Pablo Eguirón Vidarte - Telefonica SA José María Álvarez-Pallete López - Telefonica SA Ángel Vilá - Telefonica SA

Akhil Dattani - JPMorgan Securities Plc David Wright - Bank of America Mathieu Robilliard - Barclays Capital Securities Ltd. Mandeep Singh - Redburn (Europe) Ltd. Keval Khiroya - Deutsche Bank AG Giovanni Montalti - UBS Ltd. Joshua A. Mills - Goldman Sachs International Julio Arciniegas - RBC Capital Markets Justin Funnell - Credit Suisse Securities (Europe) Ltd. Luis Prota - Morgan Stanley SV SAU

Ladies and gentlemen, thank you for standing by, and welcome to the Telefónica's January to March 2017 Results Conference Call. At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session. As a reminder, today's conference is being recorded. I would now like to turn the call over to Mr. Pablo Eguirón, Head of Investor Relations. Please go ahead, sir. Pablo Eguirón Vidarte - Telefonica SA: Good morning, and welcome to Telefónica conference call to discuss January-March 2017 results. I'm Pablo Eguirón, Head of Investor Relations. Before proceeding, let me mention that financial information contained in this document related to the first quarter 2017 has been prepared under International Financial Reporting Standards as adopted by the European Union. This financial information is unaudited. 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 forecasts and estimates based on assumption or statements regarding plans, objectives and expectations that make reference to different matters. All forward-looking statements involve risks, uncertainties and contingencies, many of which are beyond the company's control and all of which may cause actual results, plans, objectives or expectations to differ materially from those expressed. 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 Investor Relations team in Madrid by dialing the following telephone number, 3491-482-8700. Now, let me turn the call over to our Chairman and CEO, José María Álvarez-Pallete. José María Álvarez-Pallete López - Telefonica SA: Thank you, Pablo. Good morning, and welcome to Telefónica's first quarter 2017 results conference call. With me today is Ángel Vilá, Chief Strategy and Finance Officer and during the Q&A session, you will have the opportunity to address us with any questions you may have. I'd like to begin this presentation by highlighting the continued execution of our strategic goals. First, business sustainability is reflected in the solid growth delivered both in reported and organic terms, namely operating cash flow, which accelerated across the board. Also, our focus on capturing high quality accesses and the encouraging response from More 4 More tariffs across markets is the basis for the expansion in customer lifetime value. Moreover, headlines in euros benefited from FX effect and earnings per share grew very robustly by 49%. Secondly, our transformation process results are visible in terms of cost reductions and synergies. In addition, with the introduction of AURA, we are adding a new type of relationship with our customers based on cognitive intelligence. And finally, we are strengthening our balance sheet through extending average debt life with financing at historical low rates and reducing leverage with our growing free cash flow generation and including the sale of the announced Telxius stake. As shown on slide 3, we are on track to meet 2017 guidance, as our Q1 figures are in line with expectations. With regard to shareholder remuneration, the second tranche of 2016 dividend, €0.2 per share in cash, will be paid on the 16th of June. And for 2017, we confirm the €0.4 per share in cash with the first tranche to be paid on the 14th of December and the second one in June 2018. These two factors and the organic deleverage through growing free cash flow will allow us to maintain a solid investment-grade rating. To review Telefónica key financials, please turn to slide number 4. Consolidated revenues topped €13.1 billion, up 5% nominally or 1.5% organically year-on-year. Underlying OIBDA grew 6.5% to just above €4.1 billion, while margin remained flat at 30.6%. Operating cash flow accelerated reported growth to 12.1%, 8.9% in organic terms. Please note the positive contribution of ForEx for the first time since the first quarter of 2015, adding between 4 percentage points and 5 percentage points to revenues and OIBDA performance, respectively. Moving to slide 5, growth ramp up from top to bottom, thanks to our management of non-operating results. As such, January to March net income reached almost €800 million, up 42% on last year's figure, while reported earnings per share were up 49%. Underlying EPS reached €0.18 per share. On slide 6, free cash flow generation reached almost €600 million, €530 million higher than in January-March 2016. As shown in the graph on the top right of the slide, operating cash flow growth explain 50% of the increase, while the working capital improvement and savings in financial payments and others more than compensated the higher cash taxes. This cash generation is reflected in the lower net debt increase compared with the last two years, that traditionally occurred during the first quarter of the year. Let me mention that Q1 is traditionally impacted by seasonal impacts. So, for the rest of the year, we expect free cash flow to improve. Please move to slide number 7. In the first quarter of the year, we have noted a significant recovery