Telefonica’s 2010 results: Top line growth & CF generation

I was attending to last week Telefónica’s Q4 2010 Earnings Call (held on February 24th) and there were extremely interesting insights coming from the executives of this telecom giant. As it’s not straight froward to find the transcript of the call, and finding it interesting, I wanted to post it to share it with all of you.

As a summary,  Telefonica has revealed a 30.8% increase in full-year net profit, but the company noted that fourth quarter net income had been significantly dented by the continued economic malaise in its home territory. For the twelve months ended 31 December 2010 Telefonica posted a net profit of EUR10.17 billion (USD14 billion), up from EUR7.78 billion, but in the last three months of the year the company said net income fell by more than 45% year-on-year to EUR1.33 billion.

In 2010 Telefonica said that across all of its operations it generated revenues of EUR60.74 billion, representing a 7.1% annual increase, with the company’s Latin American and European (excluding Spain) units reporting turnover of EUR26.04 billion and EUR15.26 billion, up 13.3% and 12.7% respectively. By comparison, amid increased competition in the Spanish wireless sector and the country’s inhabitants cutting back on non-essential expenditure, Telefonica Espana reported revenues of EUR18.7 billion, down 5% y-o-y; the parent company did, however, attribute the decline in part to lower revenues related to Universal Service (EUR95 million in 2010 compared to EUR223 million in 2009). Group operating income before depreciation and amortisation (OIBDA) meanwhile was EUR25.8 billion, up 14% compared to EUR22.6 billion a year earlier.

In terms of subscribers, Telefonica said that its total accesses were up by 7.2% year-on-year in organic terms (up 8.7% in reported terms) at 287.6 million. Group mobile accesses stood at 220.2 million at end-2010, up 8.9% against end-2009, with Brazil reporting the biggest rise in its customer base, signing up some 8.5 million net additions in 2010. Overall the number of mobile customers across Telefonica’s Latin American operations rose by 10.8% y-o-y to 149.3 million, while European (bar Spain) rose by 6% to 46.7 million.

Despite the difficult trading conditions in Spain Telefonica reported that wireless customer numbers in the country were up by 3.3% compared to end-December 2009 at 24.3 million accesses, up 3.3% on the December 2009 figure; in the last three months of the year however Movistar España reported a decline in mobile subscribers. Group-wide meanwhile Telefonica reported that retail fixed broadband accesses reached a total of 17.1 million at end-2010, up 10.9% y-o-y in organic terms, and while fixed telephony accesses continued to decline, falling 2.7% to 41.4 million, it said that the rate of decrease was slower in the fourth quarter than in previous periods.

Regarding strategy, please read the following transcript if you wanna take inspiring insights from the executive team. Most of the telecom giants are going in the same strategic direction but not all of them have demonstrated execution capabilities. Telefonica is one of the out-performers.

Enjoy the reading, CVA.

Telefónica’s Q4 2010 Earnings Call – Operator

Ladies and gentlemen, thank you for standing by. Welcome to Telefónica’s January to December 2010 results conference call. At this time all participants are in listen-only mode. Later we will conduct a question-and-answer session. (Operator Instructions) As a reminder, today’s conference is being recorded.

I would now like to hand the call over to Ms. María García-Legaz Ponce, Head of Investor Relations. Please go ahead, madam.

María García-Legaz Ponce

Good afternoon, ladies and gentlemen and welcome to Telefónica’s conference call to discuss January-December 2010 results. I am María García-Legaz Ponce, Head of Investor Relations.

Before proceeding, let me mention that this document contains financial information that has been prepared under International Financial Reporting Standards. This financial information is audited.

This presentation may contain announcements that constitute forward-looking statements, which are not guarantees of future performance and involve risk and uncertainties, and actual results may differ materially from those in the forward-looking statements as a result of various factors. We invite you to read the complete disclaimer, including the first page of the presentation, which you will find on our website.

