Telefonica SA

Ladies and gentlemen, thank you for standing by and welcome to Telefonical's January to September 2020 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. If you'd like to ask a question, please press star 1 on your telephone keypad. If you should require assistance during this call, please press star 0. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Pablo Eguero, Global Director of Investor Relations. Please go ahead.

Good morning and welcome to Telefonical's conference call to discuss January-September 2020 Results. I'm Pablo Lidón, Head of Investor Relations. Before proceeding, let me mention that the financial information contained in this document related to the Third Quarter 2020 has been prepared under international financial reporting standards as adopted by the European Union. This financial information is un-audited. 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 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 financial developments and results to materially differ from those expressed or implied by such statements. We encourage you to review our publicly available disclosure documents filled with the relevant securities market regulators. If you don't have a copy of the relevant press release and slides, please contact Telefónica's Investor Relations teams in Madrid or London. And now let me turn the call over to our Chief Operating Officer Ángel Vila.

Thank you, Pablo. Good morning and welcome to Telefónica's Third Quarter Results conference call. Today with me is Laura Basolo, our Chief Financial and Control Officer. As usual, we will first walk you through the slides and then we will be happy to take any questions you may have. Let me start with the main highlights of our Third Quarter Results. First, we had a very strong commercial activity in the quarter all across the board, with significantly improved trends versus Q2, including best fixed broadband net ads in Spain since the third quarter of 2018, record fiber to the home connections, the highest prepaid net ads in years in Brazil, and a historic low churn in Germany. Among our four core markets, Spain showed better trends at both ARPU, Revenue and OIPDA levels, with a remarkable commercial traction despite the competition noise. Germany outperformed its market once the quality network gap has been reduced. In the UK, we are progressing with regulatory approval for being the national connectivity champion, whilst in Brazil, where again we register multi-year record commercial activity, free cash flow grew double digit in euro terms, despite the currency depreciation. Second, we advanced on technological leadership in infrastructure and digitalization. As such, 5G is already live in our four core markets, and fiber has continued to expand. Third, we accelerated the carve-outs of high-growth tech vehicles. Another remarkable highlight, our free cash flow during the quarter was outstanding at 1.6 billion euros, plus 13% -on-year and 0.3 euros per share. In the January to September period, it totaled 2.8 billion euros, or 0.53 euros per share. Fifth, net debt continued to be reduced. Liquidity cation has surpassed the 22 billion euros mark, whilst net debt maturities now stand at just 1.9 billion euros for the 2020-2022 period. Finally, we are proposing to the next AGM the cancellation of .5% of treasury shares. Moving to slide 3, let me explain the progress we continued to make across our five strategic pillars in Q3. First, looking at our four core markets. In Spain, we launched 5G services with the aim of reaching 75% coverage nationwide by year-end. We also posted further recovery in commercial activity, with controlled churn and margin expansion and continued to demonstrate our Fiber leadership, with 795,000 new premises passed in Q3 to reach 24.4 million. In Germany, we signed an early extension of our agreement with Deutsche Telekom, including Fiber to the Home, and we launched 5G services in key cities. In the UK, we are progressing in the in-market conversion consolidation. Our auto virgin media joint venture formally requested your approval, and the £5.7 billion recapitalization process was completed. It is also worth highlighting the growth of the customer base in the UK across all segments of the business. In Brazil, we progressed with the joint offer for Oi, being now the preferred bidder. Meanwhile, we launched 5G in July, while maintaining our leadership in Fiber to the Home, increasing the number of homes passed in Q3 by 1.5 million to 14.6 million. Second, in Istamb, we filed for regulatory approval of the Costa Rica sale to LLA, and we continue to evaluate all available options for reducing our portfolio exposure in the region. Third, Telefonica, TX3 companies, Cybersecurity, Cloud and Big Data IoT are now established, integrated and fully operational. Two acquisitions have been made to build out our capabilities in the cyber arena, Govertis, a consultancy, and iHacklabs, a professional training business. Fourth, at Telefonica infra, today we have announced a JV with Allianz in Germany to develop Fiber in underserved areas, while we expanded Telcius Towers portfolio through the German deal. And fifth, we signed the MOU with Rakuten on OpenRAN, a next step in our journey towards a virtualized networks model. In addition, our new operational model continues to improve our agility, deliver benefits from digitalization and help us to identify further efficiencies, with OIPTA minus capex margin in Q3 expanding 0.7 percentage points year on year in organic terms. Moving to results, let me highlight that we are managing our business to mitigate COVID-19 impacts. On this slide, we can see revenue reconciliation between reported and organic year on year variations. From January to September, reported revenues declined by 10.7%, which translates into a .7% organic drop after stripping out .9% of Forex and 1% from changes in the consolidation perimeter and other effects. In our four core markets, the decline was limited to minus 2.5%, and the impact of COVID-19 was a drag of 3.9 percentage points year on year. During the third quarter, reported revenues declined by 12.1%. During the third quarter, reported revenues declined by 12.1%, which after excluding 8.1 percentage points from Forex and changes in the perimeter and other factors led to a decrease of 4.3 organically, improving from the minus 5.6 posted in Q2. COVID-19 dragged 4.9 percentage points year on year. Moreover, the decline in our four core markets is limited to minus .9% year on year. Looking at slide 5, we show OIPDA reconciliation. In the first nine months of 2020, reported OIPDA declined 15%. Forex impacted in 7 percentage points, while changes in the perimeter and others dragged 1.1 percentage points. As such, reducing the organic decline to 6.7%. This decline is limited to .1% in our four core markets, with a COVID-19 negative impact of 5.2 percentage points. In the third quarter, reported OIPDA decreased by 2.8%. Stripping out Forex negative impact of 13 percentage points and adjusting 18.5 percentage points of other impacts, mainly restructuring costs, booked in Q3-19, capital gains and impairments, we posted an organic decline of 8.3%, improving from the minus 10 posted in Q2. It is worth highlighting that the COVID-19 impacted growth by 6.8 percentage points year on year. And in our four core markets, the rate of decline in OIPDA was minus 3.3%. Moving to slide 6, we show the very strong cash flow generation, reflected in both OIPDA minus capex and free cash flow per share metrics. Our strong focus on profitability stands out with the 5.7 billion euros OIPDA minus capex generated in January to September 2020, significantly above the figure of the same period of 2019 including spectrum. OIPDA minus capex declined by .8% organically, but grew by .4% year on year in organic terms in our four core markets. Free cash flow per share increased to 0.3 euros in Q3, reaching 0.53 euros per share in the first nine months of the year, more than covering the 0.4 euros dividend to be paid in 2020. The result of all this is sequential growth in free cash flow to 1.6 billion euros in the quarter, plus .2% year on year, including mid to high teens growth in Brazil's free cash flow, even in euro terms. Our financial update for the quarter, sorry, on slide 7, clearly shows the significant impact of COVID-19 and currency depreciation on the reported figures. These impacts are detailed at the bottom of the slide, and we will explain them in more detail later on. OIPDA was also impacted by an impairment allocated to Argentina of 785 million euros and by restructuring costs in Q3-19, including 1.7 billion euros in Spain. Revenues reached 10.5 billion euros in Q3-20, and reported OIPDA decreased by 2.8%. Our continuing focus on cost and capex management enabled us to restrict the year on year decline in organic OIPDA minus capex to just .8% in Q3 at group level, while growing it significantly at .2% in our four core markets. Net income reached 671 million euros and surpassed the 2 billion euros for the nine months, 2020 on an underlying basis, resulting in EPS of 0.36 euros for the nine months on the same basis. Free cash flow expanded sequentially to 1.6 million euros and grew .2% year on year in Q3-2020, with free cash flow per share at 0.3 euros in the quarter. Net financial debt declined a further 525 million euros in Q3 to 36.7 billion euros, down 4% versus September 2019. Moving to the next slide, revenue performance improved sequentially year on year in Q3 by 1.4 percentage points led by both service and handset revenues and by ESPAM. Across our four core markets, the decline was limited to .9% in Q3. This accounted for a negative contribution from the UK, primarily as a result from roaming, handset release, delays, together with the increase in higher margin direct distribution impacting revenue recognition. Despite these short-term UK impacts, I would like to remark the better trends seen in Brazil and Spain and the strength in Germany. We are continuing to transform our revenue mix, with revenues from broadband and services beyond connectivity increasing by .0% year on year to 68% of total service revenue in the quarter. Meanwhile, Telefonica tech services delivered double-digit revenue growth year on year versus nine months 2019. On the next slide, we show also the improved trends in both OFDA and OFDA-CAPEX optimizing our cash flow generation. As such, OFDA improved quarter on quarter by 3.3 percentage points in Q3, led by Spain on the back of better content costs, Germany coming back to growth, and improvements in the UK and Brazil. OFDA-CAPEX posted a significantly improved trend, growing by .2% year on year in Q3 and .9% in Q2, driven by the performance in Germany, Brazil and the UK. This strong cash conversion is also shown in the OFDA-CAPEX margin, which expanded organically by .1% year on year in Q3, driven by an outstanding performance from Brazil, followed by the UK and Germany, and a flat-ish trend in Spain in the quarter. I would like to highlight, however, that Spain retains a benchmark OFDA-CAPEX margin of 29.7%. Moving to slide 10, our breakdown of the COVID-19 impacts by quarter and business line shows a clear improvement versus the second quarter. At the revenue level, this was due to better handset sales, supported by store reopenings across our different geographies. B2C continued to be pressured by discounts, promotion and challenging trading conditions in post-paid, along with some delays in closing new business. In B2B, discounts on renegotiations, project delays and lower demand from SMEs combined to deliver the negative impacts in. The quarter suffered significant impact on robbing. However, despite these negative impacts, we continue to implement significant cost containment measures, with lower commercial expenses, bad debt improving, among other initiatives. At the same time, the crisis has allowed us to improve customer engagement based on our network's reliability, with churn declining 0.3 and 0.1 percentage points year on year and quarter on quarter respectively. We have also accelerated digitalization, with sales via digital channels increasing 36% year on year in our four core markets in Q3. On top of all of this, demand for cloud and cyber services has increased significantly. As a result, on slide 11, we confirm our 2020 dividend of 0.4 euros per share, with a first tranche of 0.2 euros to be paid in December through voluntary script dividend and the second tranche in June 2021. Regarding treasury stock, the adoption of the corresponding corporate resolutions will be proposed to the AGM for the cancellation of the shares representing .5% of the share capital held as treasury stock. We maintain our 2020 outlook, confirming our guidance of slightly negative to flat year on year organic OEPA minus capex, as we continue to manage our cost base and operational flexibility without jeopardizing our investment priorities. Moreover, we will continue monitoring and adapting to COVID-19 related restrictions to mitigate their impacts on the business. I will now hand over to Laura to take you with more detail through the group results.