in reported trends in revenues returning to growth. In underlying OIBDA, we have accelerated the year-on-year variation by 0.5 percentage points, and in operating cash flow a stellar 11.2 percentage points. Please turn now to slide number 8 to see the different moving pieces affecting OIBDA evolution, above all the marked change in FX contribution, which this year added €191 million, and last year detracted €553 million. So, the currency impact is clearly fueling growth this quarter, contributing 5 percentage points to the OIBDA increase, mainly coming from the Brazilian real. Looking to the next quarter and taking into account current rates, FX will continue to be a tailwind in the second quarter. However, it is important to remember the positive organic delivery in markets such as Brazil, Argentina, Germany, and the UK. Moving to slide 9, quality of revenues is delivered again this quarter with growth of 1.7% of service revenues in organic terms, 26 basis points higher than total revenues and despite the negative effect of 110 basis points from regulation. By region, Hispanoamérica continued to be the main growth driver and by services, broadband and services beyond connectivity. Global efficiencies and merger synergies drove the group organic OIBDA growth. Margin was stable versus January-March 2016, reflecting expansion in Brazil and Germany, stability in Spain, and erosion in the UK and Hispam. On slide number 10, you can see the high cash conversion achieved, led by a strengthened operating leverage and lower CapEx intensity. Absolute operating cash flow level reached almost €2.5 billion and posted a very solid organic growth of 9%, balancing more than 20% in Hispam and Brazil respectively, with high-single digit in Spain and Germany, and a decline in the UK. I'd like to highlight the sequential acceleration in the year-on-year trends in all segments. Slide 11 shows the visible results of data monetization. LTE customer base increased 72% versus March 2016 and data usage by 58%, driving an ARPU uplift of around 11%. In Latam, increasing prepaid smartphone penetration up to 45%, and the successful implementation of recurring data plans continued to boost data prepaid ARPU, delivering a 20% uplift in this first quarter. As a consequence, mobile data revenues grew 13.5% year-on-year, representing 58% of mobile service revenues. On the other hand, data volumes continued to post high growth rates in both fixed and mobile networks, showing a huge monetization potential. On slide 12, you have overview on the promising growth expected from data monetization. In the speed and capacity wave, we are successfully capturing growth, thanks to the differential network we have, with fiber price premium versus DSL and higher ARPU uplift from LTE across the group as leading examples. This ARPU uplift then continues by adding service beyond connectivity, with TV being a clear driver. There are several initiatives to exploit this second wave across our markets. And finally, we are starting to work on what we see as the third wave, cognitive intelligence, which will further optimize customer experience, enhance operational efficiency, and open us up to the new optionality. In this context, we have new opportunity to expand our strategy reflected in the higher value and lower deal (11:35) for our customers. In digital services, on page 13, we continued to implement a distinctive approach. On the one hand, in video, the best premium content across our geographies continues to drive revenue growth. In addition, the recent contract signing in the first quarter for the international distribution of some of our original productions proved their high quality and our ambition to reach a wide audience, as well as providing a new way to monetize our investment. On the other hand, in adjacent services, we have, once again, strengthened our partnership with key players in security, reenforced our cloud offering for SMEs, and began to roll out several flagship machine-to-machine projects. In Telefónica Global Resources, we continued to work towards offering excellent connectivity, leveraged on our enhanced network, our main differential asset. In fact, our fiber and cable coverage of 40 million premises passed is one of the largest ultra-broadband networks worldwide, while our LTE coverage has reached 64% on average across our footprint. In parallel, we remain committed to the evolution of our network and the digitalization of our processes and systems leading to innovation, increased efficiencies and agility, and thus improving our customer experience. On slide 15, we show the solid performance of Telxius with a strong revenue growth up 5.4% year-on-year and OIBDA margin reaching 48.9%. With nearly 16,000 telecommunication towers in five countries and a leading network of fiber-optic cables that is being extended with the deployment of two new cables, Telxius is an excellent position – is in excellent position to capture the exponential growth in data traffic foreseen for the coming years. Now, I hand over to Ángel. Ángel Vilá - Telefonica SA: Thank you, José María. Let's move to slide 16. Q1 trading in Spain shows positive results trending towards high value as the mix of Fusión subscribers continues to improve. 