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 releases and the slides, please contact Telefónica’s investor relations team in Madrid by dialing the following telephone number, 34-91-482-8700.

Now, let me turn the call over to our Chairman and CEO, Mr. César Alierta, who will be leading this conference call.

César Alierta

Thank you, Maria. Good afternoon, ladies and gentlemen. Thank you for attending Telefónica’s 2010 full-year results conference call.

Today I have with me Julio Linares, Chief Operating Officer; Santiago Fernández Valbuena, Chief Strategy Officer; Guillermo Ansaldo, head of Telefónica Espana; Jose Maria Alvarez-Pallete, head of Telefónica Latinoamerica; Matthew Key, head of Telefónica Europe; and Miguel Escrig, Chief Financial Officer. During the question and answer session you will have the opportunity to ask questions directly to any of them.

2010 achievement reinforce our track record as a highly predictable and reliable Company, and proves our differential profile in the industry with tangible results. First, in 2010 we have posted a solid set of results, delivering superior top-line growth, best-in-class profitability, and high cash generation. A strong execution and diversification has been key for this strong performance.

Let me highlight Latin America accounted for 43% of Group sales, while our push in mobile broadband data has delivered a 19% annual organic growth in mobile data revenue. This was achieved in a context of strong commercial effort, resulting in a very rapid expansion of the customer base and the acceleration of restructuring measures that will further increase efficiency in the future.

Second, we have completed key strategic transactions, particularly the acquisition of 50% of Brasilcel following the M&A path set in October 2009.

Third, we continue delivering on our commitments, meeting our 2010 guidance and maintaining a robust balance sheet. All this with leading cash returns for our shareholders, raising the dividend for 2011 14% year-on-year to EUR1.60 per share.

Please turn to slide number three to review 2010 major financial metrics. Reported year-on-year growth rates were impacted by several nonrecurring effects – change in consolidation, especially the full consolidation of Vivo in the fourth quarter and ForEx. Nevertheless, underlying results remain very robust.

Revenue increased 7.1% in nominal terms to EUR60.7 billion and 2.4% year-on-year on organic terms. 2011 OIBDA exceeded EUR25.8 billion, up 14% or 0.8% in organic terms.

As a proxy to cash flow generation, operating cash flow almost reached EUR15 billion in 2010, despite increasing CapEx and the spectrum acquisitions.

Net income exceeded the EUR10 billion mark, increasing by 31% over the previous year. At the OIBDA level the EUR3.8 billion positive impact derived from the revaluation of our persisting stake in Vivo was partially offset by our decision to accelerate operations restructuring, which led to non-recurrent restructuring expenses amounting to EUR1.3 billion in the second half of the year, EUR1.1 billion in the fourth quarter. On top of that, in the fourth quarter of the year we had the impact of the tax asset reassessment in Colombia.

Nonrecurrent restructuring expenses were mainly related with personnel reorganization, EUR658 million, and firm commitments relating to the Telefónica Foundation’s social activities. This reached EUR400 million in total, 70% recorded at Telefónica and the remaining 30% at Telefónica Latinoamerica.

Depreciation and amortization increased year-on-year, recording EUR84 million in the fourth quarter, due to the amortization of the Vivo purchase price allocation. We estimate an annual impact or depreciation/amortization of around of EUR350 million for the next five years. So these impacts are preliminary and analgesic.

As a result, earnings per share reached EUR2.25, above our target of EUR2.10 per share.

Turning to slide number 5, a value-oriented strategy across the Group is behind the sound commercial performance recorded in 2010, which has allowed us to maintain our strong competitive position. We focus our commercial investments on value and growth levers.

Mobile broadband data continues to shine, with a demonstrable year-on-year increase of 64% to reach the 22 million mark. The contract segment kept gaining traction, accounting for 53% of 2000 mobile net adds, while Vivo brand net adds increased over 44% in organic terms. As a result, we now manage over 288 million accesses, 7% more than a year ago in organic terms.