Thank you, Ángel, and good morning to everyone. Moving to slide 12. Telefónica Spain consolidated the recovery trend in net ads amid a very competitive environment in Q3 2020. A superior, competitive and segmented offering continues to drive growth in number of accesses. Recording the highest fixed broadband net ads since Q3 2018 and positive conversion net ads. With fiber net ads in the quarter exceeding 100,000, taking fiber penetration to 76% of the retail broadband base and 67% of the wholesale base. Our highest value TV conversion offering also performed well, posting positive net ads. However, total pay TV base fell due to decline in lower value TV accesses, including Movistar plus Lite OTT service following a large temporary increase in the base in Q2 due to COVID-19 related confining when we added 57,000 accesses. Our conveyor customer base once again proved particularly resilient in the quarter. For the return reduced year on year to .5% despite the usual promotions in this period. While ARPU improved quarter on quarter despite a comparison based softening due to the Q3 2019 price upgrade and excluding COVID-19 impact, it would even grow year on year. Telefónica Spain continued to be at the forefront of the sector in Spain. Our STTH network reached 24.4 million premises, plus with a 29% uptake. The 5G network was switched on in the quarter with the aim on achieving 75% coverage by year end and innovative services residing in launch will further enhance differentiation. On slide 13, while Telefónica Spain results continue to be impacted by COVID-19 in Q3, year on year financial performance show clear improvement versus Q2. With a year on year revenue decline improving 0.9 percentage points despite an unfavorable comparison generating by the July 19th conversion tariff increase and a reduction in roaming. The margin was close to 42% in Q3 as the year on year OIPDA trend improved by 4.1 percentage points sequentially driven by better revenue performance, lower content costs, lower roaming costs and personal efficiencies. With regard to content, it is worth highlighting that for the first time the new cycle of football rights will no mean a year on year increase in net costs. It will be flat for the 2021 season and lower for the next season. The year on year decline in capex accelerated in line with increased commercial activity in the quarter, while a strong cash generation was reflected in a record high OIPDA minus capex over revenue ratio of nearly 30%. Moving to slide 14, Telefónica Deutschland achieved solid financial results in the COVID-19 environment with trading dynamics recovering to close to pre-pandemic levels and O2 churn reaching historical lows at 1%. Revenue grew by 0.4 year on year, supported by the strong performance of the O2 free portfolio, while OIPDA returned to growth, increasing 0.7 year on year in Q3 supported by enhanced cost efficiency. Capex decreased by .1% due to more backend loaded deployment in 2020 and adapted facing within the existing investment program. As such, OIPDA minus capex increased by .5% year on year in the quarter and by 4% in the first nine months. It is worth highlighting the launch of the 5G network, which is now operational in 15 cities, targeting over 30% population coverage by the end of 2021 and around 50% coverage by the end of 2022. Moving to the UK, on slide 15, we continue to be UK's number one network, now with over 35 million mobile customers and market leading loyalty and MPS. Looking at the financial performance, revenue declined by .5% in the third quarter, primarily due to roaming, SNIP, the iPhone 12 launch delay, together with an increase in higher margin direct distribution impacting revenue recognition. OIPDA declined by .5% in Q3, with OIPDA minus capex growing by .7% year on year in the quarter, demonstrating OPEC's discipline as well as capex flexibility and focus on growth areas. Let's now move to the performance of our Brazilian operations on slide 16. A strong commercial recovery was seen in Q3 in all growth segments, once most restrictions were lifted. Vivo ended the quarter with record mobile market share, driven by the highest prepaid NERADs, a lowest contract churn seen in years. Contract NERADs are back to -COVID-19 levels, with a benchmark churn of 1.2%, down 0.7 percentage points year on year. Prepaid, NERADs reached the highest level of the last eight years, indicating a strong commercial recovery. In FIX, the company continues to capture the huge fibre opportunity, with the record level of STTH connections in the quarter. Additionally, recent agreements with Fenix and the option to create a neutral fibre vehicle will further strengthen our fibre reach. Precast flow grew by 50% year on year in the first nine months 20, in local currency, and by mid to high teams in euro terms. Looking at our financial performance, we deliver outstanding OIPDA minus capex growth of 22.2%, with margin expansion of 5 percentage points in Q3-20. This outstanding result was supported by our continued focus on driving OPEC's efficiencies and optimizing capital allocation, of which 70% was dedicated to growth areas. Moving now to slide 17. Telefonica infra continued to deliver a solid performance during Q3, demonstrating the robustness and resilience of its business model. Continued progress was made on the strategic front, and in Q3, Telsius executed the first tranche of its acquisition of sites from Telefonica Deutschland, adding approximately 6,000 sites to its portfolio, which is expected to reach 33,000 sites once the deal is completed. On the operational front, the total number of sites increased .7% year on year, while tenants rose .5% year on year. It is worth highlighting the positive performance in the tower business, with both revenue and OIPDA growth accelerating to .2% and .1% respectively, driven primarily by higher collocation revenues and acquisitions. This positive performance saw Telefonica infra's revenue grow .1% and OIPDA .3% in the quarter, despite the negative impacts from contract extensions in cable. The OIPDA minus capex over revenue ratio, excluding M&A capex from inorganic operations, stood at .2% for the first nine months of the year. On slide 18, we can see that Telefonica Tech has continued to make significant progress. Its tech companies are already up and running, with the first phase of transfer of cybersecurity, cloud and IoT big data assets completed. Telefonica Tech services continue to exhibit sustained double-digit growth rates, with revenues up .4% year on year in the first nine months of 2020. Going forward, Telefonica Tech is expected to continue outperforming, underpin by its critical role amid accelerating digitalization during the COVID-19 crisis and by the strengthening of its capabilities. Boasted by recent acquisitions, we are now able to combine our integration and consultancy capabilities with our managed service, to provide customers with a complete -to-end service. In cloud, our multi-cloud services for enterprises of all sizes were the key driver of 23% year on year growth in revenue in the first nine months of the year, as we established ourselves as trusted partners for migration to the cloud. In cybersecurity, we are combining our in-house solutions and security operations centers with the very best partners to provide security as a service for all steps of the digital transformation. With the acquisitions made during the period, we have added new consulting and training skills, further strengthening our offerings, and with Telefonica Tech ventures, we aim to detect disruptive innovation, particularly in cybersecurity startups. In IoT and Big Data, we are developing Internet of Things for different sectors, where our unique value proposition transforms raw data into valuable, actionable information, and our new COVID-compliant use cases are helping businesses identify the requirements necessary for business recovery in the new environment. Turning to ESPAN on slide 19, we saw robust commercial activity in Q3, surpassing -COVID-19 levels, as contract net adds almost doubled versus Q3-19, and -to-home connections maintained a clear upward trend. In terms of financials, revenues show a pronounced -on-year improvement compared to the previous quarter, with revenues decreasing minus 6% -on-year versus minus 11% in Q2. OIFDA was impacted by temporary duplicating network costs in Mexico, where more savings are expected from 2021 onwards, as the benefits of the new operational model flow through. Excluding this effect, -on-year OIFDA trends could otherwise be stable versus the previous quarter, despite various strong commercial activity and tough comps. OIFDA minus capex improved 2% -on-year in the quarter, again reflecting increasing synergies and efficiencies at both OPEX and capex levels. Moving to slide 20, we review in detail how FX movements are impacting our results, while again proving how currency headwinds are structurally neutralized at the pre-CAS flow level through our effective hedging strategy. Negative FX impact increased in Q3-20, mainly due to the depreciation of the Brazilian Riai versus the euro. It acted as an .1% point reduction revenue -on-year, and reduced OIFDA by 13% points. For the first nine months, the negative contribution was lower at 5.9 and 7% points respectively. Nevertheless, the negative effect of a 108 million euro OIFDA level translated into just a 300 million euro impact at pre-CAS flow levels. And in terms of net debt, this had a positive impact of 1.2 billion euro for the first nine months, or 2.1 billion euro on a net debt plus this space. As shown on slide 21, our net debt reduced to 36.7 billion euro at the end of September 2020. In the last nine months, we have reduced net debt by 1.1 billion euro, mainly due to resilient pre-CAS flow generation that reached 2.8 billion euro for the period. This performance comfortably exceeds dividends, hybrid coupons, and commitments, while helping to bring down net debt. We remain focused on net debt reduction as demonstrated by our decision to offer a voluntary script dividend payment, which reduced our cash outflows by more than 600 million in the first round paid in July. Slide 22 presents Telefonica's AIMPOL and Diversified Financing Activity, totaling 16.7 billion euro a year to date. Of this, 6.3 billion relates to the Bridging Media O2 UK Financing, which successfully closed at the beginning of September. At the group level, Telefonica's financing activity amounts to 10.4 billion euro and contributes to both an extension of our average debt life at close to 11 years and a robust liquidity position of more than 22 billion euro. This position accepts debt maturities beyond 2022. In addition, including UK cash-in related with O2 Bridging Media Deal, net debt maturities will be 1.9 billion euros from now to 2022. Telefonica's financing activity has been executed at a historical low interest rate and has allowed us to lower our interest payment effective cost to .15% as of September 2020. I will now hand back to Ángel to close.

