Good morning, and welcome to Telefonica's conference call to discuss January-September 2022 results. I'm Adrian Zunzunegui 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.

This 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 that could 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 the slides, please contact Telefonica's Investor Relations team in Madrid or London. Now let me turn the call over to our Chief Operating Officer, Mr. Angel Vila..

Thank you, Adrian. Good morning, and welcome to Telefonica's Third Quarter Results Conference Call. With me today are Laura Abasolo; Eduardo Navarro, and Lutz Schuler. As usual, we will first walk you through the slides, and we'll then be happy to take any questions. We have again proven how to manage the current challenging macro situation.

The relentless execution of our strategy has allowed us to report improving growth trends in euros in both revenues and OIBDA and to reiterate our recently updated guidance and the dividend for 2022. Our streamlined leaner operating model enabled us to generate a stable organic OIBDA margin versus Q3 '21 despite ongoing cost headwinds.

At the same time, we maintained a strong balance sheet and have a strong liquidity position that covers maturities over the next 3 years. Operationally, we reinforced our leadership in our core markets. In Spain, Mi Movistar helped to improve our commercial momentum and sequential OIBDA performance.

In Brazil, our unrivaled operating and financial performance helped us to reinforce our leading market position. Germany posted strong operational and financial metrics, while in the U.K., VMO2 accelerated OIBDA growth as synergies started to kick in. And whilst running our operations, we continue to build optionality.

Telefonica Infra vehicles have already passed 12 million premises with fiber as of September. While the growth story of Telefonica Tech continues to develop and remains a potential source of value.

In Telefonica Hispam, we again reduced capital employed and crystallized value, while Spain is set to benefit from the EU recovery funds and in-market consolidation. At the same time, we continue to expand our network leadership and to develop new opportunities for telco growth in the new Web3 environment. Moving to Slide number 3.

We review how commercial growth flows down to free cash flow within a prudent balance sheet management. High-value accesses grew strongly once again this quarter, with fiber up 17% year-on-year, underpinning the ultra broadband expansion to 166 million premises passed, 6% up year-on-year.

The transformation of our business continues at pace, and we now generate more than 30% of our service revenues from broadband and services beyond connectivity. We are very excited to see the remarkable 6.5% organic growth in B2B, proving right our Telefonica Tech approach.

At the same time, Organic OIBDA grew 3.1% on a group level, supported by sequential improvements in all of our core markets. On a reported basis, trends accelerated in the quarter, and we now report the second consecutive quarter of revenue growth and the first quarter of underlying OIBDA growth.

Free cash flow improved as well throughout the year, growing 35% quarter-on-quarter. From a balance sheet perspective, we are better positioned to face macro and market challenges, thanks to our prudent debt management and solid liquidity position. Fixed rate debt represents 74% of total debt, with an average debt life of 13 years.

Furthermore, we have reduced leverage during the year even after M&A activity. And finally, recent confirmation of a tax refund in Spain for an amount of €1.3 billion will be reflected during Q4 in our free cash flow through lower tax and interest payments and net debt reduction.

Moving to Slide number 4 for a quick review of our financial performance. Reported revenue accelerated 10.5 percentage points versus the second quarter to plus 11.2% year-on-year. Underlying OIBDA grew 8.5% year-on-year to €3.3 billion once impacts from changes in the consolidation perimeter annualized.

ForEx continued to contribute positively mainly due to the depreciation of Brazilian real versus the euro. Free cash flow was strong in the quarter at €1.1 billion, leading to €2.5 billion in 9 months or plus 68.2% year-on-year. Net debt stood at €28.9 billion of September, roughly stable versus June.

But if we account for post-closing events, net debt would have been €26.7 billion. On Slide 5, we give you an overview on how we successfully manage inflation. In Q3 reported annual growth rates in revenue underlying OIBDA and free cash flow are above inflation for the average of countries where Telefonica operates.

Inflation can bring an opportunity for our revenue development. As we exert pricing powers in most markets which comes in addition to our strong B2B and wholesale position. However inflation also poses a challenge to costs and that is why we continue to work on efficiencies, cost savings and simplification initiatives.