Let’s turn to slide number 6 for the review of the top line. Reported revenue growth recorded the fourth sequential quarter of improvement, ramping up 9 percentage points from 2009 year-end, underpinned by the faster customer base expansion and the full consolidation of Vivo since October 2010.

In organic terms, sales sustained a positive trend, positive up to September, showing a healthy 2.4% year-on-year growth. Excluding the impact for MTR’s cuts, organic sales growth jumped to 3.4% year-over-year. Nice how that 190 basis points more than a year ago on the back of our strong commercial efforts to drive penetration and usage growth.

Slide number 7 outlines the high-class diversification of our sales. From a regional perspective, Telefónica LatAm continues to be the key growth driver of the Group. Telefónica Europe also posted some numbers compensating the lower contribution from Telefónica Espana.

From a business perspective, we are increasing our exposure to the high-growth business, broadband connectivity, applications, and new service revenues with already 23% of total sales in 2010, 3 points more than a year ago, with significant growth rates across those services.

Please turn now to the next slide to get more color on our mobile broadband strategy. Mobile broadband adoption is booming in our markets, and we are capturing this growth opportunity. Mobile broadband active users already account for 10% of our total mobile base, 3 percentage points more than the previous year, backed by the increasing penetration of the smartphones.

I would like to stress the 20% mobile broadband penetration mark already achieved in our European footprint, while the 5% level reached in Latin America give us a very clear opportunity for the future as handset costs continue to decline favorably. As a result, mobile LatAm revenue recorded a solid 90% year-on-year increase, purely in organic, driven by the (inaudible) 52% growth in non-P2P SMS sales.

Please notice that we have already launched tiered pricing across our footprints, which will allow us to profitably monetize the data opportunity. On top of that, we continue to ratch our handset portfolio, leveraging our scale to further reduce costs.

It was great to see the new devices, applications, and continuous innovations in the recent Mobile World Congress. This is key to further stimulate growth in the mobile LatAm business.

Turning to slide number 5, (sic – see slide 9) in 2010 we retained a benchmark profitability in a context of renewed commercial efforts to drive future revenue expansion. Underlying OIBDA trends improved throughout the year, as we had previously outlined, driven by sales expansion, further advances in cost control initiatives, and tactical synergies, further integrating management model, and also from our global initiatives.

The acceleration of the restructuring measures announced will further enhance efficiency in the future. As such, underlying OIBDA margin stood at 38.3% for the Group, built toward a stable basal OIBDA in organic basis.

Let’s now turn to slide number 10. Total CapEx reached EUR10.8 billion in 2010, raising growth to 50% year-on-year, mainly due to investments in spectrum in Germany and Mexico totaling EUR2.6 billion. In organic terms and stripping out the spectrum acquisitions, CapEx increased 3% year-on-year to support growing usage and fast customer expansion.

By regions, Espana and Latin America underpinned the increasing CapEx with focused investments in fixed broadband and mobile broadband networks. Lower CapEx at Telefónica Europe was driven by Germany, where we already have a high-quality owned network. 77% of the Group CapEx, excluding the spectrum costs, was devoted to growth and transformation, with maintenance accounting for the remainder.

Let me just finish the section highlighting that we have delivered on our annual targets for eight years in a row, as the slide number 11 outlines. Now let me hand over the call to Santiago.

Santiago Fernández Valbuena

Thank you, Cesar, and good afternoon, ladies and gentlemen. Let me now summarize the performance of our businesses in Spain, where we have delivered on the business priorities that we announced for the year. Amid a backdrop of strong competition and a weaker than anticipated telecoms market, our valued-oriented commercial activity allowed us to maintain our undisputed leadership in the market with an estimated revenue share of 53% and limited erosion year-on-year.

We have also retained a comparable benchmark OIBDA margin of close to 47% in spite of reinvesting efficiency gains to set the basis for future growth. Cost-cutting measures in those areas where OpEx is manageable in the very short term have been already implemented, leading to a 3% year-on-year decline in non-labor costs on a comparable basis despite increased commercial efforts.