21% of the customer base is already in high-value packages, Fusión+2 or above, 5 percentage points more than in December. It is also worth highlighting that the mobile base shows a robust positive growth of 5% and TV performance improved. This constructive dynamics prove a successful More 4 More strategy based on smart bundling combined with leading coverage and content. As such, Fusión ARPU remains stable quarter-on-quarter at €82, and its pace of growth was 4.4% year-on-year due to the different timing of tariff upgrades and promotions. On slide 17, we include the Zoom on the main drivers behind services revenue performance in Spain. The decline in Q1 year-on-year amounts to €46 million. It is mainly explained by lower wholesale revenues which declined 7.1% year-on-year or €35 million, impacted by lower football and a gradual loss of MVNO contracts. Both factors were already well flat in the past. In addition, consumer revenues post the year-on-year (15:46) growth this quarter because of a slower pace of improvement of Fusión revenues. The reason behind this is the different phasing of tariff upgrades applied to the bulk of the Fusión base, February 2016 versus April 2017. Therefore, note that service revenue trend should rebalance from Q2 based on a more comparable tariff calendar and again from Q3 once the wholesale football revenue impact has passed. In addition, I would like to highlight that the low levels of wholesale fiber penetration suggest a relevant upside in the wholesale business in the medium term. Turning to slide 18, Telefónica España starts the year delivering strong profitability and cash conversion, with both quarterly organic OIBDA and operating cash flow margins expanding year-on-year to 40% and 29%, respectively. The consistent capture of efficiency gains along with the material lower capital intensity leads to an impressive 8.3% growth in operating cash flow generation, despite a temporary tougher comparison of services revenues in Q1 as we explained before. Telefónica Deutschland, on slide number 19, maintained solid operational momentum in a dynamic environment focusing on stimulating data usage, while price pressure in non-premium showed further signs of easing. Strong growth in LTE customer base, usage and data traffic continued, with our unique positioning of O2 Free allowing to multiply data usage by 1.5 times versus prior tariff portfolio. On financials, mobile service revenue trend continued its sequential improvement when excluding regulatory effects. OIBDA posted a steady growth in Q1 with further margin expansion, balancing successful synergy capture, approximately €35 million of incremental savings, compensating commercial efforts. Finally, it is worth to highlight the operating cash flow increase of 7.7% versus Q1 2016. Turning to slide 20, the UK business shows growth in value accesses while at the same time customers continued to move towards higher tariffs leading to greater data consumption and LTE penetration. As such, total revenues grew 2.1% year-on-year, reflecting higher average subscriptions and out-of-bundle spend, growing MVNO contribution and an increase in value customer base. This revenue performance, coupled with ongoing cost efficiencies, drove OIBDA up 0.6%. On the other hand, operating cash flow fell 21% due to a 31% increase in CapEx, as we accelerate towards completing our LTE rollout. Moving to slide 21, our performance in Brazil shows that we continue to steadily growing and expanding profitability. High-value commercial activity is driving both solid accesses growth and sustained ARPU increase. Service revenues grew 2.1% year-on-year, with mobile service revenues up 5.1%. This performance and the reduction in OpEx on the successful execution of synergies drove the OIBDA and operating cash flow increase up by 7.5% and 21.6%, respectively. Currency evolution is very positive this quarter, and growth in reported figures is 30 percentage points higher than in organic terms. In Hispanoamérica, moving to slide 22, we continued to focus on quality growth. As such, mobile contract accesses growth and increased penetration of smartphones and LTE translated into double-digit mobile ARPU increase. At the same time, fixed accesses with fiber and cable connections grew by 53% year-on-year, enabling further uptick of higher quality fixed broadband and Pay TV services, with higher ARPU for both services. Turning to slide 23, we show how these commercial trends are driving solid revenue and OIBDA growth, up by more than 9% and 6% respectively, and how our operating cash flow is growing by 23.6%. This widespread growth is mainly driven by countries like Argentina, where tariff upgrades and growing volumes underpinned an outstanding performance; or Colombia, where our solid commercial activity is consistently delivering positive results. On the other hand, in countries like Mexico and Peru, intense competition continues to drive negative year-on-year changes. However, we saw some signs of improvement with ARPU trends stabilizing or even improving in both countries. Let me now turn to the financial metrics starting on slide 24. We continue to reduce our net debt-to-OIBDA ratio down to 2.91 times as of March 2017, mainly explained by healthy free cash flow generation in the quarter. Including the Telxius stake sale, net debt-to-OIBDA ratio declined to 2.84 times. Our cash flow generation reflects improved operational performance despite seasonal impact on working capital. All in all, free cash flow has been multiplied by 8.7 times compared to first quarter last year. We expect further deleverage