers to American Towers.

Second, our top line performance returned to growth, while net income reached an all-time record level and -- with free cash flow excluding spectrum, growing by more than 30% year-on-year. Third, we continue to prioritize growth when it comes to CapEx allocation with almost 50% devoted to NGNs.

Fourth, we posted a significant net debt reduction as much as 30% down year-on-year or EUR11 billion, mainly due to capital gains on the strategic transactions, which improved the capital structure of the group.

Finally, we are upgrading our full year guidance to a stable -- from stable -- to stable to a slight growth at both the revenue and OIBDA level. CapEx -wise, we feel extremely comfortable by reiterating our up to 15% CapEx to sales target. Thank you very much for listening. We are now ready to take your questions..

[Operator Instructions] And your first question today comes from the line of David Wright from Bank of America..

Hello guys. Thank you very much for the call this morning and a lot to digest. I guess the most significant announcement is the decision to move the U.K. business from cable to fiber. I see the price upgrades you've given the GBP100 per premise versus the GBP60 DOCSIS.

So can you just give us some more on your thinking? Is it the offload disadvantage ultimately that has driven the decision to choose fiber over cable? That is a very, very interesting development. I would very much welcome your thoughts. And just secondly, on to Spain.

I appreciate, I think, Angel, you guided toward better ARPU dynamics in the second half. And you mentioned some dilutive effect in the Q2 number from football. If you could just expand on that the moving parts, please? That would be very useful..

Thank you David, this is Angel. I will start with response to the U.K. question, and then I will pass to Lutz. Today, we have announced that VM O2 has the intention to upgrade the fixed network to full fiber to the premise by 2028.

This will imply covering with fiber an additional 14.3 million cable premises because we already have 1.2 million, which are covered with fiber through lightning. We, from Telefonica have been clear supporters of fiber networks, all across our footprint. We already enjoy the largest fiber footprint in Europe by far.

And we have been extremely supportive of the proposal of the JV. Lutz, I pass it on to you, and then I'll take it back on the Spanish question..

Yes, Good morning David. So we have in U.K., a very unique situation. We have a deep fiber fully ducted network. And that brings us in the position that we can upgrade our network to fiber to the premise at very low cost. And this is referring to the GBP100.

Now we have the comparison with DOCSIS 4.0, right? So we have, based on DOCSIS 3.1, today already 1.1-gig speed available. We can upgrade DOCSIS 3.1 to above 2-gig per second. And then after that, we have taken the decision not to go for DOCSIS 4.0, but instead to go for fiber to the premise.

This is clearly an offensive move because we see a lot of business opportunity coming with it. Think about the wholesale market in U.K., think about the B2B market and also better competitive position in the consumer market. Yes. Back to you, Angel..

the first one is the ending of the football season, leads some of our customers to downgrade temporarily. This will be an effect that will reverse in the Q3 and of course, in the Q4 when the next football season starts. Also, there is a continuing impact as we have seen in previous quarters of increasing no-frills options penetration.

Customers taking the O2, or the Movistar Conecta Max, which is pure connectivity without content. We also have had lower out of the bundle consumption and some promotions ending at the beginning of the quarter.

This promotion intensity -- or ending of promotion intensity will be much lower in the quarters and going forward because we have been far less active in promotional activity. At the same time, the new Fusion portfolio that has more for more was applied at the end of the quarter -- of the second quarter, while we have had March 2020 tariff upgrade.

So this impact in the Q2 would not be recurrent in the following quarters. So the new portfolio, Fusion, has still not been relevant in Q2, although it will kick in Q3 and so on. So we -- the outlook for ARPU from the second half -- for the second half, starting Q3, we expect the ARPU to reflect the reversal of some of the seasonal effects.

And we also will have higher revenues from new digital services that are getting traction. Therefore, we expect a higher ARPU for the second half than what we've seen in the first half..

And Angel, if I could just follow up, I guess the football downgrades, that should be annual though that happens every year, does it not. And you mentioned the tough comp on pricing. I assume it's difficult now to envisage price increases with the current competitive pressures. And the obvious question is maybe the margin doors need to step down now.

Is that correct with the digital services running a lower profitability? Thank you..

Well, regarding the football end of season, you would have to compare with 2019, similar effect because in 2020, the competition were halted. So we didn't have that impact one year ago, which we are experiencing now. Regarding price increases, we are seeing price increases from competitors. Vodafone and Euskaltel are increasing prices now in July.

Orange has announced price increases in August. So that happens in the market.

And regarding margin, yes, what we have seen is, in this quarter, since we have been reactivating some of the commercial activity, but we still do not have full recovery of roaming, which is at levels -- the second quarter roaming is at levels, depending on the geographies between 1/3 and 40% of what would be the normal roaming levels compared, for instance, to Q2 2019.