Energy costs, for example, represent 2% of our revenue, but more than 60% of our 2023 consumption is hedged through long-term PPAs, and we have an ambition to continue at the same time, increasing the coverage. We continue as well working on initiatives to reduce energy consumption.

Fiber and 5G are 85% and 90% more efficient than copper in terms of energy consumption and deployment brings forward legacy shutdowns, such as the copper decommissioning project in Spain, which we aim to complete in 2024.

As for labor costs, they account for around 13% of group revenue below our peers and showing the steps taken to manage this OpEx item. Our CapEx peak is behind us with an outlook for the year of up to 15% of sales, whilst active tax management at the group level provides an additional buffer supporting free cash flow. Moving to Slide 6.

Let me confirm our full year guidance and dividend. We believe these results demonstrate our ability to cope with an overall tougher context than originally anticipated. 9 months results are aligned with our full year target for revenue of high end of low single-digit growth and OIBDA of mid- to high end of low single-digit growth.

While CapEx to sales at 13.8% stands well within the up to 15% target. On shareholder remuneration, and as previously stated, we will be paying the first tranche of the 2022 dividend of €0.15 per share in cash in December '22, and the second tranche of €0.15 per share in June '23.

In addition, we will propose to the AGM the adoption of the corresponding corporate resolutions for the cancellation of 0.4% of shares held as treasury stock as of 30th of June 2022. Moving now to Slide 7. We report on our progress across the pillars of ESG. On the environmental side, we continue to implement our renewable energy plan.

Thereby, reducing emissions. Chile has become our sixth market to become 100% renewable, joining Brazil, Germany, Peru, Spain and the U.K. with the rest of Hispam ramping up to 50% renewables by the end of the year. With this progress, we are fully committed to reaching our target of 100% renewables across the group by 2030.

In parallel, we were the first telco to publish a detailed life cycle assessment report, which demonstrates our arrangement with the EU taxonomy. Within the social dimension, we continue to bridge the digital divide connecting more people and more places.

Through our infra unit, we expanded our FibreCo portfolio within Spain and the U.K., bringing digitalization to the underserved. We also progressed on diversity and inclusion.

Our comprehensive equality policy was approved by the Board, establishing minimum group-wide standards to ensure we achieve our gender equality objectives such as pay gap and equal representation. In governance, we remain committed to the highest standard of business ethics.

As of the end of September, 74% of employees had already taken our responsible business practice scores in the 3 months since its launch. And now let me start with a review of our businesses. On Slide number 8. Telefonica Spain's commercial activity continued to improve in Q3 '22 across all KPIs.

In a more rational market, fixed broadband and mobile contract grew sequentially. The convergent Mi Movistar portfolio gained traction and now exceeds 1 million customers. ARPU grew year-on-year for the third consecutive quarter and churn improved again to 1.2%.

In a complex environment, our better levels of ARPU churn and MBS confirm our premium market position. The better quality experience perceived by our customers that enjoy a compelling and complete portfolio with a much value is the main driver behind this success.

Revenue grew year-on-year for the sixth straight quarter although growth decelerated due to a tougher year-on-year comparison for handset revenue and lower wholesale TV revenue as the new football model kicked in. Excluding this latter impact, service revenue trend showed another sequential improvement.

OIBDA year-on-year improved by 0.6 percentage points sequentially to minus 2.8% year-on-year in Q3 '22 on a lower energy drag, content cost deflation and ongoing efficiencies from the redundancy plan and network transformation. Moving to Germany on Slide 9, which has delivered another quarter of strong operational and financial trends.

The company's mobile base continued to expand due to core business momentum and strong traction of the O2 growth tariff. Revenue grew by 6% year-on-year in the third quarter driven by sustained mobile revenue momentum of plus 6.6% year-on-year and a record third quarter for handset sales, which grew by 18.9% year-on-year.

OIBDA grew 4.2% year-on-year with continued own brand momentum, driving improved operational leverage, mainly in mobile and further efficiency gains as well as some roaming support.