progress throughout 2017, as we continue to deliver across our operations on top of inorganic measures. On slide 25, Telefónica continues reenforcing its balance sheet by issuing close to €7 billion year-to-date with an average debt life of above 16 years for new debt at an average cost of 3.3%. As a result, we have extended our average debt life above two years in the last three months to reach 8.3 years. We have built a healthier liquidity position at €24.6 billion which allows us to cover debt maturities for over the next two years, and we have taken advantage of historical low refinancing rates that together with exposure to short-term interest rates reduced interest payment costs 128 basis points year-on-year to 3.48%. I will now hand back to José María to recap. José María Álvarez-Pallete López - Telefonica SA: Thank you, Ángel. To recap, today's strong set of results allow us to advance in the execution of our sustainable growth strategy. As such, our distinctive operating cash flow growing strongly both on reported and organic basis and fuel the year-on-year expansion of free cash flow. Furthermore, we retain a benchmark profitability and our EPS grew very solidly. Finally, we continue to reinforce our balance sheet and we'll reiterate all our commitments. Thank you very much, and now, we are ready to take your questions.

Thank you. We will take our first question from Akhil Dattani from JPMorgan. Please go ahead, your line is now open. Akhil Dattani - JPMorgan Securities Plc: Hi, good morning. Thank you very much for taking the questions. And my first question is just to start with Spanish revenue performance. And as you'd already highlighted over the last couple of months, there was an expectation that the comps into Q1 would be tougher given the phasing of price increases. And obviously, you've discussed that on the call so far this morning. And you've mentioned that Q2 would improve as the price increases kick in in Q3 a bit further, as the wholesale benefits improve too. But could you maybe help us quantify how we should think about that? Can we think about revenue growth returning back to where you exited at in terms of service revenue growth at end of last year, or are there any other factors within that that we need to think about that might either make it better or worse than that level of performance? And then, secondly, in staying with Spain, we've seen in the press over the last couple of weeks various comments that you as a company may look to launch a new Fusión (26:32) brand. I just wondered if you could comment both in terms of the board (26:35) the competitive environment and in terms of those specific comments, whether that is something you're looking at, and how you think about I guess more broadly your KPI momentum in Spain going forward. Thanks a lot. José María Álvarez-Pallete López - Telefonica SA: Well, thanks for your question. In the revenues of Spain, let me try to explain a little bit further the evolution on this first quarter. This first quarter is highly conditioned by the wholesale revenues and that it should progressively fade away. If you review page 17 on the presentation, you will notice that B2C revenues were basically stable year-on-year in spite of a much tougher comparison as we have not have Fusión offer upgrade this quarter, but we did have them in the first quarter of 2016. Therefore, this should be improving along the year as we have already been putting in place a first upgrade of the offer in April. And remember that B2C accounts for 54% of total revenues. B2B was also stable and as we have been able to compensate declines in communication services with a double-digit increase in IT services. We expect B2B to be broadly stable along the year with some phasing events in some quarters due to specific contract renewal or signing. And we know that B2B accounts for 28% of our total revenues in Spain. Wholesale revenues were down year-on-year in the quarter, mainly due to the lack of football right resale of the La Liga right that we owned in 2016 and that we do not own anymore, and therefore, we do not resell them in 2017. And also the Yoigo contract is having some impact. Out of the total wholesale revenues, MVNOs on football represent just 80% of total wholesale revenues, while transport, interconnection, fixed broadband represents 82%. As we expect, the football rights effect to be progressively diluted along the year, namely from August onwards; and therefore, progressively, this wholesale revenue impact should be neutralized. In any case, remember that wholesale revenue accounts for 80% of total service revenue. As a result of all of that, we foresee a progressive recovery along the year. We do not guide on a specific year that is – and certainly we do not guide on a quarter-by-quarter basis. But we do foresee progressive recovery, progressive improvement along the year. And on your second question, we cannot confirm a second brand launching still. We analyze all alternatives of course. And we have second brands in some of these – for example, giffgaff in the UK, or others in Latin America. However, we foresee that we are very strong on the bundle strategy on the mid and high end, and we think that we should gain some traction on the low end. And therefore, we are certainly rethinking our strategy on the low-end Fusión customer base. Pablo Eguirón Vidarte - Telefonica SA: Thank you, Akhil. Next question, please.