Thank you Laura. Slide 23 shows the growing importance of ESG in the -COVID-19 era and our full commitment. Digitalization is one of the most important pillars to tackle climate change. It will enable other sectors to reduce their carbon emissions. But we have to advance digitalization with the most efficient networks in terms of energy and emissions. We announced therefore a new objective to increase the ambition because climate crisis is urgent. We will become net zero by 2025, reducing our emissions and compensating the remaining ones. We will become more and more relevant for our customers in this topic. For example, Telefonica's B2B customers in Spain avoided GHG emissions through our digital services and avoided 2.2 million tons of CO2 during the first three months of the pandemic. Telefonica has been recognized for the success of its initiatives in this area. We have been awarded the Sustainable Procurement Award at the Amazon Business Exchange for promoting sustainability in our supply chain. And we are one of the top 25 most diverse and inclusive companies in the world, according to Refinitiv, which ranks over 450 environmental, social and governance metrics for more than 9,000 listed companies. Finally, our sustainability strategy is reinforced by our inclusion in the FTSE For Good Sustainability Index with an improved score of 4.3, exceeding the sector average, and by our entry into Moody's, Euronext, VGO, Iris, Europe 120. All in all, our role is becoming more and more important for the societies where we operate. We are a key component of the solution for the recovery of the economy and the digital transformation of the society. To recap, we are continuing to act decisively and execute rapidly to deliver our sustainable long-term business strategy. First, we are providing ongoing support to all stakeholders to contribute to economic recovery. Second, we have proven our businesses' resilience in the face of COVID-19, effects and GDP headwinds, delivering improved financial and operational trends and maintaining investment in strategic growth areas. Third, we are delivering progress on our strategic priorities across all fronts. Fourth, we are taking a proactive approach to balance sheet management with a continued contribution to net debt reduction. And finally, we are reiterating our full year guidance and dividend for 2020. Thank you very much for listening. We are now ready to take your questions.