In-line with plants in its final year, Telefonica Deutschland continued to execute its investment for growth program, with Q3 representing the big investment in 2022 so that 5G coverage now stands at 75%.

We now move on to Slide 10 and our joint venture in the U.K., Virgin Media-O2, which has made strong strategic and operational progress supporting delivery of synergies. Customer growth trends improved in fixed mobile and converged products.

As the company passed a significant milestone as it connected its 1 millionth Volt customer in September, highlighting its continued progress in conversions. Network investment has continued.

So the fixed network now reaches 16 million premises and is on track to deliver over 0.5 million new network premises in 2022 with 5G connectivity now available in over 800 towns and cities.

In the third quarter, OIBDA growth accelerated to plus 8.1% year-on-year, which includes a 3.3 percentage point impact of a noncash, nonrecurrent effect and was also supported by the delivery of synergies and continued cost efficiencies. Moving to Brazil on Slide 11.

Vivo released an outstanding set of results, growing double-digit in both accesses and main financial KPIs. Contract accesses grew 18% year-on-year after capturing more than 70% of new connections in the market during July and August.

Fiber-to-the-home connections accelerated in Q3 and were 9% up versus June, thanks to the progressive fiber deployment which has already reached 22 million premises passed, an increase of almost 4 million in just 12 months. Despite infers -- inflationary pressure, which has started to ease in the country.

year-on-year organic OIBDA growth accelerated to 12.3%, expanding the margin to a remarkable 43%. OIBDA minus CapEx increased by 4.4% in the first 9 months of the year despite the acceleration of our own fiber deployment. And finally, Vivo continues to put ESG at the core, being in the top 100 companies in the Refinitiv D&I Index 2022.

Moving to the next slide. Telefonica Tech consolidated its position as a leading tech solutions provider with solid year-on-year revenue growth of plus 70% in Q3 '22 and 9 months '22 or 30% year-on-year growth in constant perimeter. Both businesses grew more than 70% in the 9 months of '22.

Main drivers of this consistent market outperformance, architects profile and its differentiated go-to-market approach.

Around 5,800 professionals, mostly located in Europe with high-value skills in professional and managed services, strong credentials, higher geographic diversity and in the last 12 months, €1.4 billion of revenue and a differential customer journey based on the migration from traditional communications and IT services to next-generation IT solutions.

This allows Telefonica Tech to be the trusted partner to accompany the large base of B2B Telefonica customers enter path to full business digitization and optimization. Commercial activity remains robust in both cyber and cloud and IoT and Big Data with bookings growing by 16% year-on-year, which will support a sustainable revenue flow going forward.

Finally, in Q3, we strengthened our partner ecosystem with Aruba, McAfee and Sateliot, among others, and reinforced cloud capabilities. For example, we achieved specialization distinction from AWS and NetSkope for our technical expertise and exceptional scale of services. Turning to Slide 13.

We offer a unique portfolio of best-in-class fiber goals, both in Europe and in LatAm with an aggregated target of more than 25 million premises to be passed by 2026 from the current $12 million deployed to September 22. In July, we announced the creation of BluVia in Spain and also the fiber JV in the U.K.

with InfraVia Capital Partners and Liberty Global. In Germany, UGG signed MOUs to deploy 550,000 premises and 1 additional wholesale agreement with a regional ISP. FiBrasil enhanced its commercial position announcing wholesale agreements with Sky Brazil and Vero.

ON*NET Fibra Chile reached its deployment target of 3.5 million premises passed by 2022, ahead of plan and strengthened its market leadership by announcing the purchase of Entel's fiber network. With this transaction, Entel will become a wholesale tenant.

And in Colombia, ON*NET Fibra is not only the largest neutral fiber-to-the-home wholesale provider in the country, but also the market leader.

On another front, during the first 9 months of the year, Telxius subsea cable maintained its strong commercial momentum which, together with good cost management, fueled year-on-year OIBDA growth of 13.6% organically and 26.3% on a reported basis.

Bandwidth provision for capacity services grew by 46% year-on-year in the first 9 months of the year, and the value of contracts signed with third parties increased by 17% year-on-year during the same period as a result of the incremental demand from hyperscalers and relevant carriers.

