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Telefonica SA
7/29/2021
Good morning and welcome to Telefonica's conference call to discuss January-June 2021 results. I'm Adrian from Fonegi from Investor Relations. Before proceeding, let me mention that the financial information contained in this document has been prepared and the international financial reporting standards as adopted by the European Union. This financial information is un-audited. This conference call and webcast, including the Q&A session, may contain forward-looking statements and information relating to the Telefonica Group. These statements may include financial or operating forecasts and estimates, or statements regarding plans, objectives, and expectations regarding different matters. All forward-looking statements involve risks and uncertainties, including risks related to the effect of the COVID-19 pandemic 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 Chairman and Chief Executive Officer, Mr. José María Álvaro Thank
you, Adrian. Good morning and welcome to Telefonica's second quarter results conference call. With me today are Ángel Villar, Laura Basolo, Eduardo Navarro, and Lut Schuller, CEO of Virgin Media O2JV. As usual, we will first walk you through the slides and then we will be happy to take any questions you may have. The second quarter was crucial for Telefonica. We reached an inflection point in the transition to sustainable, profitable growth, with organic revenue up and -on-year trends accelerating for the fourth consecutive quarter. We posted our best-ever net income after booking capital gains from the sale of Telstra and the creation of the Virgin Media O2JV. Moreover, these capital gains have translated into a more efficient capital structure. And finally, they help us produce debt financial debt by 30% -on-year. In parallel, a more efficient capital structure was reflected with our net debt denominated in Latin, increasing to 30% versus 21% as of March. On the strategic front, we continued progressing on our objective with key transactions closing in June and July. In the UK, one of our core markets, our position was reinforced as we created the National Connectivity Champion. Additionally, we continued to modulate exposure to e-spams. The eFRACO in Chile has been completed and we announced a new fiber vehicle in Colombia with KKR. Telefonica Tech has reinforced its capabilities in the cloud space with the acquisition of CanCon UK and AltoStratus, while accelerating -on-year growth trends. With regards to Telefonica Infra, PIPROSIL started operations in July, after regulatory approvals were granted. All of this, with digitalization gaining even more relevance and supporting our operating model and facilitating economic and social recovery. Finally, ESG remains an important part of our strategy. We launched a new industry-wide eco-rating scheme for mobile phones and have been nominated Europe's climate leader by the Financial Times. Turning to slide 2, second quarter reported figures reflect the significant capital gains booked, as we just mentioned, as well as other extraordinary effects. Reported figures also reflect changes in the consolidation perimeter, as Telefonica UK and Telstra Star Wars were consolidated until May 31st. And since then, the BG Media O2JV started to be consolidated using the equity method. They also reflect FX headwinds, which eased in the quarter. As such, the second quarter reported figures narrowed the -on-year decline by .6% to 10 billion euros and grew .4% organically, accelerating as much as .8% points versus the first quarter, with all business lines contributing to this improvement. Organic OEDA also improved its annual growth rate to .3% in the second quarter -on-year, whilst net income reached the 7.7 billion mark and EPS reached 1.37 euros. On its side, free cash flow amounted to €877 million in the second quarter, and for the first time, excluding spectrum payments, it topped €1.6 billion, 31% more than a year ago. Finally, net financial debt was reduced by as much as €11 billion in the last 12 months to €26.2 billion, post-distribution of Telstra's minorities as of June 2021. This is how the June 2016 net debt position. Moving to slide 3, we are upgrading our 2021 guidance for revenues and OEDA. First half of the year performance is already meeting or slightly surpassing former full year guidance of revenue and OEDA stabilization, and the outlook is positive for the second half of the year. Base and the positive tariff update calendar make us feel also positive about strong operational momentum being at least maintained. In Germany, as our colleagues shared with you yesterday, full year guidance has also been upgraded as well on strong commercial and operational momentum. Lastly, in ISPAM, we are seeing the commercial turnaround materializing, a top-line reversal happening in all countries, and whilst OEDA is more volatile, we are continuing to gain efficiencies. As for CAPEX, following first half results, where it stood at .4% over revenues, we maintain our up to 15% former guidance. On shareholder remuneration, we paid the second tranche of our 2020 dividend last month for a voluntary script dividend, in which .5% of shareholders opted to receive new shares, further enhancing our financial flexibility as just around 300 million euros were paid in cash. As for 2021 dividend, 0.5 euros per share will be payable in December 2021, and another 