So we still have -- we're suffering the impact of roaming still not reactivating. We also have a reactivation of handset sales, which come with lower margins and IT. That has put pressure on our margin.

But for the second half, we will be not far from the 40% levels because we see and we expect some further roaming reactivation, which is margin accretive, the proved ARPU that I was talking at the beginning of your question. And we will continue having efficiencies in commercial costs.

So for the second half, you should see, and we are expecting margin recovery, at least one percentage point higher than what we saw in Q2, and we should be not far from the 40% levels..

Your next question comes from the line of Georgios Ierodiaconou, Citi..

Yes, thank you for taking my questions. I actually have two kind of follow-ups to the previous questions asked by David. The first one around the decision to go for fiber. You mentioned the opportunity on the wholesale market.

I'm just curious what was preventing doing some kind of agreement with cable on wholesale? Is it the demand on the other side? Or is it logistically allow users to do that with fiber? And if I could perhaps ask a question whether that also makes it easier for you to find partners to fund the upgrade to fiber? Whether that's something you may be considering in parallel to what you already announced? And then my second question is Spain, and thank you for going through the moving parts.

I think it's quite clear. Some of the things are happening under your control. But if you could also comment, you mentioned that the price increases announced by your competitors. If I'm not mistaken, in Spain they notify the customers will be earlier.

How much of the benefit was already in the June numbers you have shown on slide five? And how much of it do you think across to the third quarter? So should we expect that you move into positive territory now that your competitors have done more for more?.

Thank you, Georgios, the first question, I pass it to Lutz, please..

Hi Georgios, so I mean when you think about the wholesale market, it's very simple, right? More short and midterm, we can offer a possible wholesale partner, the faster speed onto our cable network, right? Today, one gig. In the near future, 2.2 gig.

And then, right, for the longer term, we have all the speed possible available higher than 10-gig up and download. So this simply puts us in a very strong future-proofed position in potential negotiations. And I think the partner approach is completely independent from that, right? So we haven't announced any acceleration on lightning.

So obviously, we are pursuing possibilities there. But I think the announcement today to upgrade on to fiber is simply taken into account the unique position in U.K., right? At very low cost, you get to a fully fledged fiber network. And that, in the long term, puts us in a very strong position. Back to you, Angel..

Thanks, Lutz. And regarding the second question on Spain. I think we have to envelope everything that's happening into a more rational market. We have been working in driving rationality in the market by cooling down. This has had a benefit in terms of our churn. Also fostering quality has improved our NPS. And the market is behaving more rationally.

And what we have seen is that the promotions have gone to half of what they used to be. Even the early summer promotions, the different players are having, for instance, for second residences, are softer with more rational behavior. This more for more that we are seeing from our competitors are a sign of rationality.

All operators have shown forces to stop irregular practices for acquiring subscribers. The regulator has been promoting a spectrum auction with conditions, which are pro investment. And we have seen rational behavior in that auction as well. So we think that there are evident signs of rationalization from most players in the market.

And this is leading to these dynamics that I was describing before with respect to outlook for ARPU and also in the commercial traction that we are seeing within the quarter. I don't know if that responds your underlying question on that..

Yes. If I could ask a follow-up on the fiber question. I'm just curious to understand, you mentioned that finding a financial partner is independent radically from the decision today. I just wanted to understand two things.

Firstly, whether financial partner is more lean toward project lightning itself? Or whether it could include some of the existing infrastructure? And is it fair for me to assume that it makes sense for you to announce wholesale deals before you find a financial partner because, obviously, that way the price is better? So should we basically expect the wholesale just to compress? Thank you.

Lutz, to you. Thank you..

I would say everything is possible. And also every order is possible, is the simple answer, right? We have different plans. We are in different conversations. Let's see, right? It's too early to tell. Sorry to be not more concrete, but we're actually in the middle of it. Thank you. Back to you, Angel..

Thank you..

Thank you. Next question please..

Thank you. Your next question comes from the line of Jakob Bluestone from Credit Suisse..

Hi, good morning. Thanks for taking my question. I've got one question, please, on Spain. You referenced Spanish EBITDA, which sort of fell fairly similarly to what we saw during Q1.

And I was just wondering if you could comment specifically around the outlook for EBITDA in Spain? When do you think the rate of growth might improve? You obviously mentioned that ARPU growth or consumer ARPU -- conversion ARPU growth should improve in the second half.

But I think that only makes up about sort of 1/3 of your service revenues and there's other stuff in there as well.

So could you maybe comment specifically on what is the outlook for EBITDA in Spain? Do you think the growth rate will improve in the coming quarters?.