Thank you. And our next question is coming from David Wright from Bank of America. Please go ahead, your line is now open. David Wright - Bank of America: Yeah. Thanks very much, guys. A couple of questions. Maybe I guess just to sort of push a little on Akhil's yesterday, by the end of the year, should we be expecting sort of revenue growth back to those 2016 levels in Spain, so around the full year? So, just trying to get a little more comfort there. And then, just secondly, in the UK, that CapEx spend is high again. As you mentioned, you are getting towards the end of your LTE rollout. Should we be see – should we start to see CapEx levels come down again in the UK, or is there a kind of an effort to continue to improve that network quality potentially ahead of any kind of IPO or even a minority stake sale? Thank you. José María Álvarez-Pallete López - Telefonica SA: Thanks for your question. Again, allow me to reiterate that we don't guide on regions. But having said that, we foresee – let me make a few reflections on the Spanish market. The market consolidation of the market and the More 4 More strategy is basically driving into upselling of the different customer base of the different players. In Q1 – in this first Q1 and the second quarter of this year, we are upgrading again all our services. And therefore, what we can extract out all that is that this is a very rational environment, we think we have differential assets, we have the largest fiber network in Europe and the strongest 4G coverage in Spain, and we think we have the best TV proposition as we are focused on value; and therefore, we also think that the fiber wholesale agreement would drive even more rationality into the market. So, overall, we think that all the trends that were valid at the end of 2016 are still here, in spite of the fact that we have been having this impact of wholesale revenues in Spain. And remember again, that B2C – and B2B accounts were basically more than 80% or roughly 80% of the revenues in Spain. And we see solid trends on that part of the business. So, we are pretty comfortable with the market environment. We are working in order to improve the current trends. And we think that all the reasons that we're behind the market in 2016 are still valid today. And in terms of CapEx in the UK, we foresee a quite similar CapEx to sale ratio in the UK in 2017 compared with 2016. We are improving our network significantly, and that's why we have decided to accelerate some CapEx deployment in the UK this quarter. We have reshaped our Beacon agreement with Vodafone in order to make it more flexible and both of us to have more agility. So, you should expect a similar level of CapEx over sales ratio in the UK this year compared with the previous year. David Wright - Bank of America: Thank you very much. Pablo Eguirón Vidarte - Telefonica SA: Thank you, David. Next question, please.

Thank you. And our next question is coming from Mathieu Robilliard from Barclays. Please go ahead, your line is now open. Mathieu Robilliard - Barclays Capital Securities Ltd.: Yes, good morning. Thank you for taking the question. My first question on Spain, sorry if I come back to that. Just looking at the KPIs, now I understand there's some upselling there, but clearly, there's been a bit of a deterioration in some of the broadband and line loss trends. And I was wondering if we should relate that to some sort of consumer fatigue about the price increases. So, the question would be, are you comfortable you can continue to do More 4 More initiatives without having a negative impact on KPIs going forward. Second question has to do with Brazil. Very strong numbers in Brazil published yesterday. We're not seeing a big recovery in top line, but obviously, very strong synergies. And I was wondering if you're expecting the macro to play a role for the rest of the year and to enable a further acceleration. The numbers you see in Brazil are already benefiting from the easier macro. I guess, the question really is, can the revenue accelerate in Brazil. Thank you. José María Álvarez-Pallete López - Telefonica SA: In terms of – thanks for your questions. In terms of Spain, of trading this quarter, first, allow me to mention something that it is important for us, our outstanding mobile contract this quarter. We have had record gross adds this quarter and we have to improve sequentially the quarter-on-quarter TV performance on a better IPTV. And we have had some solid growth on ultra-broadband. It is true that we have been having the impact of tariff upgrades and promo calendar. But overall, if you ask me which is the most significant indicator around the potential fatigue that you were mentioning in our customers in Spain, allow me to say that in spite of these price upgrades, churn levels remain significantly low. Churn level in mobile is 1.6% in contract; on fixed telephony, is 1.4%; on fixed broadband, is 1.6%; on fiber, is 1.3%; on ultra-broadband fiber, is 1.2%; and on Fusión, is 1.4%. And allow me to say that those level of churn which are, I would say, relatively positive compared to the benchmark of the industry and the sector, namely Europe, we have been having all those indicators at the same time that we have been having an expansion of Fusión ARPU of roughly 4%, which is significant in spite of the fact that we have not been having any tariff upgrade in this first quarter. And that means that the Fusión composition base, which is the most significant contributor to B2C revenues, has also been improving. We have been able to up-sale our customers. And now, you have that the high-end customers of Fusión accounts for 21%, which is 5 