0.15 euros per share in June 2022, both through voluntary script dividend. Regarding treasury stock, the adoption of the corresponding corporate resolution will be proposed to the annual shareholders meeting for the cancellation of the share representing .7% of the share capital held as treasury stock. During the second quarter, we further consolidated our commitment to sustainability across our three ESG pillars, helping society thrive, leading by example, and building a greener future. In terms of building a greener future, we have launched an industry-wide equity rating scheme to identify the environmental impact of mobile phones. In addition, BG Media has just issued its first green bond raising 1.3 billion pounds to support the fiber rollout and the use of renewable electricity. I would also like to highlight the Financial Times has nominated Telefonica as a climate leader. With respect to leading by example pillar and in line with our commitment to creating a more equal society, we have updated our new diversity and inclusion policy and announced a target of at least 33% of women in management position by the end of 2024. Thanks to our program, we are one of the best companies to work for women in Brazil, and we have reached a collective agreement with unions to adopt flexible working in Spain. And finally, with regards to our contribution to society, Telefonica has not only extended its network connecting more people, but also has promoted education and employability to reduce the digital divide. For example, in April, we opened a new 42 campus, our second free programming campus with no age limit and open 24 hours, 7 days per week. Also, in terms of offering new solutions for society, we have found Indesia, which aims to drive digitalization via artificial intelligence in Spain, and have launched VidaV in Brazil, a health marketplace to make telemedicine more accessible. All of the above contributes to the achievement of UN sustainable development goals, as can be seen in our new report, A Sustainable World, A Connected World. I will now hand over to Angel to go through a detailed review of our business performance.
Thank you, José María. On slide five, we review the performance of our Spanish operation, which is turning around its revenues and showing annual growth for the first time since late 2019. The market rationalization that we have been promoting since Q4 2020 is bearing fruit. Following a somewhat muted commercial activity over the last quarters, all accesses showed a month on month recovery throughout the quarter, with positive net ads in fixed broadband in June. The early ending of the football season had a negative impact on conversion ARPU. This impact, however, is expected to reverse in the coming months, and we expect better ARPU in the second half. Furthermore, conversion churns continues to come down, and customer satisfaction has reached a new record high, 33% in June. Revenues, hence, were back to growth in Q2 for the first time since Q4 2019, thanks to improved trends in service and handset revenue, helped also by SolidIT, a partial recovery of roaming and the new portfolio. The OVA trend also improved versus Q1, though it was less marked than in revenue due to the lower margin of IT and handsets and the delay in full roaming recovery. Looking forward, we anticipate margin improvement from the next quarter, underpinned by better trading, improved ARPU, and further positive roaming impact. Finally, and in what we would call a very rational option, we secure the spectrum needed in the 700 megahertz band at very favorable terms, which will help us to accelerate our 5G deployment and improve operating leverage. Moving to Germany on slide 6, where we have seen operational momentum accelerate in the quarter, with O2 ARPU now back to growth year on year in Q2. At the same time, we continue to get strong results in mobile network tests, and have 5G available in over 80 cities. In May, we also are continuing our partnership and securing long-term revenue streams. In this quarter, both revenue and OVA year on year trends have improved to plus .7% and plus .3% respectively, with CAPEX growing by .9% year on year in the first half, continuing to ramp up through the year. This has resulted in continued strong cash generation, with RTA minus CAPEX margin expanding by 1 percentage point in the first half of the year. Moving to the UK on slide 7, where I am delighted to say that the JV between O2 and Virgin Media completed on the 1st of June. Since then, Virgin Media O2 has moved at pace to start integration, with senior leadership in place, B2B cross-selling started, and fast product development on the consumer side. During this time, there has been continued commercial momentum and focus, with a total base of 54.6 million plus 7% year on year on the back of solid base growth from across the company. Network rollout continues at pace, with 5G now live in almost 200 towns and project lining adding 89,000 new premises passed in Q2, helping to grow the company's gigabit network to 7.2 million premises passed, and remaining on track for completion of the gigabit upgrade by the end of 2021. The JV has also reaffirmed its target to deliver annual synergies of 540 million pounds by mid-2026, with a net present value of 6.2 billion pounds. To give an overview of the underlying performance, we have included the pro forma results for Q2 here, with revenue broadly stable year on