I now give the floor to Laura, who will review Hispam's operations and the group financial results..

Thank you, Angel. Moving to next slide. On Hispam, the quality of accesses continued to improve, thanks to the strong momentum in contract and broadband. FTTH connections now account for 81% of total fixed broadband accesses, up 10 percentage points year-on-year.due to the successful execution of the alternative fiber deployment model.

This deployment allows us to capture the growing demand for fiber and at the same time to reduce exposure to the region. Revenue and OIBDA continued to grow year-on-year organically, plus 3.8% and plus 1.2%, respectively, thanks to access growth and the progressive generation of synergies.

Operational efficiencies offset inflation and commercial cost pressure. OIBDA minus CapEx grew a remarkable plus 15.1% year-on-year in the first 9 months of the year. Finally, Telefonica is a knowledge as the telco with the best corporate reputation in LatAm by Merco. Turning to Slide 15.

Following the intense long-term financial activity over the last years, we faced a smooth maturity profile. We maintained a solid liquidity position of €22.1 billion that compares with a '23 to '26 gross debt maturities average of €2.9 billion, 56% lower than the 4-year average we had at September 2016.

This line maturity profile together with a strong liquidity position, especially after cashing in some inorganic deals, allows us to cover debt maturities over the next 3 years. As of September, we have contained interest payment costs amounting to 3.94% versus 3.85% in December.

Our debt is 74% linked to fixed rates mainly euros which is a solid position to face rising interest rates in the coming years. Net financial debt stands at €28.9 billion as of September. Considering post-closing events, it will decline to €26.7 billion, deleveraging to 2.52x end-of-period net debt to OIBDA despite M&A activity in 2022.

We also strengthened our balance sheet with shareholders equity increasing 15.8% versus December 2021 to €25.7 billion at the end of September. I will now hand back to Angel, who will wrap up..

Thank you, Laura. To wrap up on Slide 16. Sustainable growth continued in Q3, with improving momentum in reported terms, while successfully managing macro challenges. Commercial actions based on our network leadership are supporting growth and our customer journey.

I would like to highlight again the strength of our balance sheet, our liquidity position and free cash flow capabilities, which are key in these uncertain times. Free cash flow and net debt will reflect in Q4 the tax refund in Spain on which we received confirmation last week. I also want to reconfirm our guidance and dividend for 2022.

On an industry level, we continue to play an active role in currency development of open standardized APIs to position us and the industry for new growth opportunities in the digital world. And finally, let's not forget we are helping society thrive, promoting economic and social progress based on digitalization. Thank you very much for listening.

We are now ready to take your questions..

[Operator Instructions] We will now take the first question. It comes from the line of Yemi Falana from Goldman Sachs..

Two questions from me on Spain. I think one of the key highlights in this quarter was just some strong cost control and some relatively robust EBITDA margins in that business.

So, could you maybe talk to -- talk -- provide some color around the ongoing lower OpEx that you expect as copper decommissioning continues and as you flagged is completed in 2024.

How much of a tailwind do you think that can be for margins into next year? And then secondly, just on the NPS and churn development, appreciate churn has been low for some time and NPS has been high for some time.

So the changes quarter-on-quarter are relatively small, but could you maybe talk to some of the moving parts that have seen churn tick up slightly and NPS ticked down slightly in the quarter..

Thank you very much for your questions. On the first question regarding cost control, OpEx and margin, we are clearly making a very strong effort of efficiency in this time of uncertainty and high inflation. We have managed, as you can see on the slide, to slightly increase the EBITDA margin in this quarter in Spain versus the previous quarter.

And this is the result of several moving pieces -- on 1 side, personnel costs are down year-on-year, thanks to the redundancy program that we launched earlier in the year and the moderated salary increase that was applied in this year 2022.

On the supply costs, basically in content, we are already experiencing the benefits of the lower content cost in the renewal of LaLiga that already has come into the -- into this quarter into effect. On commercial costs, we are seeing different moving parts some of our revenues come with higher equipment costs.