Thank you Jakob, the trend of OIBDA in Q2 improved versus Q1 slightly, but improved, thanks to improved service revenues, and despite a worse year-on-year comparison versus what was a very typical Q2 in 2020 because in the second quarter of last year, we had very low commercial and production costs and some nonrecurring factors.

So it improved its trend, but the comparison was tough versus one year -- one quarter, one year ago, that was very atypical. This improvement was lower than the revenues improvement because of the lower margin of some of the revenue growth levers, namely handset sales and IT. And as I was saying before, the reactivation of roaming.

We believe that from Q3 onwards, the football seasonality will revert, improving the ARPU and therefore, flowing into profitability and also recovery of roaming, which may add, in our estimates, around one percentage point to margin. And this would, of course, improve the trends for the second half.

One thing that I would like to note is that on the third quarter, there will be a difficult year-on-year comparison related to content costs because one year ago, we got some rebates from content suppliers to us because of the nonhappening of certain sports events.

And this helped the OIBDA of the third quarter 2020, and that is not a recurring factor in 2021. So all in all, we believe that the margin is going to be -- going back to close to 40%. The year-on-year comparison in the second half will improve.

But in the third quarter, we'll be adversely affected by these nonrecurrent content rebates we had one year ago..

Your next question comes from the line of Keval Khiroya from Deutsche Bank..

Thank you. I've got two questions, please. So firstly, can you update us on where you stand on the potential of further inorganic options in LATAM? And do you think it will now be easier to strike potential deals now that hopefully most of the COVID drags are behind us? And then secondly, following on from the previous questions on Spanish OpEx.

You will obviously have this continued mix shift toward more digital services. And as you look beyond 2021, do you think any areas where you can actually accelerate the level of cost reduction to then help the overall impact on the margins beyond this year? Thank you..

Thank you, Keval, for your question. Going to Hispam, our aim in Hispam is not to do deals. It is to modulate our exposure as we focus on profitability, efficiencies and extracting more value from our assets.

Having said so, I think we find a nice formula with the fiber costs, which are allowing to accelerate growth, which are allowing to capture that fixed broadband growth in those countries. And at the same time, we are monetizing the brownfield and the contract.

And both the FibreCo in Chile, the FibreCo in Colombia and the very soon expected approval of Costa Rica are going to contribute to net debt reduction of EUR one billion in 2021. But that's not the ultimate goal, as I said. And we are modulating and improving return on capital in different fronts. One of us is taking care of the operations.

And I think we have, as commented, delivered very strong results. Revenue and OIBDA improved by 9.5% and 0.3% organically. And in terms of commercial KPIs, we had very, very solid. New contract accesses are over EUR1.1 million in the first half of the year.

Fiber is growing very well, booming with almost 0.5 new connections, and that's being fueled by a new operating model. A new operational model, much more neutralized, which is going to bring very nice savings and at the same time, it's giving us a lot of agility.

We are already operating as such, and the FibreCo in Colombia was being run by a true regional team, doing it in a very short period of time, as you have seen since we closed the FibreCo in Chile. And we are also going to work on that line in the case of Peru.

As you have seen also in the debt explanation, we are reducing the equity exposure substantially. We have net debt in Chile, Peru and Colombia very much aligned to the group ratio, around three times. And we've been active throughout the first half year. We've been issuing in Chile. We are having issuing in Colombia.

We are preparing back financing in Uruguay, that is going to take net debt in Uruguay to almost two times OIBDA. And we are doing this with very asset light. So no capital or very low capital is being devoted to the region.

We are not detracting neither management focus from the group nor financial resources, and Hispam is becoming an optionality and a potential for value creation as it's been the case already through the financials and through the three inorganic deals that I commented. And as COVID headwinds remove, I think that's going to be even better..

If I may add, Keval. This is the first quarter in the last 15 quarters that Hispam grows in euros in reported terms and also in OIBDA. So I think that also the operational performance of the Hispam unit is helping us to allocate in a different manner our capital structure.

So please note that there is a turnaround in euro reported terms in both revenues and OIBDA..

And regarding your question on direction of travel of OpEx. Not only looking at the rest of the year, but going forward toward next year, the main buckets of costs of Spanish operation would be personnel cost, content cost, then we have cost of goods supply, costs related to IT, commercial cost and other expenses.

So the direction of travel of these different elements, when one looks not for the next quarter, next second quarter, but getting into the years to come. Personnel cost, as you have seen, we are continually working for efficiencies with respect to personnel cost. The second bucket, content costs.

We are going to start seeing new cycles of sports where we have acquired or we plan to acquire content with deflation. So for instance, from September this year, the new UFA Champions League kicks in where we achieved a 16% reduction in the cost in the last auction.

And of course, La Liga will be one year after, and the auction still has to take place, but our aim is to go for deflation. These two lines should go in the direction of being more efficient cost wise.