year with improving trends in both fixed and mobile, OID plus .8% year on year on the back of continued cost control and commission savings, and delivering solid cash profitability with OID minus capex, growing by .5% year on year in the first half of the year. Moving to next slide, as the UK's largest gigabit broadband provider, today we are taking the opportunity to bolster our long-term network strategy by upgrading to fibre to the premise or fixed network of 14.3 million cable premises, after taking into account existing 1.2 million fibres to the premises to full fibre with completion in 2028. We see a huge opportunity in the UK, with low fibre penetration of around 20% compared to Spain 80%, where we can utilise our fibre expertise, as well as creating options to potentially pursue the broadband wholesale market in the UK, together with other B2B and B2C opportunities. Regulatory scheme in place is a plus, so the time to invest is now. By utilising the company's fully-adapted network, the upgrade will be one of the UK's most efficient fibre roll-outs. Costing around £100 per premise passed versus £60 per premise for upgrade to a full DOCSIS 4.0 cable network. So, a very modest increase in network cost during the upgrade, with no additional funding needed. In addition, revenue benefits are expected to accrue to BMO2's consumer enterprise and wholesale businesses from the fibre to the premise upgrade. Moving now to Brazil, on slide 9, Vivo's unique value proposition resulted into sound access growth in the most valuable segments, namely contract and fibre connections. Transformation to a fibre company will be further boosted by Fibrezil, which is already up and running, and will help us reach our target of 24 million fibres to the home premises passed by 2024. On the financial side, we posted very solid results, significantly accelerating growth trends in revenues to .2% -on-year in Q2. Better MSR and fixed revenues that are close to stabilisation explain the enhanced top-line performance. This improvement at the top line, along with efficiencies, drove OEDA to return to positive growth at plus 3% -on-year. CAPEX's allocation continues to support cutting-edge technologies that fit our top line, with 83% of its total related to growth and transformation. And finally, ESG commitments continue to expand, generating positive impact for all stakeholders. Thus, Vivo reached the 11th position in Mercos' ranking of the most responsible companies during the pandemic in the world. On slide 10, we show the progress of our fibre vehicles, which allow us to create growth opportunities and value, while accelerating deployment plans and addressing increasing demand for high-quality ultra broadband. In Germany, UGG is progressing well in the rollout of its network and has already connected the first municipalities. The first retail client was connected in June in construction. Additionally, both Fibrezil in Brazil and InfraCo in Chile received all necessary regulatory approvals, with both companies already operational after their transactions completion at the beginning of July. We have also announced a new fibre vehicle in Colombia, with KKR holding 60% of InfraCo and Telefónica Colombia the remaining 40%. The company has a target of around 4.3 million premises passed in three years, with 1.2 million brownfield premises from Telefónica Colombia contributed, at a multiple of approximately 20 times enterprise value to APA, and a net debt reduction at group level of approximately 0.2 billion euros. The closing is expected for Q1-22 after approvals. We have a strong infra portfolio that gives us optionality. We will continue to focus on pursuing growth and value creation opportunities through our infrastructure assets and capabilities across our footprint. On slide 11, Telefónica Tech revenue growth accelerated to plus .6% year on year to 2,003 million euros in Q3, in Q2, on an increasing revenue base and again beating its market growth. Tech services are driving the return to growth of the group B2B revenues, plus .5% year on year in the April to June period. In cyber and cloud, higher value revenues like managed services, professional services, and own partners platform, which account for more than 50% of these revenues, continue to deliver double digit growth. While in IoT and big data, IoT connectivity revenues representing more than 50% improved their growth rate to .1% in the first half year on year. From a commercial perspective, we signed an agreement with TM1 Cyber Security Solutions for Malaysian B2B, and in Spain we adopted our Cloudcom's portfolio to facilitate new ways of working and we reinforced our SME offer. In this arena, we are proud to mention that we were awarded by Microsoft as the best Spanish Partner of the Year in the digitalization of SMEs category for helping them maintain the business in the pandemic. In Q2, we acquired Altostratus in the cloud business, and we incorporated Athens in Spain to the perimeter of Telefónica Tech to continue reinforcing our professional capabilities. Finally, Telefónica Tech has just announced the acquisition of Campcom UK, reinforcing our position in UK and Ireland with an -to-end advanced cloud and security provider of significant size, relevant partnerships, and highly skilled professionals serving customers from both private and public sectors. I will now hand over to Laura for a review of our e-spam operations and the financial position.