Ladies and gentlemen, if you'd like to ask a question, please press star 1 on your telephone keypad. To cancel your question, please press star 2. Once again, that's star 1 to register a question and star 2 to cancel. We would kindly ask you to ask a maximum of two questions per participant. There will be a short silence while questions are being registered. We can now take our first question. From Georges Lerode-Noucaan from Citi. Please go ahead.

Yes, good morning and thank you for taking my questions. I have a couple. The first one is around the agreement you announced with Allianz today. I'll be curious to understand some of the motivations behind you engaging in this agreement and also whether there are other similar options. You may be looking either in Germany or other markets. I know you have some of these type of agreements in Brazil, but whether you plan to extend them beyond these two markets. The second question kind of leads to that. So far your agreements seem to be more oriented towards rolling out new infrastructure. I was curious whether you can do a fixed line infrastructure in Spain, in Brazil, and in some of the other markets. Whether you see an opportunity perhaps to monetize some of the existing fiber that you own. Thank you.

Thank you, Georges, for your question. This morning we announced a 50-50 joint venture with Allianz in Germany. We believe that there is a massive opportunity for fiber to the home in that market because the penetration is low. There are programs to grow fiber through different players, but there is a big opportunity. We are doing this with a pure wholesale approach. It would be a neutral vehicle open to all the players in the market. It has been structured in such a way that it will not be consolidated by either Allianz or ourselves. It's ring-fenced both from an accounting and from a rating point of view. We are approaching this as a complementary access to fixed broadband to the different vehicles or agreements that Telefonica Deutschland has. We have extended the agreement with OCHE Telecom, accessing also fiber to the home. We have an exclusive agreement with Vodafone to access their cable. We have an agreement with Telecolumbus. Telefonica Deutschland is going to be an anchor client, shareholder, and also supplier of some services to this new fiber. Clearly, our objective is to be complementary to other fiber vehicles in Germany, to avoid overbuilt in the country, to maximize the take. We are aiming to have a project with a very substantial IRR. We saw last year the valuation at which Deutsche Glasfaser was valued in that market. We are looking at a similar, although a little bit different project in other markets in Brazil and in Chile. In Brazil, we are quite progressed. We are in phase two, round two of offers for a fiber car, which unlike Germany, which is pure greenfield, in Brazil we have a brownfield component plus a greenfield build out to reach, in Germany it's going to be slightly over 2 million fibers, fiber homes passed, in Brazil we're aiming for above 5 million, including the initial contribution of brownfield plus the build out of greenfield. That second project is progressing nicely. We have interested parties in the second round, as I said, and in Chile we're also in the process of bringing potentially investors into the fiber vehicle. Regarding the fiber that we have in Spain, it's a different situation. In Spain, we don't have the underpenetration that you have in other markets. It's a very well-penetrated market in fiber. Actually, the leader in Europe, there are very active commercial agreements in place to wholesale that fiber. It's regulated, but also there are commercial agreements with all the players in the market for access to that. Clearly, it's a very valuable and very well developed fiber core of fiber presence in the country. It gives us lots of optionality, but it's a different situation from markets where the fiber is not as developed as Spain.

Thank you, Iorios. Next question, please.

We can now take our next question. Jacob Bluestone from Credit Suisse.

Hi, good morning. Thanks for taking the questions. I've got two numbers to see questions. Firstly, your working capital was minus 764 million in the first nine months compared to positive 482 in the first nine months last year. It's a swing of about a billion euros. Can you maybe just help us understand why working capital is such a big drag? I don't know if you can give any guidance either for the year or how you see that evolving. That's the first question. The second question is on your net debt. If I look in the release on page 14, you disclose that your net debt includes a positive value of a derivatives portfolio with a net value of about 2.2 billion. Last quarter, that was about 4 billion. Can you help us understand why did the derivatives portfolio fall in value by about 2 billion euros? Am I correct that your net debt would have been 2 billion lower if that hadn't happened? Maybe you can just help us understand what's going on with this derivatives portfolio. Thank you.