On supply costs or cost of goods sold for either our IT activity or the handsets, which are implicit in our new Fusion portfolio, this will be aligned with the evolution of those revenue lines because those are directly linked to the cost of sale. Commercial costs, in general, should keep the same way as they have now.

And other expenses like net worth savings, efficiencies from legacy switch of bad debt and so on, these are going -- we expect to continue to decline as has been the case up to now at a significant rate. So this should be the direction of travel of our cost function in the Spanish operation..

Your next question comes from the line of Nick Delfas from Redburn..

Yes, thanks very much. Question for Lutz, really. Of GBP100 upgrades figures quite eye-catching, obviously, for those of us who live in the U.K., calling a plumber tends to cost that much.

Have you really tested that in a wide range of situations to understand whether that's the real cost? And then what's your cost to connect on top of that?.

Lutz, to you again..

Yes. And so yes, we have done pilots already. As we speak, we are doing a bigger pilot with 50,000 premises. So the technical team is very confident to meet that number. As I said before, right, it's -- the reason for that is that we have already in our network deep fiber everywhere, and then we have really proper ducts.

So it's -- what we have found so far and what we have all documented is that the GBP100 are achievable. This compares to GBP60 what we have tested, if we would call, for DOCSIS 4.0, right? So it's not that DOCSIS is debt in general, right? It's simply a great situation for the U.K. You had a second question on cable, right? I forgot that.

What was that, again?.

Yes. Well, that gets you past the home, so what's going to be the cost to....

Yes, be connected. So I think we haven't disclosed that yet. I've seen that you made an estimate, right, already. You're not so wrong with that estimate. So because obviously, we have to test that again, we have to pull fiber then entirely into the home and the customer obviously needs a new CPE.

The good thing is that we can do this entirely demand-driven. What do I mean with that, right? If a customer gets on to DOCSIS 3.1 today, right, the customer can get up to 2.2-gig speed, yes, and fiber then kicks in for higher speed. So therefore, right, we get to our fiber network at very low cost very quickly.

And then the migration cost, right, are simply linked to a customer jumping on to higher speeds than 2.2-gig. And this obviously also can come with additional revenue. So therefore, I think to call out costs independent of top line is not appropriate at the moment..

So you'd have a connection fee of maybe GBP300 plus for an incremental, maybe, if someone wants it..

Maybe not connections fee. It can be also, right? I mean you've seen the new wholesale regime in U.K. And you see that simply, it seems that the first time in the country if we are able to monetize higher speeds.

And so I think right, today, the average speed of the Virgin Media customers, 200 MB, this is 2.5 times faster than the average of the country. So we talk about now a business model that kicks in for an average speed above 2.2-gig, yes.

So I think either the monthly subscription will be higher, combination of installation costs and monthly will be higher whatever. I think, right, it's early days. Stay tuned..

So sorry, you have a large connection fee, but you're going to have to pay for that for the incremental ARPU from a customer wanting 10-gig versus 1-gig?.

Exactly, right? I mean we can choose what we are going to do between installation cost and connection costs..

Okay. Thanks very much..

Okay..

Thanks Nick. We have time for one last question, please..

Thank you. Your final question comes from the line of Carl Murdock-Smith from Berenberg..

Hi. Thank you for the question, I just wanted to ask a slightly longer-dated question. I recognize it's more of a Board decision than necessarily for you. But just beyond this year, what are your thoughts regarding the voluntary scrip option? You obviously seem quite confident in terms of the future. You seem to think that your shares are cheap.

So why are you happy to continue to see the share price? Will the share counts continue to increase? And now that the net debt is much reduced following the M&A, should we be thinking that the voluntary scrip option won't continue in future years?.

Well, thanks for your question. As you know, what we have tried is to provide flexibility to our remuneration policy, especially in uncertain times this year because of the COVID outcome and also because of several spectrum auctions that we had on top of the table that now two of them are cleared.

In terms of the acceptance of our shareholders to this proposal, 71% came for shares in the last and therefore, they were somehow protected by the dilution. And we are trying to devote any excess free cash flow that we have in order to try to mitigate the dilution impact of the scrip option.

We have canceled 1.5% of what treasury stock in the last shareholders' meeting. And today, we are proposing an additional cancellation of 0.7%. So I guess that the answer is that for the time being, we will provide this flexibility. That we have that committed for this tranche -- this coming tranche in December of the 2021 dividend.

And the second tranche will be approved by the next shareholders' meeting, and we will update you there. We don't have a specific proposal to share. For the time being, we really appreciate this flexibility that allow us to keep investing into growth CapEx.

But yes, you're right, we are approaching the time in which the debt levels are much more sustainable and in which the underlying EPS is back to better trends. So we will be reassessing the position in the next year-end results..

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

Thank you very much for your participation, and we certainly 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..