Thank you, Ángel. Let's move to slide 12. During the quarter, we continued to modulate our exposure to the e-spam region. However, accelerating growth, and for the first time in 15 quarters, we posted -on-year revenue and OIVDA growth simultaneously in reported terms in East Panamerica. On the commercial side, accesses increased -on-year for all main products. In contract, all main markets posted positive net additions, while in FTTH, net additions accelerating, driving a record performance for the company in Q2. In the fixed business, the new fiber vehicle announced in Colombia together with InfraCo in Chile is a clear example of our strategy to lower capital intensity, crystallize asset value while accelerating expansion plans. On slide 13, we show how net debt has come down by 9 billion euros or 26% since December 2020, thanks to the sale of Telsys Towers and the B-Met O2 UKJV, coupled with a strong 910 million euro free cash flow generation. Net financial debt stood at 23.2 billion euros as of June, or 26.2 post-estimated distribution of proceeds to Telsys minorities. Including post-closing events, net debt could be reduced to 25.8 billion euros. Net debt to OIVDA ratio went down to 2.57 times, that is, 0.2 times below the 20 ratio. Our liquidity cash in amongst the 26.9 billion euro and our average step life has increased to 13.7 years, placing us in a very comfortable position as we have covered maturities beyond 2024. Telefonica maintains a proactive and innovative approach to financing in 2021, raising 5.3 billion euro in total, including financing at the German Fiber JB and the first bond at BG Media O2 JB. We are evolving our financing strategy with increased weight of debt in latam currencies, as shown by the long-term financing raising local currencies by our subsidiaries in Chile and Colombia. To note, Coltel signed two sustainable linked bilateral loans, being the first Telefonica-ISPAN company to sign sustainability linked bilateral loans. The effective cost of interest payment over the last four months stood at 2.69 percent as of June 2021, due to debt reduction in debt denominated European currencies and its cost. I will now hand back to José María to recap.
Thank you, Laura. To recap, first, in the second quarter, we completed two significant steps in our long-term sustainable growth strategy, the completion of the BG Media O2 JB in the UK and the sale of Telcius towers to American towers. Second, our top-line performance returned to growth, while net income reached an all-time record level and with free cash flow excluding the spectrum growing by more than 30 percent year on year. Third, we continue to prioritize growth when it comes to CAPEX allocation, with almost 50 percent devoted to NGN. Fourth, we posted a significant net debt reduction, as much as 30 percent down year on year, or 11 billion euros, mainly due to capital gains on strategic transactions, which improved the capital structure of the group. Finally, we are upgrading our full-year guidance to stable or to slight growth at both the revenue and IBA level. CAPEX-wise, we feel extremely comfortable by reiterating our up to 15 percent CAPEX to sales target. Thank you very much for listening. We are now ready to take your questions.
Thank you. If you would like to ask a question, please press the star followed by one on your telephone keypad. To cancel your question, please press the hash key. Once again, that is the star to register a question and hash to cancel. We would kindly ask you to ask a minimum of two questions per participant. Thank you. And your first question today comes from the line of David Wright from Bank of America.
Hello, guys. Thank you very much for the call this morning and a lot to digest. I guess the most significant announcement is the decision to move the UK business from cable to Faga. I see the upgrades you have given, the £100 per premise versus the £60 DOCSIS. Can you give us some more on your thinking? Is it the upload disadvantage ultimately that has driven the decision to choose Faga over cable? That is a very interesting development. I would very much welcome your thoughts. And just secondly, on to Spain. I appreciate, I think, Angel, you guided towards better ARPU dynamics in the second half and you mentioned some diluted effect in the Q2 number from football. If you could just expand on that, the moving parts, please. That would be very useful. Thank you,
guys. Thank you, David. This is Angel. I will start with the response to the UK question and then I will pass to Lutz. Today we have announced that BM02 has the intention to upgrade the fixed network to full fibre to the premise by 2028. This will imply covering with fibre an additional 14.3 million cable premises because we already have 1.2 which are covered with fibre through lightning. We from Telefonica have been clear supporters of fibre networks, all across our footprint. We already enjoy the largest fibre footprint in Europe by far and we have been extremely supportive of the proposal of the JV. Lutz, I pass it on to you and then I will take it back on the Spanish question.