Thank you, Jacob, for the questions. The working capital, not only for this Q, also for the full 2020 versus 2019, is going to be very much affected by the deferred payments of the German spectrum acquired in 2019. If you recall, we accounted everything in CAPEX. However, the payment itself is going to be deferred in more than 10 years. That's affecting the whole working capital comparison this year. If you exclude that, it's actually lower consumption. In Q320 versus Q319, it's pretty much stable, slightly lower. If you look at the nine months, there's lower consumption. We keep working capital very well with CAPEX facing. I mean, they are restructuring, playing negative because we accounted for it in 2019 and we are paying it now. But on the other side, some of the one-offs that were executed Q4 last year are being cashed now. And then you have all the timing of the multiyear contracts, mainly wholesale contracts. And AT&T in Mexico is working negatively, but it's very, very much affected by the German spectrum. And if you exclude that, it's a similar Q3 and a little bit more favorable for the first nine months of the year. So nothing different on that front once you take the spectrum of Germany out. On the next step, we did do some changes in the way we are accounting for M2 from the market to market of derivatives last year. And we disclosed that in detail. And the investor relation can explain you. But what we did precisely is that this will not impact our net debt evolution. Much of these M2 market changes have to do with the debt we have in dollars because we have derivatives to move from variable to fixed. And then we also have derivatives to hedge for the US dollar and euro. So you have very, very large movements. They are just – I mean, they do not have a cash impact. And at the end of the derivative, it will become neutral. And we actually excluded it from the net debt to avoid all that volatility. But we can give you more detail on that. But your net debt evolution year on year has nothing to do with this.

Thank you. That's very helpful.

Thank you, Jacob.

Next question, please.

Next question comes from Joshua Mills from Exxon. Please go ahead.

Hi there. Thank you for the questions. Two from my side. The focus on Spain and specifically the EBITDA, so you refer in the press release to lower content costs, which I think may be related to some rebates from your content spend earlier in the year. Could you quantify how much lower the content costs were in Q3? And then also let us know if that is going to continue into Q4, just so that we can think about modeling that out. It would be very helpful. And then the second question on the fiber to the home business in Germany, what kind of take-up rates or network utilization do you anticipate in the 2 million homes you will be rolling out to? And have you already started to have active discussions with other wholesale operators in the market outside of telephonic equations? Thank you.

Thank you for the questions. As you saw, and we had anticipated to the market, the EBITDA margin of our Spanish operation has reached 41.8 percent, is higher than it was in the first half of the year. And we expect as well the EBITDA margin of the second half of the year to continue to be higher than the one of the first half. This is the result of an OPEC -on-year decrease, despite reactivation of commercial costs, thanks to efficiency measures and thanks to better evolution of the TV content. So personal cost was down high single digit in the year, same savings from the personal reduction program as in Q2. The supply cost was down low single digit on lower content costs. Our commercial costs were stable on back to normalize activity. Content costs have reached, or will reach stability -on-year in Q4, once all the contents are comparable -on-year. We have a full Liga and European competitions with inflation starting from next season. So you will see stability in content costs and inflation from next year. It is true that in this quarter we ended up having, or in the first half of the year, we ended up having fewer content that we originally had contracted for. This applies to some of the sports rates we exploit. The figures are not public, but yes, we can confirm that some savings were generated over the third quarter based on this lower content that we had over the year. So going forward and in the specific regarding sports content stability for the rest of the current sports season, decline from the current next season when the new Champions League cycle, which we achieved with a 15% deflation, will kick in into our figures. Regarding the Fibercoin Germany, we are aiming, and there will be a period of build-out to reach this in excess of 2 million homes, we are aiming to be very complementary to the deployments of other players in the market. So we are addressing underserved, non-urban, but affluent regions in Germany. As such, I cannot disclose the targets that we have of take-up, but I can tell you that we are aiming for those targets to be quite positive in our projections. Thank

you. Just to clarify, there will be no further content sales in Q4. But have they all been booked in Q3? We

have had content savings in Q3, depending on the evolution of the situation. For instance, in the spring we had with the lockdown, a close-down of many of the social venues that were displaying sports content to their patrons. Many of those are back, a huge percentage of those are back because we have had soccer season all over the summer. The new wave could result potentially in some of those social venues having some restriction on those, and then we could have adjustments also in the costs to deliver to those as well. So the situation is fluid. We have booked savings in Q3. Depending on how the situation evolves, we may see, and the evolution of the different sports going forward, we may see those in the future. Those are not factored at this moment in our outlook for the rest of the year in Spain, which again, we are looking forward to having a higher OED margin in the second half than in the first half. If those additional content savings were to be produced, they would be incremental to this outlook.

Thank you.

Thank

you, Jörg.

Next question, please.

Next question comes from Keval Kitzbohja from Deutsche Bank. Please go ahead.

Thank you. I've got two questions, please. One on CapEx and one on the other companies' line. So first, CapEx has obviously made impressive reductions in CapEx this year, helping you at the free cash flow level. As we look in the coming quarters and next year as you start to push more into 5G as well, how should we think about how the capital intensity should evolve at the group level? And secondly, just within the other companies and elimination's line on EBITDA, obviously it's a bit more difficult for us to have a clear view on where that should be. Could you help us get an idea of how we should think about how large that negative number should be going forward? Thank you.

Thank you, Keval. On CapEx, we had the 2020 CapEx embedded in our guidance, which envisaged CapEx growth in certain markets. Given the situation created by COVID-19, we are offsetting some of the impact via lower, clearly via OPEX efficiencies, but also via lower CapEx to preserve operating cash flow and aim for the guidance that we have stated for the outlook for the year of slightly negative to flat operating cash flow margin. CapEx spend and pressure has been reduced. Some rollouts were impacted by lockdowns, some related provision in portability, temporary in some markets, some deployment speed have been delayed, and clearly there was delay on spectrum auctions that also had some coverage and maintenance work that was postponed. We are actively managing the CapEx to adjust to the new economic context and perspective. We are reprioritizing our most profitable investments and considering the competitive situation in every market. But all of this without impacting the network's quality and reliability, without jeopardizing our key investment priorities and fully meeting the network coverage obligations. And for instance, we have launched 5G already in our four core markets and we are achieving record fiber to the home deployments and connections all over the footprint. It's early to quantify the details. Some CapEx maybe will have been delayed to 2021, but clearly some other CapEx efficiencies are going to be permanent and are not going to imply catch-up in 2021. For the rest of 2020, what I can confirm is that we fully stand by the outlook that we have given to the market on operating cash flow evolution and this should not imply any CapEx shoot-up on the period. And for next year, we will give the guidance when we present the full year results. But again, many of the CapEx efficiencies due to reprioritization also and reducing the investment in legacies and so on are here to stay. Those would not be spilling over to next year's.