But at the same time, we are optimizing the cost of our commercial activities. And then in operating expenses, we have the increase of energy prices that in this third quarter has been lower than what we saw in the previous 2 quarters.

We are working quite intensely to manage, in particular, this energy line, and we have moved swiftly to have 80% hedge of the energy line in Spain at prices that come from before the big rise in costs. So we have been negotiating PPAs that are gradually coming into effect.

And these PPAs have prices around €60 per megawatt hour, which are much lower than what we have seen this year, which means that if spot prices were to stay where they are combined with the hedges that we have now for 80% of our consumption, the energy line for the Spanish operation, good experience if spot prices were to stay would experience a slight decline.

All in all, we continue to see that we can deliver margins in the high 30s and potentially in the fourth quarter at the level of what we saw in Q3 or potentially a bit higher.

With respect to the second question on NPS and churn, we believe that it's the result of the positioning that we have in our Spanish operation, we have developed a strategy of giving our customers the best connectivity with the best entertainment products, also with additional services -- digital services beyond connectivity, such as home security, alarms.

Now we are getting also into home solar generation, also with the best financing coupled with these services.

And this is resulting in a consistent performance in the NPS that is experiencing the record values that we have ever had and also with another sequential decline in churn because this type of services provide the stickiness to our customer base..

Very helpful. Could I just clarify, it's 80% hedged for 2023.

At €60 per megawatt hour or is that for this year?.

No, I was talking for 2023. We have 80% hedged. Price per megawatt hour is slightly €60.5 per megawatt hour..

And the next question comes from the line of Pilar Vico from Credit Suisse..

I have two on my side, please. So the first one is around Mi Movistar. I'm not sure if you could please provide a bit more color on the performance the speed of the migration from Fusion and also how you're seeing O2 performing? And the second one is probably more related to the higher rate environment that we are seeing.

Has this changed any of these -- have these actually changed the approach you have to your capital allocation strategy?.

Thank you, Pilar. Regarding Mi Movistar, it's fulfilling the expectations that we had on churn reduction and on upselling, it's still in progress in the market, but already subscribers are only 5 months after launch are already surpassing 20% of the conversion base in September.

The gross ads that we are getting with Mi Movistar are delivering higher ARPU if you compare Q3 '22 to Q3 '21. We are seeing a large preference for mobile services, 2.5 lines per pack and unlimited data packages.

There is an excellent reception of TV add-ons with football penetration in line with expectations, and this has helped us capture a higher percentage of the customers of football that had left the content at the end of the previous season.

We are getting a reduction of churn in convergence, minus 0.2 percentage points, thanks to Mi Movistar, we are seeing 6 percentage points higher NPS versus Fusion and larger handset redemption. So, so far, this is performing quite nicely.

With respect to O2, that was the second part of your first question, subscribers continue growing on the back of new portfolio that is enhancing the positioning in the market. So we are having a quite positive evolution in gross fixed brand, that and in churn, which is making us more competitive in the low-end segment..

Pilar, with regard to higher rate environment, thinking of the debt refinancing, we maintain a very conservative approach to it.

And the financing activity has been very intense in the last years, as you have followed, and we have taken advantage of historical low refinancing rates to extend average debt life and smooth our maturity profile in coming years. The very high percentage we have on fixed rates allow us to be much more resilient in this current environment.

But if we touch upon the capital allocation question as well, I think in the past year, we have been allocating capital very strict. We have been focusing in the core of OBs and in growth and growth comes from having a stronger Obs and also from the Tech business unit that is growing so nicely. There’s no doubt, the cost of capital is rising.

And therefore, we will be even more restricted in this capital allocation. And we will also give higher priority to our strong commitment to investment grade, which is here more important. But as an overall context, we have done the homework to tap the market at the appropriate time and to be more resilient in this environment.

And I remind you the very high liquidity figure we have and how we cover the maturities over the next 3 years..

It comes from the line of David Wright from Bank of America..

I guess a couple of questions for Laura, please. Just firstly, on the hybrid refinancing that is coming due. They look to be very expensive right now. So I'm just wondering how you're approaching that given you obviously carry an equity credit, but I'm sure you wouldn't want to lose from the balance sheet. That's question number one.