Yeah, good morning, David. So we have in the UK a very unique situation. We have a deep fibre, fully ducted network and that brings us in the position that we can upgrade our network to fibre to the premise at very low cost and this is referring to the £100. Now we have the comparison with DOCSIS 4.0, right? So we have, based on DOCSIS 3.1, today already 1.1 gig speed available. We can upgrade DOCSIS 3.1 to above 2 gig per second and then after that we have taken the decision not to go for DOCSIS 4.0 but instead to go for fibre to the premise. This is clearly an offensive move because we see a lot of business opportunity coming with it. Think about a wholesale market in the UK, think about the B2B market and also better competitive position in the consumer market. Yeah, back to you, Angel.
Thanks, Lutz. I'm going to the Spanish question and the moving part. You were asking about, if I am right, the second quarter of the revolution and what would be the outlook for the second half of the year, no?
Yes. We have
experienced an ARPU decrease in the second quarter and the main drivers of that evolution are the following. The first one is the ending of the football season leads some of our customers to downgrade temporarily. This will be an effect that will reverse in the Q3 and of course in the Q4 when the next football season starts. Also, there is a continuing impact as we have seen in previous quarters of increasing no-fields options penetration, customers taking the 02 or the Movistar Connectamax, which is pure connectivity without content. We also have had lower out of the bundle consumption and some promotions ending at the beginning of the quarter. This promotion or ending of promotion intensity will be much lower in the quarters going forward because we have been far less active in promotional activity. At the same time, the new Fusión portfolio that more for more was applied at the end of the quarter, of the second quarter, while we had had a March 2020 tariff upgrade. This impact in the Q2 would not be recurrent in the following quarters. The new portfolio of Fusión has still not been relevant in Q2, although it will kick in in Q3 so we look forward to the second half. We expect the ARKU to reflect the reversal of some of the seasonal effects and we also will have higher revenue from new digital services that are getting traction. Therefore, we expect a higher ARKU for the second half than what we've seen in the first quarter.
Angelo, if I could just follow up. I guess the football downgrades, that should be annual though. That happens every year, does it not? You mentioned the tough comp on pricing. I assume it's difficult now to envisage price increases with the current competitive pressures. The obvious question is maybe the margin does need to step down now. Is that correct with the digital services running a lower profitability? Thank you.
Well, regarding the football end of season, you would have to compare with 2019, similar effect, because in 2020 the competition was halted so we didn't have that impact one year ago, which we are experiencing now. Regarding price increases, we are seeing price increases from competitors. Now in July Orange has announced price increases in August, so that happens in the market. And regarding margin, yes, what we have seen is in this quarter since we have been reactivating some of the commercial activity, but we still do not have full recovery of roaming, which is at levels. The second quarter roaming is at levels, depending on the geographies, between one third and 40% of what would be the normal roaming levels compared, for instance, to 2019. So we're suffering the impact of roaming still not reactivating. We also have reactivation of handset sales with lower margins and IT that has put pressure on our margin. But for the second half, we will be not far from the 40% levels because we see and we expect some further roaming reactivation, which is margin creative. We improved our pool that I was talking at the beginning of your question, and we will continue having efficiencies in commercial costs. So for the second half, you should see we're expecting margin recovery, at least one percentage point higher than what we saw in Q2, and we should be not far from the 40% levels.
Thank you.
Thank you. Next question, please.
Thank you. Your next question comes from the line of Giorgio Eradanicano in Citi.
Yes. Thank you for taking my questions. I actually have to kind of follow up to the previous questions asked by David. The first one around the decision to go for fiber, you mentioned the opportunity on the wholesale market. I'm just curious, what was preventing doing some kind of agreement with cable on wholesale? Is it the demand on the other side or is it logistically a lot easier to do that with fiber? And if I could perhaps ask a question whether that also makes it easier for you to find partners to find the upgrade to fiber, whether that's something you may be considering in parallel to what you already announced. And then my second question was for you, and I think you're going through the moving parts. I think it's quite clear some of the things are happening under your control. But if you could also comment, you mentioned at the end the pricing increases announced by your competitors. If I'm not mistaken, it's been notified the customers a bit earlier. How much the benefit was already in the June numbers you have shown on slide five. And how much of it do you think across two and a quarter? So should we expect that you move into positive territory now that your competitors have done more for more? Thank you.