On the other hand, eliminations, I understand it is difficult to follow, because you have to take into account here we include headquarters, we include a small subsidiaries, some of them being affected also for COVID. For instance, in the small subsidiaries, we have a purchasing unit and as we are reducing OPEX and CapEx, the result of this unit has also got reduced. But going forward, you saw that in Q2 it was around 165, and in Q3 it has increased about 30 million to 200. That 30 million can be explained by our donation to Fundación. As you know, we accrued for an extraordinary donation some years ago. That has lasted longer than expected, because they have also prioritized many of the projects that have not impacted on free cash flow, because the free cash flow is going through in any way. Going forward, and I think some of the small subsidiaries that are part of this will improve also with COVID, I think around 200 million could be a right amount for Q4. You also have to take into account here I'm not including capital gains, that would help or either restructuring that would worsen. But if I try to go to the underlying order and elimination, I think the figure you've seen for Q3 could be a right extrapolation for Q4.

Sorry,

because as it's part of the others, it's hard to see, but I can assure you that on the headquarters line there's been a lot of efficiency also. Not only aligned to COVID, also it was part of our operating model and strategic decision on Q4 last year. So we are simplifying the organization and operating model, and that's dealing with significant savings.

Thank you.

Thank

you, Gabriel. Next question,

please. Next question comes from Matthew Robillard from BART. Please go ahead.

Yes, good morning and thank you. First I had a question on Spain. So obviously because of COVID we've seen some difficult trends, but on the convergent product basically what we've seen is an ARPU decline, which I suspect is also part of a downspin in the market. So my question really is how do you manage this going forward? Do you think volume growth can offset the structural ARPU erosion, or do you think that despite the tough macro and competitive environment there is scope for more initiatives in the future so that you can stabilize the ARPU and at some point your top line in Spain? And then the second question had to do with the leverage and the debt rating. So recently a feature positively maintained the debt rating and the stable outlook, but I do note that one assumption among others is that the euro to Brazil rate stays at 6.3. It's already at 6.8. So obviously that's one assumption that is not going in the right direction. And so I was wondering what are the levers you think you can work on to offset that and specifically do you have any progress in terms of what you can do with the Latin American or the Hispano-American business? Thank you.

Thank you, Mati, for your questions. I'll take the first one on the Spanish convergent ARPU. The ARPU of our convergent products was down, yes, year on year, but it was up 1% quarter on quarter sequentially. Here you have different moving pieces. When you look at the year on year drivers, it's very significant the impact of the price increase that took place in the third quarter of 2019, which was not the case in this third quarter of 2020. Also, we have COVID-19 effects and we have lower extra consumption out of the bundle, given that we have moved to more allowances in mobile, for instance, and we have the dilutive effect from multi-brand options, meaning the increased penetration of our O2 proposition. At the same time, we have upselling, we have new digital services with quite strong traction, and we have lower year on year promotion weight. So, yes, declines versus last year with two significant effects from the price increase comparison from one year ago and the COVID impact being the most important, but quarter on quarter it's improving, as we said in the previous call. It's improving because of economic reactivation, it's improving because of the return of the football, the social venues reopening, and despite these tougher comps. In addition to growing quarter on quarter, what we have also is a turn which is .1% lower than one year ago, and we expect ARPU, convergent ARPU, in the second half of the year to be higher than in the first half of the year.

Sorry. Please go ahead. Sorry,

if I can just follow up. So you think that kind of the spin down, I think we've seen a little bit, and you alluded to that with your multi-branding strategy, can be offset over the next quarters, right?

We are expecting the ARPU of the second half of the year to be higher than the one of the first half of the year. That's how I would synthesize all the moving pieces so that you can build it into your models. Thank you.

Thank you, Mati, for your question. It was actually more than one question, no, because you asked about the rating in organic options and also a progress on ISPAN. So I will try to answer all of them. You are right. Fitch has maintained a stable outlook. It is true that they mentioned that there's a risk associated to effects and translation impact, but they also affirm the willingness and capacity of Telefonica to protect cash flow generation through disposals and also the organic free cash flow generation. On the inorganic, we are actively managing our asset portfolio. I think we are being bolder and we are executing faster because we need to remove uncertainty on our delivery path. We have a balance sheet in excess of 100 billion euro. It's full of high-quality assets. We have infrastructure assets more than other companies in the sector, so we believe we have huge capacity to generate value with our asset base. In this regard, as you know, we have executed already and we have transactions that are under approval processes. It's the UK merger, it's the sale of Costa Rica, it's also the sale of the German towers to tell you that part of that benefit will go through already in Q4 this year. Telefonica Tech also offers optionality and obviously Telefonica ispand. With regards to Telefonica ispand, our strategy has organic and inorganic angles. In the organic front, we need to boost efficiency and we need to focus much more this unit with a dedicated team that we have in place to generate pre-cast flow and reduce the exposure to the region. In that part, in the inorganic option, we keep on working in parallel in getting ourselves prepared for the spin-off. In that regard, we have done lots of work. We have done the operational car park. We have also done the corporate car park, which is almost completed. We are preparing the documentation, working on the capital structure of the company, and we are closely monitoring market conditions and progressing in all work streams so when the window comes to be fully prepared. But we are also exploring and working in different M&A alternatives. Having said that, and as being more active than ever in the inorganic front, let me tell you that on the organic front, I think our pre-cast flow has proved to be very, very, very robust. Pre-cast flow is part of our DNN and it's an absolute priority for us and even more this year. We have demonstrated during the pandemic that we have levers that we will continue to pull to minimize the revenue impact all the way to pre-cast flow through efficiencies and capex prioritization. This also applies to effects, as you also saw, and you mentioned the REI, and it's not good news, but you have also shown how the over 2 billion effects impact in revenue has got reduced to pre-cast flow to 300 million, even with this huge REI depreciation. And we still think we are going to deliver very, very robust pre-cast flow in this complex year, in the remainder of 2020.

Thank you

very much.

Let me give you a couple of figures to give you comfort on what I said before. We have had record fixed broadband net ads, highest for the last two years. This is in part due to the second residences, but these have come in this quarter with the new football season, with the reopening of the social venues, which has meant that we have had convergent gross ads significantly higher than in Q3 2019, the football gross ads in the quarter growing double digit, and the mix of the gross ads in conversions with the best value mix in the last four quarters. 76% of the gross ads were in the mid and the high end of the FUSION packages. Just for you to have some color or some evidence of what is behind my statement before that we expect TARP in the second half higher than the first.

That's very helpful. Thank you very much.

Thank you, Mathieu. Next question, please.

Next question comes from Akhil Dattaniya from JP Morgan.