And question number two, we have talked about Hispam for some time. You guys moved it to effectively a kind of non-core region. I'm just wondering if there's been any change in thinking about Hispam.

Is it still -- is there still a for sale sign out there on these assets? Or is it something that you guys are quite happy to maintain in the group now that there's some good commercial performance..

Thank you, David, for your questions. Regarding hybrids, hybrids is definitely a part of our capital structure and it has served its purpose as it has, as you know, the 50% debt component and also the 50% equity component. Obviously, then it's more expensive than playing debt.

But at the same time, the equity component has also been very attractive in the past years and up to the large refinancings we did. In fact, as you know, the cost of the layer is 3.56%, and it has been reduced very much in the last 2 years.

And due to that prudent refinancing, even with higher costs, we still are benefiting from that refinancing exercise we've been doing in the past year. So we shouldn't have a big impact in the medium term. The company is committed to this layer of hybrid.

Our intention is to refinance and exercise the cause in a manner that is consistent with best market prices. We have been prudent in managing that hybrid profile and we will continue to approach them in that way. There's no doubt that you said, cost is becoming less attractive.

But as I also said, that prudent refinancing allow us to keep on benefiting from those lower costs in the medium term. We are not in a hurry. We have time to decide as we still have until June 23 to exercise next hybrid call. Part of that was already refinanced in the past.

And we can also eventually make use of the permitted flexibility from S&P, which allow us to do a -- they define in material 20% over 12 months and also 25% over any 10-year period. So we will keep adapting and navigating through the different market conditions.

But as I said, that prudent financing we did in the last 2 years, and that low cost, we have blended for the layer allow us to be somehow more protected in the medium term. Your second question on Hispam and you always make this question, which I like. So that means you care for the Hispam assets.

But I usually give you the same answer, which is that our strategy has not changed. I mean Hispam is non-core. What does not mean Hispam is for sale. What you should be expecting is to continue managing Hispam as we have been doing. We are building strong pillars. We are growing value accesses, contract, fiber.

We are delivering a lot of efficiencies from operating model from much less capital-intensive investment models. We have been improving the capital structure. Hispam is giving us optionality, either because of the better organic improvement or as it has more value today for other inorganic options.

So we will keep on working as non-core, a low capital exposure and creating value for whatever option we decide to pursue..

It comes from the line of Luigi Minerva from HSBC..

The first one on your thoughts about introducing inflation indexation in Spain as you point out in the slides, do you have it in other countries [indiscernible] exercise pricing power consequently. And I think if I'm not wrong, Vodafone Spain signaled that they would be keen to introduce inflation indexation from 2023.

So yes, what are your thoughts about Telefonica Espana doing something similar? And the second point is perhaps the comment on consolidation. Now we had the opinion from the ECJ Advocate General on the U.K. case, which was not supportive.

I mean what are your considerations about it and whether you see any consequences for the Spanish consolidation, for example?.

Thank you, Luigi, for both your questions. Regarding the first one on inflation indexation or pricing reviews in Spain. Well, we believe first that the market is consolidating its rationality. We have seen several proof points in this third quarter in the back-to-school campaign, promotional activity has been more muted than in previous years.

Vodafone introduced the retail price increases based on inflation that will be effective from Q1 ‘23. We have seen more for more moves. We did such a move in February ‘22. Then the previous Euskaltel did it in June, or in July and B2C in Orange also in October for SMEs.

We have seen that even small players like Avatel, including new clauses in the contracts, paving the way for raising new tariffs. In Telefonica Spain, we have implemented repositions of tariffs every year since 2015 or so, always under commercial criteria, mostly with hikes above inflation.

Only the latest movements were below inflation given the circumstances. And we do contemplate to continue implementing this strategy. We definitely have more for more in our near-term agenda. Regarding consolidation, we believe that Europe needs a more flexible approach – regarding a market consolidation because it’s very fragmented market.

And any intra in market consolidation could bring bigger investment capacity, greater certainty in new generation investments and so on.