Thank you, Giorgios. The first question, I pass it to Lutz,
please. Hi, Giorgio. So, I mean, when you think about the wholesale market, it's very simple. More short and midterm, we can offer a possible wholesale partner the fastest speed onto our cable network. Today, one gig. In the near future, 2.2 gig. And then for the longer term, we have all the speed possible available higher than 10 gig up and download. So this simply puts us in a very strong, future-proofed position in potential negotiations. And I think the partner approach is completely independent from that. So we haven't announced any acceleration on Lightning. So obviously, we are pursuing possibilities there. But I think the announcement today to upgrade onto fiber is simply taken into account the unique position in UK, right? At very low cost, you get to a fully-fledged fiber network. And that, in the long term, puts us in a very strong position. Back to you,
Ángel. Thanks, Lutz. And regarding the second question on Spain, I think we have to envelope everything that's happening into a more rational market. We have been working in driving rationality in the market by cooling down. This has had benefits in terms of our turn. Also fostering quality has improved our MPS. And the market is behaving more rationally. What we have seen is that the promotions have gone to half of what they used to be. Even the early summer promotions that different players are having, for instance, for second residences, are softer with more rational behavior. This, more for more, that we are seeing from our competitors, are a sign of rationality. All operators have joined forces to stop irregular practices for acquiring subscribers. The regulator has been promoting spectrum auction with conditions which are pro-investment. And we have seen that there is a sense of rationalization from most players in the market. And this is leading to these dynamics that I was describing before with respect to outlook for ARPU and also in the commercial traction that we are seeing within the quarter. I don't know if that responds to your underlying question or not.
Yes, thank you. If I could ask a follow-up to the Fiber question. I'm just curious to understand, you mentioned that finding a financial partner is independent from the decision today. I just wanted to understand two things. Firstly, whether a financial partner is more aimed towards project lightning itself, or whether it could include some of the existing infrastructure. And is it fair for me to assume that it makes sense for you to announce wholesale deals before you find a financial partner? Because obviously that way the price is better. So should we expect the wholesale deals to come first? Thank you.
Lute,
to you.
Thank you. I would say everything is possible. And also every order is possible, is the simple answer. We have different plans. We are in different conversations. Let's see. It's too early to tell. Sorry to be not more concrete, but we are in the middle of it. Thank you. Back to your answer. Thank
you. Thanks, Georgios. Next question,
please. Thank you. Your next question comes from the line of Jacob Bluestone from
Credit Suisse. Hi, good morning. Thanks for taking the question. I've got one question, please, on Spain. You referenced Spanish EBITDA, which fell fairly similarly to what we saw during Q1. And I was just wondering if you could comment specifically around the outlook for EBITDA in Spain. When do you think the rate of growth might improve? You obviously mentioned that ARPU growth, consumer ARPU, convergent ARPU growth should improve in the second half. But I think that only makes up about a third of your service revenues. And there's other stuff in there as well. So could you maybe comment specifically on what is the outlook for EBITDA in Spain? Do you think the growth rate will improve in the coming quarters? Thank you.
Thank you, Jacob. The trend of the Q2 improved versus Q1, slightly, but improved, thanks to improved service revenues. And despite the worst year on year comparison versus what was a very typical Q2 in 2020, because in the second quarter of last year, we had very low commercial and production costs and some non-recurrent factors. So it improved its trend, but the comparison was tough versus one quarter one year ago that was very atypical. This improvement was lower than the revenues improvement because of the lower margin of some of the revenue growth levers namely handset sales and IT. And as I was saying before, the reactivation of roaming. We believe that from Q3 onwards, the football seasonality will revert, improving the ARPU and therefore flowing into profitability and also recovery of roaming, which may add, in our estimates, around one percentage point to margin. And this would, of course, improve the trends for the second half. One thing that I would like to note is that on the third quarter, there will be a difficult year on year comparison related to content costs because one year ago we got some rebates from content suppliers to us because of the non-happening of certain sports events. And this helped the OEPA of the third quarter 2020 and that is not a recurring factor in 2021. So all in all, we believe that the margin is going to be going back to close to 40 percent. The year on year comparison in the second half will improve, but in the third quarter will be largely affected by these non-recurrent content rebates we had one year ago.