Cash flow generation remained strong with an operating cash flow margin of 36% on comparable terms, again a best-in-class mark. Taking into account the significant pressures in revenues, the increased CapEx, and higher commercial volumes year-on-year, it should be highlighted the efficient management of the working capital, which allowed to limit the decline in operating cash flow after working capital in reported terms to 5.5%, well below the drop in the operating cash flow numbers.

On slide number 13 the outline the top-line performance in Spain. On top of challenging economic conditions, adverse regulatory measures explain 1.4 percentage points of the 4.4% year-on-year decline in revenues. ULL prices in Spain are not only the lowest in Western Europe but they were also below our costs, according to the regulators’ cost accounting methodology. In our view, current prices are not sustainable.

Obviously, competitors are taking advantage of these attractive prices to launch aggressive commercial campaigns in the fixed broadband market, therefore impacting our retail actions in fixed broadband revenues. These, together with lower consumption patterns, are the main drivers of the decline in sales.

Price pressure intensified in the fourth quarter of the year and has continued during the first months of 2011, with the traditional rational network competitors launching very aggressive campaigns. So there might be some regulatory consequences as, according to the press, one player has sued one of them in the CMT, the local regulator, for dumping.

We continue to focus on value. Therefore, though this situation is also affecting our pricing policy, leading to higher promotions, we keep upgrading and enhancing our fixed broadband offer to increase its perceived value and to preserve the value of the market. We expect competitors’ rationality to come back to the market.

To finish up with Spain, I would like to stress that we keep working to have a more competitive cost structure. On top of the initiatives already launched that have allowed non-labor costs go down in 2010, we are making progress in our goal to reshape personnel expenses and we aim to accelerate these measures in the coming months.

We are already reducing management positions in Spain, and we are analyzing the potential outsourcing of some operations and further headcount restructuring processes. At the same time, we will negotiate with labor unions to have more flexible labor conditions and pay reviews not linked to CPI.

We will continue optimizing operational and commercial costs. Further capitalizing Group scale will lead to additional savings. Finally, an active management of our asset portfolio should help us to deliver healthy profitability, which will continue to be benchmarked in the sector.

Please turn now to slide number 15 to review our Latin American operations. 2010 results confirm the success of our profitable growth model on the back of an integrated management of the operations in the region, a model that is now bringing benefits to Vivo as the company is already under full control of Telefónica.

Revenues from Latin America increased 7% year-on-year in organic terms up to December, fueled by the double-digit growth in MSRs and sequential acceleration of fixed broadband revenues. OIBDA performance was strong, with year-over-year growth ramping up to 9% in organic terms by year-end, leading to a solid OIBDA margin of close to 40%, if you exclude the capital gain from the revaluation of our previous stake in Vivo and nonrecurring charges booked in the fourth quarter of the year.

The improvement in profitability was achieved despite higher commercial volumes especially in mobile contract. In 2010 mobile contract net adds reached 6.7 million, and were almost half of total net additions, a benchmark ratio for the region. As a result we reached 184 million total accesses by the end of 2010, or 9% higher than a year ago.

Moving to slide number 16 on mobile, we are enjoying the perfect combination of growing voice and data revenues. The strong net adds and the higher quality of the accesses growth drove double-digit growth in MSRs, with positive growth in voice revenues. And over 40% year-on-year increase in data revenues shows our focus on enhancing customer value.

Our strategy in the region is not about capturing growth at any price but to focus our commercial efforts in the higher value segments. This is proven by the sound performance of the contract segment, up 29% year-on-year in 2010 on the back of higher gross adds, lower churn rates, and an active prepaid-to-contract migration policy.

It is also worth noting the strong push in mobile broadband accesses, which are almost doubled versus 2009, and already account for over 5% of our total mobile base in the region. As a consequence (inaudible) remained almost flat year-on-year despite the 11% rise in the customer base and negative regulatory impact.