We have seen, of course, as everybody, the ruling of the Court of Justice and the conclusion of the advocate general which we believe that it does not prejudge the final judgment of the European Court of Justice because there are many factors to be taken into account for this type of consolidations.

And in particular, in the Spanish case, we believe that the JV modifies the wholesale and retail communications and TV markets.

So the regulator must analyze the transaction and potentially propose remedies, but the approach should consider the landscape of the sector, which is a very highly fragmented market, a very competitive fiber wholesale environment, ARPUs struggling for most of our competitors, return on capital employed below WACC for all the players except Telefonica, the need to step up 5G deployment.

In addition, such consolidation will mean that Telefonica in terms of number of customers will be not dominant in some areas. This should lead to certain deregulation that we are under now. Also football costs of the merged Orange-MasMovil would be higher because the formula applies to a number of customers, a number of TV customers.

And this JV does not imply a relevant infrastructure concentration. So we think that all these factors should be taken into account in order to proceed with this transaction. We are supportive, provided that relevant or the required remedies be implemented.

And we believe that it’s consistent with both what we have seen in the European Court of Justice ruling and the comments that the Advocate General makes..

We will now take the next question. It comes from the line of Mathieu Robilliard..

First, I had a question on energy costs. I wanted to expand a bit on at the group level. You just pointed out that Spain energy costs could be down year-on-year because you started hedging before most of your competitors. In Germany, we learned yesterday that thanks to the German government, energy cost for test function could be flattish.

I think you have also good levels of hedging in Latin America. So the question is, is it conceivable to believe that in 2023 at the group level, the headwind from higher energy prices will materialize in a much smaller increase in energy cost or no increase at all. And if you could quantify what it was for 2022, that would be sort of helpful.

And then the second question was on labor costs. You did flag that you had signed agreements in Spain for contained wage inflation.

And I was wondering if that was still the prospect of [indiscernible] for '23 in Spain?.

Thank you, Mathieu. I'll take both questions. And I will go with a little bit of granularity because the situation is different in different countries. Starting with energy.

As I was saying before, in Spain, going into 2023, we are 80% hedged at attractive prices that were set up in PPAs that were signed before all this crisis started, but have not been coming into place until now and gradually building up.

So if spot prices were to stay where they are, given the level of hedge, the overall bill in Spain would be declining.

In Germany, with government decision that was announced 2 days ago to cap the energy cost at €130 per megawatt hour for companies or 70% of the consumption of the prior year that gives -- as my German colleagues were saying that gives us confidence that we will keep the energy cost broadly stable in '23.

This €130 per megawatt hour is 20% discount to the average energy cost we had in '22 in Germany. In the U.K., we already have hedges for more than 80% of the consumption for 2023, albeit the prices imply an additional increase in the energy cost.

In Brazil we have hedged 79% through long-term agreements and the rest is regulated at prices between $40 and $50 per megawatt hour. And in Hispam, the situation is even more stable with prices, which have lower in regulated markets.

So all in all, we think that the increase that we have seen in energy costs for the group in 2022 is not to be repeated in 2023, which is situation much more managed and already hedged, although with the differences that I gave to you in the different markets.

With respect to labor -- sorry?.

Sorry, could you quantify what you think the 2022 impact will be at this stage?.

You are asking for the specific figure of energy costs for the group for 2023?.

No, '22, '22. I can follow up..

Yes, yes, please, please follow up with IR because I don’t have such a granular detail with me. Moving on to labor costs. We have also going country by country in Spain, we had in 2022 1% wage increase.

We have an agreement with – a collective agreement with the unions where there is a commitment to maintain purchasing power in the accumulated period of 3 years of ‘19 to ‘22 and wages in the initial part of this period rose above inflation. So there will be a compensation. But yes, in 2023, it’s still early.

We have not started the negotiations, but there will be an increase in labor cost higher than what we have seen in 2022. In Germany, the increase was 3.4% for all employees, plus some particular help to some segments of the employees and the adjustment of the negotiation is still pending for 2023 and our German colleagues expect a reasonable outcome.