Thank you, that's very clear.
Thanks Jacob. Next question please.
Thank you. Your next question comes from the line of Keval Kariya from Deutsche Bank.
Thank you. We've got two questions please. So firstly, can you update us on where you stand on the potential for further inorganic options in that time? And do you think it will now be easier to strike potential deals now that hopefully most of the COVID-19 drags are behind us? And then secondly, following on from the previous questions on Spanish OPEX, you will obviously have this continued mix shift towards more digital services.
And as
you look beyond 2021, do you think there are any areas where you can actually accelerate the level of cost reduction to then help the overall impact on the margins beyond this year? Thank you.
Thank you Keval for your question. Going to ESPAN, our aim in ESPAN is not to do deals, it's to modulate our exposure whilst we focus on profitability, efficiencies, and extracting most value from our assets. Having said so, I think we find a nice formula with the FiberCost, which are allowing to accelerate growth, which are allowing to capture that fixed broadband growth in those countries. And at the same time, we are monetizing the brownfield and the contract. And both the FiberCost in Chile, the FiberCost in Colombia, and the very soon expected approval of Costa Rica are going to contribute to net debt reduction of one billion in 2021. But that's not the ultimate goal, as I said. And we are modulating and improving return on capital in different fronts. The one of us is taking care of the operations, and I think we have, as I've commented, delivered very strong results. Revenue are improved by .5% and .3% organically, and in terms of commercial KPIs, we had very, very solid new contract accesses are over 1.1 million in the first half of the year. Fiber is growing very well, booming with almost 0.5 new connections. And that's being fueled by a new operating model, a new operational model much more mutualized, which is going to bring very nice savings, and at the same time, is giving us a lot of agility. We are already operating as such, and the FiberCoin Colombia was being run by a true regional team, doing it in a very short period of time, as you have seen since we closed the FiberCoin Chile. And we are also going to work on that line in the case of Peru. As you have seen also in the debt explanation, we are reducing the equity exposure substantially. We have net debt in Chile, Peru, and Colombia very much aligned to the group ratio around three times, and we've been active throughout the first half year. We've been issuing in Chile, we are having issuing in Colombia, we are preparing back financing in Uruguay that is going to take net debt in Uruguay to almost two times or if that, and we are doing this with a very asset light. So no capital, or very low capital is being devoted to the region. We are not attracting neither management focus from the group nor financial resources, and ESPAN is becoming an optionality and a potential for value creations that has been the case already through the financials and through the three inorganic deals that I commented. And as COVID headwinds remove, I think that's going to be even better.
If I may add, Keval, this is the first quarter in the last 15 quarters that ESPAN grows in euros in reported terms and also in OEDA. So I think that also the operational performance of the ESPAN unit is helping us to allocate in a different manner our capital structure. So please note that there is a turnaround in your reported terms in both revenues and OEDA.
And regarding your question on direction of travel of OPEC, not only looking at the rest of the year, but going forward towards next year, the main buckets of costs in Spanish operation would be personal cost, content cost. Then we have cost of goods, supplies, costs related to IT, commercial costs, and other expenses. So the direction of travel of these different elements, when one looks not for the next quarter, next second quarter, but getting into the years to come, personal cost, as you have seen, we are continually working for efficiencies with respect to personal cost. The second bucket, content costs, we are going to start seeing new cycles of sports where we have acquired or we plan to acquire content with deflation. So for instance, from September this year, the new UEFA Champions League kicks in where we achieved a 16% reduction in the cost in the last auction. And of course, La Liga will be one year after and the auction still has to take place. But the aim is to go for deflation. These two lines should go in the direction of being more efficient cost-wise. On supply costs or cost of goods sold for either our activity or the handsets which are implicit in our new Función portfolio, this will be aligned with the evolution of door revenue lines because those are directly linked to the cost of sale. Commercial costs in general should keep the same weight as they have now. And other expenses like network savings, efficiencies from legacy switch off, bad debt and so on, these are going to expect to continue to decline as has been the case up to now at a significant rate. So this should be the direction of travel of our Función in the Spanish operation.