percentage points more than in the previous year, and the basic has declined this 5% with the low-end remaining stable basically. And that means that we have been able to up-sale our customers. In this quarter, ARPU growth, this up-selling has been diluted by the promo effect. But once the promo effect will be diluting progressively, you will see that being fostering ARPU growth. So, overall, we think that this rational strategy that we are following in the Spanish market is so far we have been able to execute it, at the same time, then controlling the churn effects and having significantly low levels of churn. And in terms of Brazil, the macroeconomic in Brazil – scenario in Brazil is certainly recovering on the back of a much more rational economic measures. The market consensus estimate for GDP expansion in this year is 0.4%, but we are already seeing some reports of some macroeconomic analysts showing a 3% to 4% GDP growth in 2018. And these opportunities (37:50) started to be perceived in our revenue trends, and namely on commercial activity, and certainly on the bad debt levels – on the provision of bad debt in the different companies. So, overall, yes, we see macro recovery already being a fact in Brazil. Yes, we do think that that should be translated into a much better customer environment, commercial environment. And as we do have the best network in Brazil and we do have the best brand and the best distribution network in Brazil, we feel that we should be able to capture this extra boost coming from the macroeconomic environment. And finally, allow me to say to the – you that as the economy improve, we could see a better evaluation on the prepaid segment in Brazil, which is still underperforming year-on-year and also on the B2B business for us. So, we see some further room for improvement in Brazil. And finally, just to conclude, this macroeconomic recovery, we think is here is solid, is here to stay, but we have been the only telecommunication company that has been able to grow even in the times of – when the GDP was declining 3%. So, we feel that we are prepared to take advantage of this better macroeconomic environment. Mathieu Robilliard - Barclays Capital Securities Ltd.: Thank you very much. Pablo Eguirón Vidarte - Telefonica SA: Thank you, Mathieu. Next question, please.

Thank you. Our next question is coming from Mandeep Singh from Redburn. Please go ahead, your line is now open. Mandeep Singh - Redburn (Europe) Ltd.: Thank you for taking the question. Apologies, but I want to come to Spain. I appreciate you don't give specific country or regional annual guidance, but we've had multiple moments in the past where returning Spain to revenue growth and sustainable 40% margins was a sort of watershed moment and it's been expressed by management on calls as sort of ambition as the sustainable trend. I mean, your message on that appears to be a bit softer. I mean, how should we think about Spain? Is this a business where revenues will grow sustainably and where 40% margins are sustainable? So, if you could just sort of just give us a little bit more in terms of what's the ambition around the Spanish business and the sustainability thereof. Thank you. José María Álvarez-Pallete López - Telefonica SA: Well, thanks for your question. I'm more than happy to be back to Spain. In terms of revenues, we expect recovery along the year with service revenue progressing toward a stabilization. Handset sales will not follow linear trends. I mean, in general terms, they are decreasing. Consumer trends will continue increasing. We have already executed tariff update for Fusión in April, and the preliminary figures that we have out of April and this first week of May allow us to say that revenue trends are back into the right direction. In terms of SMEs, rising competition is also eroding some part of the trend. But as we launched Fusión business last year, we have been able to stabilize that part of the business. And in the corporate segments, we are growing double digit in IT, more than compensating the comps. As I have mentioned already, wholesale revenues should – our suffering in the first quarter, and we'll be starting to ease away in the third and fourth quarter. Overall, again, competitive environment is rational. The More 4 More strategy is sustainable. We have the best network. We think we have the best brand. And therefore, all the trends that we were highlighting in the previous quarters should be here to stay. Mandeep Singh - Redburn (Europe) Ltd.: Can I just follow up briefly on margins if you don't mind, please? José María Álvarez-Pallete López - Telefonica SA: Yes, certainly. Sorry. In terms of margin, we have been able to absorb – I think it was a 10% increase in content cost year-on-year with a stable margin, thanks to the voluntary retirement plan that we put in place last year, efficiency in distribution channels, and also we should start to notice some effect in the next quarters, but namely in the next years, of the central office decommissioning. So, in terms of margins, what we can tell you is that we have been able to absorb the extra content cost with efficiencies in other chapters, namely in labor force. But we are also working – we have been also working on the distribution line, and we are also working on the network side because for the time we are running two networks, the analogical, the copper one and the fiber, we will be progressively decommissioning central switches. So, we feel that margin levels in Spain should be sustainable. Mandeep Singh - Redburn (Europe) Ltd.: Thank you. Pablo Eguirón Vidarte - Telefonica SA: Thank you, Mandeep. Next question, please.