In the U.K., there was in 2022, a 3% pay rise with also some for special segments of employees. And it’s too early to tell. There is good relations with unions and employee representatives and the conversations still have not started.

In Brazil and Hispam personnel costs increased with inflation going into 2023, we’re aiming to be at inflation or slightly below. As a principle, we will aim to negotiate below inflation prices that would be our principle. But these conversations are still pending.

And the second principle, which is very important is that we will continue to work to offset the incremental costs at personnel at least partially with other efficiencies. And in the case, for instance, of Spain, the content cost deflation and the stabilization to reduction in the cost of energy plus other efficiencies will go in this direction.

But we still have pending the negotiations with the employee representatives. And as soon as there is more precision on this, we will keep updating the market..

The last question is coming from the line of Keval Khiroya from Deutsche Bank..

Two questions, please.

So firstly, going back to the question on LatAm, you've been very clear on the strategy, but has there been any increase in the prospects of consolidation in these markets as a cost of funding for some of the players may be higher and the returns are still low? And then secondly, a longer-term question, but you are a long-term investor in TEFD.

Once the 101 network won't affect the TEFD wholesale cash flows of the medium term, it could be more mature long term.

How concerned are you about this future free cash flow loss? And would you entertain any other strategic possibilities other than allowing for another network to be rolled out given you are in favor of network consolidation rather than duplication..

Keval, not sure about the first question. I think you were talking about cost of funding, but you were talking in general or related to Hispam. Could you clarify..

Yes. Sorry, the question was obviously, some of your peers in LatAm, some of the smaller players have a higher cost of funding and the returns are still low. Do you therefore see any increase in the prospects of consolidation in Hispam..

Yes. Thank you, Keval. It could be the case. I think in general, as I was saying at the beginning, we have to be much more stricter in the use of capital, not only to M&A investments, also for CapEx as we've been doing in the region. And I think in Hispam, we've been very disruptive in the model to reduce cost of capital.

Whilst we are achieving very same results commercially. So we are doing in a very sustainable way. When we look at the results of the competitors, not everyone is doing well, and I do see there's much more appetite to reduce capital as a sector. So there are more conversation on sharing that they could be in the past.

You know we've been very, very proactive. The fiber cost we have done is a way of sharing. I mean, on the -- and now Entel is going to be part of ON*NET, which is very good news. And for 5G, we definitely have to go in that route. In market consolidation, you know the countries where there could be more benefits.

I mean, I'm not saying anything we are working on at all. It's just public information on potential synergies that could be. I mean, in Colombia, they are definitely probably too many players. We've just gone through the merger of BTR and Claro in Chile that has been approved. So there are opportunities.

And I could say that in the same way, the focus from Telefonica and Hispam has been different, and that's even more necessary today with the increased cost of capital I think the rest of the Hispam sector is going in that direction. So there could be some movements..

And regarding Telefonica Deutschland, we are very pleased with the performance company. Germany is clearly one of our core markets and continues to deliver value for shareholders. We have – as you have seen in the presentation, both us or Telefonica Deutschland, we continue to grow revenues and EBITDA at pace.

And also we have passed the peak of the investment for growth program, which bodes well for operating cash flow performance going forward. With respect to other networks, we have a lot of respect for 1-on-1 and their initiative.

It’s a project in which the market still has only limited knowledge on the details of the rollout, and we keep on getting updates from time to time from them.

We are clearly with the National Roaming Agreement and the agreements that we have with 1-on-1 Drillisch, we expect to have a broadly stable gross margin profile in the years that we can project mid and long term, which provides good visibility on the evolution of the gross margins and the EBITDA and cash flow of Telefonica Deutschland.

So we have lots of respect for them. It’s difficult to say how the market will evolve. And for the time being and the evolution of the contracts that we have in place with them and what we foresee of 1-on-1 development of the network gives us comfort on predictability of the P&L of our operation in Germany going forward..

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

So thank you very much. We hope we have been able to respond to your questions. Mathieu, sorry on the detail on the numbers that IR will provide you. Please contact our Investor Relations department. Thank you..