Regarding our wireline business in Latin America, in 2010 we posted a strong commercial momentum which gradually led to improved trends in financial metrics through the year. Broadband accesses rose 16% year-on-year on the back of very strong net adds, which almost tripled versus 2009, reflecting the success of our strategic levers – bundles and term contention leveraging enhanced quality.

It is also worth mentioning the positive evolution of fixed accesses, which remained virtually stable year-on-year as we continued to push bundles. Pay TV also delivered positive performance in the fourth quarter, leading to a 9% year-on-year increase in the access base. As a result, Internet and Pay TV revenues growth improved sequentially to account for 22% of total wireline revenues in 2010 and growing contribution across our markets.

On slide number 18, we view the strong results recorded in Brazil in 2010, with fourth-quarter figures confirming the trends already delivered up to September. In Telesp, our efforts to enhance quality led to a record level of fixed broadband net adds, over 680,000 accesses. More importantly, the company continued to regain market share, leveraging an enhanced broadband offer.

We also managed to turn around the traditional business with a positive growth in the customer base versus significant line losses in 2009. As a result the financial metrics continued to gradually recover through the year, especially on the top line.

On the other side, Vivo continues to outperform in a very competitive wireless market with even better results in the fourth quarter. The focus on quality growth allowed Vivo to gain market share in the contract segment, which accounted for a third of total net adds in 2010.

Thus, the strong rise in customers and the actions to foster voice and data usage led to a healthy 11% increase in mobile service revenue in 2010, with an acceleration in the fourth quarter. Profitability improved with OIBDA margin expansion year-on-year despite increased commercial efforts and efficiency initiatives – again a very different performance versus our key competitors.

I would also like to highlight that we are fully on track with the capture of synergies derived from the combination of Vivo and Telesp. We will provide further details on the execution process in our Investor Day, but we are very positive about all the opportunities we have ahead of us.

Finally, with Brazil let me remind you that the tender offer for Vivo’s ordinary shares has already been launched and is expected to finish by the third week of March. The total outflow should be below EUR800 million, in line with our expectations. On the other side, the corporate restructuring of Vivo and Telesp be is also on track, with the full process expected by the end of the first half of this year.

To finish up with Latin America on slide number 20, we will just make two comments on Mexico and Venezuela. In Mexico in 2010 we continued to gain market share. We reshuffled our prepay offer in the fourth quarter, already leading to better commercial results, as prepaid net adds doubled quarter-on-quarter. Nevertheless it is too soon to see the results in financial metrics, but we expect sequential improvements throughout 2011. We have also strengthened our position through the investment in spectrum, which should lead to better results in the mobile broadband market in 2011.

In Venezuela we posted strong financial results, leveraging a very robust increase in data revenues despite lower commercial activity impacted mainly by limited availability of handsets.

Let’s now turn to slide number 21 to review Telefónica Europe that delivered strong financial and operational operating performance in 2010, with continued expansion of our customer base and the fast growth of mobile data revenues. Of our new mobile customers, 65% were in the contract segment and now represent close to 50% of the base.

Significantly, active users of mobile broadband increased 46% year-on-year in 2010, resulting in a customer base of close to 10 million. As a result organic revenue accelerated its growth trends throughout the year, topping a 7% year-on-year growth when excluding MTR cuts, underpinned by the healthy organic rise in non-SMS P2P revenue, 26% year-on-year in 2010.

We managed to maintain a stable OIBDA margin in 2010 despite higher commercial investment, recording a very solid 17% operating cash flow growth, both in comparable terms.

On slide number 22 we show that show that Telefónica O2 UK showed a strong result in 2010, underpinned by the growth of mobile broadband while mobile core continued to excel. 23% of our customer base actually paid for using data services at year-end 2010 which is a significant 7 percentage point improvement over 2009.