That's very clear. Thank
you. Thanks Keval. Next question please.
Thank you. Your next question comes from the line of Nick Alfas from Regburn.
Yeah, thanks very much. Question for Lutz really. The £100 upgrade figure is quite eye-catching. Obviously for those of us who live in the UK, calling a plumber tends to cost that much. Have you really tested that in a wide range of situations to understand whether that's the real cost? And then what's your cost to connect on top of that? Thanks.
Lutz, to you again.
Yeah. So yes, we have done pilots already. As we speak, we are doing a bigger pilot with 50,000 premises. So the technical team is very confident to meet that number. As I said before, right, the reason for that is that we have already in our network deep fibre everywhere. And then we have really proper ducts. So what we have found so far and what we have all documented is that the £100 are achievable. This compares to £60 what we have tested if we would go for DOCSIS 4.0, right? So it's not that DOCSIS is dead in general, right? It's simply a great situation for the UK. You had a second question on cable, right? I forgot that. What was that again? Well,
that gets you past the home. So what's going to be the cost? Oh, yeah, the connection. So
I think we haven't disclosed that yet. I've seen that you made an wrong estimate. Obviously, we have to test that again. We have to pull fibre then entirely into the home and the customer obviously needs a new CPE. The good thing is that we can do this entirely demand driven. What do I mean with that? Right? If a customer gets onto DOCSIS 3.1 today, the customer can get up to 2.2 gig speed and fibre then kicks in for higher speed. Therefore, we get to our fibre network at very low cost very quickly and then the migration cost are simply linked to a customer jumping onto a higher speed than 2.2 gig and this obviously also can come with additional revenue. Therefore, I think to call out cost independent of top line is not appropriate at
the moment. So you'd have a connection fee of maybe 300 pounds plus for an incremental revenue
for someone? Maybe not connection fee. It can be also right. I mean, you've seen the new wholesale regime in UK and you see that simply it seems that the first time in the country we are able to monetize higher speed. So I think today the average speed of the Virgin Media customer is 200 meg. This is two and a half times faster than the average of the country. So we talk about now a business model that kicks in for an average speed above 2.2 gig. So I think either the monthly subscription will be higher combination of installation costs and monthly will be higher whatever. I think it's early days. Stay tuned.
So sorry, you have a large connection fee but you're going to have to pay for that for the incremental RPU from a customer wanting 10 gig versus 1 gig.
Exactly. Right? I mean, we can choose what we are going to do between installation cost and connection costs.
Okay. Thanks very much. Okay.
Thanks, Nick. We have time for one last question, please.
Thank you. Your final question comes from the line of Carl Murdoch Smith from Berenberg.
Hi. Thank you. Thank you for the question. I just wanted to ask a slightly longer dated question. I recognize it's more of a board decision than necessarily for you. But just beyond this year, what are your thoughts regarding the voluntary script option? You obviously seem quite confident in terms of the future. You seem to think that your shares are cheap. So why are you happy to see the share price or the share count continue to increase? And now that the net debt is much reduced following the M&A, should we be thinking that the voluntary script option won't continue into future years?
Thanks. Well, thanks for your question. As you know, what we have tried is to provide flexibility to our remuneration policy, especially in uncertain times this year because of the COVID outcome and also because of several spectrum auctions that we had on top of the table that now two of them are cleared. In terms of the acceptance of our shareholders to this proposal, 71% came for shares in the last and therefore they were somehow protected by the dilution. And we are trying to devote any excess free cash flow that we have in order to try to mitigate the dilution impact of the script option. We have cancelled .5% of what the Treasury stock in the last shareholders meeting and today we are proposing an additional cancellation of 0.7%. So I guess that the answer is that for the time being we will provide this flexibility and you know that we have that committed for this coming tranche in December of 2021 dividend and the second tranche will be approved by the next shareholders meeting and we will update you there. We don't have a specific proposal to share. For the time being we really appreciate this flexibility that allow us to keep investing into growth capex. But yes, you're right, we are approaching the time in which the debt levels are much more sustainable and in which the underlying EPA is back to a better trend. So we will be reassessing the position in the next year end results.
That's great, thank you.
Thank you, at this time no further questions will be taken.
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