And our next question is coming from Keval Khiroya from Deutsche Bank. Please go ahead, your line is now open. Keval Khiroya - Deutsche Bank AG: And thank you. I've got one question on Spain and one on Latam, please. And so, just on Spain, when we look at the non-Fusión revenues, it's still falling around 15% and the KPIs are quite weak within the – I understand obviously some of this is driven by the migration to Fusión, but the Fusión has themselves – perhaps a little bit lower than just everyone a (43:35) year ago. So, how should we think about the direction of non-Fusión revenues? Do you have any drivers to improve this trend or is this 15% decline quite realistic for what we should see for the rest of the year? And then, secondly, when we look at Latam, we see some positive elements both as you highlighted Peru and Chile to remain a little bit mixed. When do you expect Peru to improve? Is Entel still being very aggressive? Are there any signs of improvement at all beyond the quarter in terms of competitive backdrop in Chile and Peru? José María Álvarez-Pallete López - Telefonica SA: Well, thanks for your questions. You're right. Non-Fusión revenues declined 15% this quarter, while Fusión revenues increased by 9.3%. And remember that basically, Fusión revenues are twice larger than non-Fusión revenues. We have been having this quarter price upgrades on the non-Fusión revenues and, therefore, these effects should start to be reflected in the coming quarter. And we have been also improving our trends on the contract side, on the mobile side. So, yes, we are working on stabilizing or improving the trend on the non-Fusión revenues, and it is also true that we have to keep migrating customers from non-Fusión into Fusión. Also, allow me to mention that in the non-Fusión revenues, you have the DTS one-play revenues, and therefore, the migration of customers from pure satellite plate (45:09) into Fusión and also the migration to customers to other platform should be easing away in the next quarters. So, we expect that to improve in the next months. And in terms of Chile and Peru, those are different scenarios. Allow me to start by Chile. In Chile, we have been focusing on high-value segments and we have been having growth in contract and then in fiber-to-the-home despite very intense competition. We have a relatively strong position and we are improving on the high-end on the value customer side, and we are suffering on the low-end with the entrance of some new players. In terms of fixed, we have been having a solid performance of Pay TV. We have been growing 2% and on the fiber-to-the-home, we have been increasing by 22%. We have already in Chile more than 1.2 million home passed with fiber which accounts for 30% (46:20) of fixed broadband accesses. And fixed broadband ARPU has been growing. So, even though revenues have decelerated and have fell slightly due to this decrease in prepay and regulation, ex regulation, revenues in Chile would have increased. And then OIBDA is down 10% because we have been – having more commercial cost and some higher network expenses. So, overall in Chile, we see trends solid in the high-end of the market, we keep expanding our fiber and LTE network. And, therefore, we think that we need to hold on to our commercial position, but the overall underlying trends of the company are getting better. In Peru, the situation is different. In Peru, the situation is, we have a strong competition on both the high end and the low end of the market, is a very highly competitive environment, namely mobile – specifically mobile, while we have a positive traction on the fixed line. And we do not foresee that commercial intensity on the mobile side to be relieved in this year, neither in prepaid nor in postpaid. So, in Peru, it will take us longer to turn around the business on the mobile side. And allow me just to point out the evolution on the fixed line, which is growing, and we are also expanding significantly our ultra-broadband capabilities in Peru. So, different scenarios. In Chile, we think we can hold on and somehow improve our trends. In Peru, it's going to take us longer. Keval Khiroya - Deutsche Bank AG: That's clear. Thank you. Pablo Eguirón Vidarte - Telefonica SA: Thank you, Keval. Next question, please.