We advanced on our goal to profitably monetize the mobile data opportunity with the introduction of data caps in the fourth quarter, already taken by 36% of retail mobile contract date users. We also reduced handset subsidies in the fourth quarter, leading to higher hardware revenues. As a result, total revenue growth for the year was 6.5% year-on-year in local currency underpinned by the strong 5.6% rise in mobile service revenue despite the drive from MTR cuts.

Continued efficiencies led to a sound 7% year-on-year OIBDA growth in comparable terms. We also increased our investment in the network, including the recent 900 megahertz reforming to ensure best-in-class quality.

Let’s now turn to slide number 23 to explain the performance of Telefónica O2 Germany. 2010 continued to deliver growth in the mobile business, in particular in the contract segment which accounted for over 50% of total net adds in the fourth quarter. This was driven by improved customer service and strong demand for mobile broadband, including the iPhone, which we have been selling from October.

LTE network rollout in rural areas is already in progress with much most of the planned sites for this year located in existing auto premises and commercial operations due to begin in the second quarter of 2011 after successful trials with customers in four locations.

Mobile service revenue growth accelerated through 2010 to 5% year-on-year in the fourth quarter, excluding mobile termination rate cuts, which were halved in December. This, compounded with My Handy handset model, which does not allocate subsidies into mobile service revenues, led to a strong 8% organic year-on-year increase in total revenues for the year.

Profitability improved sharply in 2010, further capturing synergies with HanseNet and continued operational efficiencies, leading to an operating cash flow that more than tripled 2009 figures in comparable terms. Turning now to slide 24, I would like to highlight that we have generated close to EUR8.5 billion cash and dedicated 8% of it – nearly EUR6.8 billion – to shareholder remuneration. On the first chart, you see that our debt has increased by EUR12 billion in the year, of which EUR8.6 billion are due to financial investments, mainly the Vivo acquisition, and EUR2.4 billion to changes in foreign exchange. Close to 50% of those are due to the Bolivar devaluation in Venezuela.

Even so our financial flexibility at the beginning of the year has allowed us to accommodate this increase without exceeding our 2.5 times limit for the debt and commitments of our OIBDA as shown on the bottom chart. That limited is respected both on a reported basis and if adjusted – by adding Vivo’s OIBDA not consolidated in the first nine months, and subtracting the positive result of the gains on the sale of fixed assets, net of nonrecurrent restructuring expenses. Even if nonrecurrent restructuring expenses – other than the firm commitment to Telefónica Foundation – were kept within OIBDA, the leverage ratio would still not exceed 2.5 times.

Turning to the next slide, we show that we have decreased our effective interest rate ex-FX, at 5% of our debt, 54 basis points lower than in 2009, while implementing a prudent financial management. So we have succeeded in keeping our financial expenses ex-foreign exchange at EUR2.5 billion, nearly exactly the same level as we had in 2009, excluding from the previous year about EUR600 million charge due to hyperinflation in Venezuela. All this despite the aforementioned debt increase.

On our financial management, let me mention first that we have taken advantage of the low rate environment to increase our fixed rate debt by close to EUR13 billion, though EUR6.8 billion have been implemented through forward swaps starting to fix our debt in the middle of 2011. The weighted average interest rate of these swaps is 2.7% with average maturity in 2017. Had we fixed this amount of debt at the end of January 2011, we estimate that the equivalent cost would have been 60 basis points higher at 3.3%.

Second we have been reinforcing our liquidity position by increasing our undrawn committed credit lines up to EUR9 billion, EUR1.8 billion up in the year, with 100% of the amount of the credit lines maturing in 2010 rolled out successfully.

Lastly we have raised around EUR16 billion long-term financing in 2010 – EUR8 billion through a syndicated loan; close to EUR6 billion through bond issues; and around EUR2 billion in LatAm financing in public entities. Despite the less active fourth quarter, leading to a one-quarter reduction in the average life of our debt in the quarter – not surprisingly – the issuance at the beginning of the year by EUR3.2 billion should be enough to slightly exceed our six-years medium-term limit for the average life of our debt.