Hello. Please

unmute your line.

Hi. Good afternoon. Thanks for taking the question. I've just got one question, please, with two parts to it, which is just around the balance sheet and capital structure. I think as you've outlined to the core, you've done a very good job of managing down debt and protecting cash flow from the currency impacts you've had. But I guess it's more of a conceptual question, rather a bigger picture on how you think about the balance sheet. I guess what we've seen this year is investors as a whole are feeling increasingly uncomfortable with high levels of leverage. And I think in many ways a lot of the debate has now shifted to looking at net debt as a portion of your EV, which obviously has gone up a lot given how much the sector has gone down. So how do you think about that metric? How do you think about the comfort you have internally with the balance sheet and how you're managing that going forward? And secondly, just a very quick clarification point. You've made very clearly the point this year that you've used a script to address the dividend and give you flexibility. Any comments you can give around how you think about the dividend and scripts going forward? Thanks a lot.

Okay. Thank you, Akhil, for the question. I'm not sure you were referring to net debt over EBIT. Is that what you said? No, sorry,

Laura. Sorry, I wasn't clear. It was net debt as a proportion of your enterprise value. So essentially today the equity is about 20%. Yeah,

yeah. Understood, understood. Thank you, Akhil. Yeah, you're absolutely right. As our share price is not performing at the level we would like to and actually is quite below the sum of the parts and most of the analyst recommendation, the proportion of net debt is increasing their share, and we are following on that. What I can tell you on that front is that we have an absolutely commitment to keep on reducing leverage, and we have an absolute commitment to remain with a solid investment rate. And in order to deliver that, we have to generate free cash flow, and we have to execute inorganic moves. There's no other solution. On the free cash flow, you saw one, and I know, but for us, it's the most sustainable way to reduce net debt. And with a very strong free cash flow, also the share price should go up. So part of that unbalance we have now between the net debt and equity should be resolved. You know we do not include free cash flow as part of our official guidance, so please take this comment more as a forecast. But we are just two months ahead of closing, and unless there's something unexpected that I cannot think of at present on top of the pandemic uncertainty, of course, I definitely think our free cash flow should be above 4 billion. And that's well above the current market consensus. And also with this message, I can tell you that there's a lot of management focus on delivering free cash flow as a sustainable way for our share price appreciation and also for delivery. And in the inorganic, I told Mathieu everything we've done last year, everything we have done already in the first nine months, and more is definitely going to come. I also tell you that the inorganic moves also include investment, because as part of the strategy, we need to reinforce our core obese. So the beat we did for oil and also the news we launched today on the FiberCore go on that direction. You can also be that we are doing this with partners, so we take care of the capital as we want to increase and improve return on capital employed. And on the on the dividend and on the script, you know, our cell holder approved the dividend being on a script in order to give flexibility and order to show prudency, which I think is well needed in these times. We are aware that the script dividend for those that take the cash has a dilutive effect. And that's why we took the action of minimizing part of or partially compensate part of that dilution for the June 20 script. And that's why we are proposing amortizing part of the current or one point five for five treasury stock. But we still think an extra level of prudency is needed. And also this frame within our commitment of the solid investment great. It's soon to talk about a future dividend, but let me stress the factors to take into consideration. First, the strong free cash flow generation with the forecast I gave you that comfortably covers the dividend. And then reduction of net debt organically and all other commitments. The active portfolio management, I mentioned the high quality assets above 100 billion and also that we have done the homework. So the net debt figure may be high, but it's been very well managed. We have a maturity of debt, which is now 11 years. We have refinanced over almost 70 billion euro. We have a liquidity cushion of 22 billion and that's without considering the UK the UK proceeds. So I think despite the complicated year, we have proved that free cash flow is not affected, even with a double dip impact from Covid and effects that has been tremendous in our portfolio. Our business, therefore, it's a robust cash generation. We own a sizable base of top quality assets and we have a healthy financial and liquidity position. So we will keep taking down debt. We will improve the ratio you refer to and we will crystallize value for the benefit of our shareholders.

Thank you. Thank you.

Next question,

please. Next question comes from Mandy from Red Brun. Please go ahead.

Hi, it's Mandy from Red Brun. It's a relatively simple question, hopefully, but you sort of asked it before. I'm really just looking at the sort of medium term outlook for your consumer business in Spain. I'm not asking you for a specific forecast, but just conceptually your ARPU levels are very high, amongst the highest, if not the highest by some margin in the market. And to every external observer, Spanish pricing is under severe pressure in the market. So the simple question really is how can you grow or stabilize your consumer business in Spain? Thank you.

Thank you, Mandy. I think that this question is being asked continuously in every call. And we continue producing every quarter results that prove that we can be able to maintain the performance of our Spanish business. Here what we have is differential assets in the sense of the best network available in the country. We also have best products and services, including exclusive content and positioning with respect to customers that are in the upper segments of the business, which are valuing what we're giving them in terms of connectivity, functionalities, content, and so on. In addition, our ARPU is made of more services per customer than the ARPU of some of our competitors. And we continue adding new services to appeal to our customers. For instance, our home security solutions in the general venture with Prosegur are getting spectacular traction. We are selling four times what Prosegur standalone was selling one year ago. For instance, we have just launched e-health services that have become extremely relevant in these times. So, yes, we have ARPU premium with respect to our competitors. At the same time, we are offering, including in that ARPU, more services than what you have in the ARPU of our competitors, services which are providing not only the ARPU, but which are providing stickiness of the customers with us. And therefore, we are maintaining or having the possibility to increase our ARPU quarter and quarter while reducing churn at the same time. We understand that we need to keep on proving this every quarter. And you can be absolutely sure that we're going to continue working to prove it every quarter.

Thank

you.

Thank you, Mandeep. Next question, please.

Next question comes from Giovanni Mantalati from UPS Investment Bank.

Hello. Hi. Thank you. Just wondering if you can share with us some color about the next auction for La Liga Rides. Is there anything planned for next year? Is there any thoughts you can share with us? I mean, assuming there is anything planned for next year?

Thank you. Well, I think it's early days to think about La Liga. What you saw in the previous cycle, we achieved deflation in La Liga. Admittedly, it was slight deflation, but we achieved deflation. Most recently in the Champions League, a new contract, we have achieved 15% saving versus the previous cycle, and we have stabilized the price of each one of the years of the cycle without having the intra-cycle inflation. We have negotiated also, for instance, other sports rides like Formula One renewed for three seasons with more than 25% deflation versus the current cycle. So the trend is here. We have reversed a trend of many years of inflation, and now we can prove that in three of the main sports content rides that we are enjoying, we have achieved deflation in all three.