With this, let me now hand back the call to our Chairman.

César Alierta

Thank you, Santiago. Let me set now with you our priorities for 2011. We continue to prioritize revenue growth, leveraging our diversification. Further momentum at Telefónica LatAm and Telefónica Europe will outpace top-line process in Telefónica Espana. We will focus our efforts on capturing the mobile data growth opportunity in our footprint with commercial efforts, our enter to increasing customer value, and therefore quality growth.

As a result and according to (inaudible), Group revenue is expected to increase up to 2% in 2011. We report the growth rate being significantly higher due to the full consolidation on Vivo in the Group accounts since the fourth quarter 2010.

Despite increased commercial activity, we will be able to deliver an industry-leading profitability. We expect Group OIBDA margin to be in the upper 30%s, limited margin erosions despite high commercial activity, based on executing our profitable Group business model; further leveraging scale economics; and benefits from global initiatives.

Total CapEx as the spectrum coursed will be around EUR9 billion a year. We continue setting the foundation for future growth, improving network capability to support the mobile data explosion and further growth in fixed broadband.

CapEx excluding the spectrum acquisitions will go up in LatAm and in Spain, remaining nearly flat in Europe despite higher investment in the United Kingdom network.

Please notice that the full reconciliation of Vivo has a significant impact in this figure. We have fully consolidated 100% of Vivo CapEx in 2011, which is expected to be around BRS2.7 billion.

Please be aware that the quarterly performance is going to be heavily backloaded as the market recovery in Spain takes longer to materialize and the bulk of the synergies in Vivo Telesp will start after the operational integration is completed.

In 2011 we will honor our commitments to deliver growing dividends. There are no key strategic transactions pending on the M&A front, and therefore the focus will be on acquiring additional spectrum in countries we are already present, to secure future growth.

We will continue analyzing value-creation opportunities, maintaining an active management of our non-core asset portfolio. And we expect to improve the leverage ratio.

Therefore, the Board will propose a dividend – the execution of the dividend of EUR1.60 in 2011, growing 14.3% year-on-year. As usually, the dividend will be paid in two tranches. Free cash flow payout is clearly below the 101%. With no doubt, we do reiterate our commitment to pay EUR1.75 in dividend next year.

Regional priorities are outlined on slide 28. First, there is one clear common priority for all of them – increase the value of the customer base and monetize the mobile broadband opportunity in a very profitable way.

By region, in Spain we will define our revenue leadership with a rational commercial approach focused on leveraging our integrated profile. While we aim to further broadband revenues, both fixed and mobile, and to capture the remaining growth opportunities in the corporate segment, where the demand for ICT service should recover strongly in 2011.

In Latin America, we will speed up the integration of fixed and mobile business to maximize the benefits of being integrated, maintaining at the same time a strong commercial momentum. In Europe, we aim to continue outperforming in the contract segment and to lead the mobile broadband monetization.

In summary, our high-class diversification, with a growing bias toward emerging markets and integrated operations, will allow us to deliver further top-line expansion and to prove we continue to generate a strong cash flow for our service products.

To recap, we have delivered a solid set of numbers at the Group level, leveraging our high-class diversification and our strong execution and skills that mitigate external challenges. Once again we have met year-on-year target for the eighth year in a row. We have also completed key strategic transactions in 2010, positioning us much better for the future and follow with the M&A passed in October 2009.

Finally, in 2011 we will continue to focus on capturing the growth opportunities of the digital world while maintaining premium returns. Thank you very much for your attention. I hope you will join us in our next Investor Day in London, where we will share with you the main challenges and opportunities for the industry, and we will provide an update on Telefónica’s strategy for the coming years.

Now we are all of us ready to take your questions. (End of transcript).

P.S. Case you are interested in the financial report published, please find it next.