Sorry, if I may follow up?

Please, please, go ahead.

Is there any visibility on the potential timing of the auction? As far as you're aware.

No, we don't have visibility on that timing. Thank

you, Giovanni. Thank you, Giovanni. Next question, please.

Next question comes from Luigi Minerva from HSBC.

Hello, can you hear me?

Yes, we can. Go ahead.

Thank you. Yes, thank you. It's Luigi Minerva from HSBC. I have two questions. One is a follow-up on the dividend. I was wondering whether, given where the share price is, the board would consider a -by-back program as perhaps a better way to send a signal of confidence in the outlook of the business. And my second question is on Telcsus. You continue to transfer assets, but it seems to me that until Telcsus is consolidated within the group, you cannot properly develop it, as you would probably do. So is control of Telcsus something that you would consider changing? Thanks.

Thank you, Luigi. On the first question, you are actually implying shareholder remuneration. And as I said, we have our shareholder remuneration for 2020. We don't have a multi-year policy, so we will comment on this at due time. But let me tell you that although we have increased our treasury stock up to .54% that we communicated at the end of September from a previous point, 53% at July 14th, these shares have been more tactical, and we do not have any program in place at the moment. In addition, we bought these shares after the massive derating year today, and we have used these to mitigate part of the dilution from the script dividend. We will analyze potential -by-back programs once we feel comfortable with the reduction and leverage. And under current circumstances of volatility and uncertainty in general, not in Telefonica, we believe we need to provide with an extra level of prudency.

Regarding Telcios, we believe that this is a very valuable asset in some of the parts of Telefonica. As you can see on slide 17, the company is performing very nicely with substantial growth and very high margin. We are now at a different development in the two businesses. In the towers, as you can see on the bottom right of slide 17, growing organically at 20% in revenues, in the third quarter, 18% in EPA. Today, with the German tower deal, we are now at close to 27,000 towers, from the 16,000 with which Telcios started three years ago, when we closed the second tranche of the German deal, 33,000 towers. This is a very substantial and valuable tower company, which gives us optionality. It has been clearly growing, double its size since the company was created. And we think that in order to facilitate the development and the growth of the company, we could be open to contemplate options. At the same time, when one looks at the evolution of the consolidated of Telcios, the behavior of the submarine cable business has been different. And let me explain why you see the change in trend in this quarter. The service contracts between the submarine cable division of Telcios and Telefonica's operating businesses were expiring in 2020 and 2021. What we have done is renegotiate those early in exchange for an extended period of five years. The trade-off for this extension has been to reduce the fixed prices, and that's why you see the submarine cable reducing its performance compared to previous quarters. In reciprocity, this reduction in the fixed prices of the submarine cable will improve the operating businesses' margins. From Telcios' point of view, this reduction in prices is impacting the short-term revenues, but the extension of the contract gives full visibility and growth ahead for the Telcios submarine cable for mid and long term. And this visibility in long term will allow Telcios to contemplate all possible strategic alternatives for this subsea cable unit.

Thank

you, Luigi. We have time for just one final question,

please. Our last question comes from David Wright from Bank of America.

Hello, guys. Thank you very much, and especially for the last question. I'll make them nice and brief. Just on Spain, just on the fighter brand O2, our analysis suggests it's tracking about 20 to 25% of gross ads. I just wondered whether you could give us any kind of indication of whether that's a reasonable ballpark, just when we're forecasting ARPU, please. And then, second of all, just Laura, clearly some more progress on the Hispam potential de-merger. I wondered if you could give us some more indication on what leverage range you could put on that vehicle. From my perspective, it seems hard to imagine it could carry the net debt to EBITDA that Telefonica Group has. So could the spin-off actually be a re-leveraging event for Telefonica Group? And also, you've written down Argentina substantially today, so obviously you're happy with the current book values of those lifetime assets. Do you actually have a book value for Telefonica Hispam, post the Argentina write-down, please?

Thank you, David. On O2, it's having good commercial traction and is helping us or is making us be relevant in a segment of market which is not covered by our fusion conversion offers. So we had 76,000 conversion nets and the customer base is three times year on year. It has low leverage of churn at 1% and ARPU, which is stable at 49 euros and is leading in net promoter score.

David, on your Hispam question on potential spin-off, we are actually working on the potential capital structure, as you may imagine. But I'd rather not disclose that as it's not an isolated and independent entity. We have to position the region as a sum of sizable and diversified number of countries and operations, some of them with very large scale in the countries they operate and that should support its credit profile. The leverage ratio of competitors, as you know, as well as me, is between two times to four times, so there's plenty of... It's a pretty wide range. You are right. It could be leverage neutral, depends on the ratio, but the main target of the spin-off is to de-risk the balance sheet, lower the equity exposure, changing the FX mix and simplify the equity story. So we will give you more color as we progress on this, no doubt. And obviously, to have it as leverage-friendly as possible, it's also very nice to have, but it's not the ultimate goal, as it's more the de-risking and simplify, simpler equity story. On the book value, my understanding is that we give a detail on book value at the annual account. So you will see that and you can see how it was for the different Hispam assets. So we will have this in the next accounts with more detail on the main OVs that conform the Telefónica Group Perimeter and therefore you can find that the Hispam book value of the assets. Not sure if you want me to comment anything on the Argentinian impairment, but I would like to emphasize that it has lots to do with the macro environment. Argentina is suffering a very severe confinement and also the legacy of some imbalances. As a result, inflation expectations continue to rise and that has implications on our discount rates and that together with the FX explains about 75% even more of the impairment. The remaining has to do with the decree not allowing increasing tariffs in many of our services. I can tell you the operation is working on a plan to reverse commercial trends and change the operating model so as to reduce OPEC and prioritize CAPEX to protect free cash flow. Argentina is also very advanced in digitalization, not only in their operations, but also in the interaction with the customers and that allows for OPEC to start growing hopefully before inflation. I don't want to minimize the impact of this, no doubt, but it's no cash as you know. There hasn't been a correction in the value of Argentina in the past and you also have to take into account that if the operating cash flow is less than 3%, we have taken Argentina out of our organic growth. So from this point I unless the macro continues reversing what is in our hands, what is under management, I think you have to look at these specific assets as optionality going forward.

That's very good. Thank you very much. Thank

you very much for your participation and we certainly expect to have provided some useful insights for you. If you still have questions, please contact our Investor Relations Department. Good morning, stay healthy and thank you.

Telefonica's January to September 2020 Results Conference call is now over. You may disconnect your line. Thank you.