Thank you. And our next question is coming from Giovanni Montalti from UBS. Please go ahead. Your line is now open. Giovanni Montalti - UBS Ltd.: Hello. Good morning. If I can, on the cost base in Spain, looking at service revenues, so let's say excluding the mobile handset portion and, let's say, subtracting OIBDA before one-off. It looks like your cost base in Spain, let's say, the one linked to the recurring business is down around 1%. I understand and I do respect the fact you don't want to give indications on a regional basis, but is it reasonable to assume that the improvement that you have been indicating in terms of top line for the coming quarters will, let's say, be followed also by the OpEx base? Shall we, let's say, expect the evolution of the OpEx base to continue to be, let's say, on the downside as it was in Q1 and eventually to improve this decline as well. And on the wholesale revenues, if I may, you again have been guiding for an improvement going forward. When do you think it could be reasonable to start thinking about the wholesale revenues as a potential source of growth, not just stabilization? I mean, once you get rid of the content portion of the revenues, once we get rid of the impact from the lots of the MVNOs contracts, the agreements you have reached with Vodafone and the improvement in the price mix that should derive from the fiber wholesale connections could make this revenue line a source of growth actually. Is this something you would share some comments with us? Thank you. José María Álvarez-Pallete López - Telefonica SA: Well, thanks for your questions. On the cost basis of Spain and the way going forward, allow me just to focus for the time being in three chapters, although we are working on some others. In terms of the voluntary retirement plan, as you know, we booked a provision in 2015, the extension of plan in 2016. We have been booked an extra provision this quarter because we have been having more people subscribing to the plan than we were anticipating at the end of the year. That means that the acceptance so far is roughly more than 4,200, of which 228 (50:53) left in this first quarter, which means basically is that the run rate of those savings should be around €480 million since 2019 and, therefore, we have still some effect to flow through the organic P&L of Telefónica España. We think the level of this should be in the neighborhood of more than €350 million in 2017, another €100 million in 2019, and an extra €8 million coming from the higher acceptance. So, still a way to go to have more impact on efficiency on the labor force in Spain. And then on the distribution channels, we have been closing stores for the last years. We have been closing basically close to 400 stores, namely 383, if I remember correctly. 41 shops were closed in this first quarter. And our online sales are also growing. So, in terms of distribution channel, we should have also some positive effects flowing through the P&L in the next quarters. And then finally, on central office closure, we are the first company in the world to shut down 38 central switches. And we target to close more than 2,000 in the next years. You know that according to regulation, we need to give a one-year pre-notice in places where we don't have unbundling of the local access. And we have already announced more than 200 central offices closure. And, therefore, we should expect more efficiency growth. And in terms of the – on the places where we have unbundling of the local access, we need to have (52:45) of five years. And we have been already pre-announcing more than 30 central switches. So, you will see that us also acting very heavily on the network side of the cost in Spain going forward. And then we are also trying to land down toward (53:01) the cognitive intelligence impacts on the cost basis out of AURA. We will try to give you more color out of that in the next quarters. And then on your wholesale revenues question, we should have negative effects coming from this TV thing that should be fading away in the third and fourth quarter, then we'll have the migration of the Pepephone and Yoigo into their new owners' network which would be in 2017 and 2018. But allow me to say that MVNOs and TV represent just 18% – 18%, 1-8% – of wholesale revenues, while other wholesale revenues, namely the ones coming from the network, represents the bulk of wholesale revenues. And out of that, we have the unbundling of the local access of the traditional copper lines that progressively would be somehow migrated into fiber accesses. And the rental access of fiber is significantly higher than the rental access of the copper line. And then we are also ready and having conversation with different players to extend wholesale agreements into our fiber network. So, allow me now to be very specific because we don't guide on the different countries and certainly not on the different segments, but we think that there is room to significantly improve the wholesale trends because of the strong network that we own in Spain. Giovanni Montalti - UBS Ltd.: Thank you very much. Pablo Eguirón Vidarte - Telefonica SA: Thank you, Giovanni. Next question, please?

Thank you. And our next question is coming from Joshua Mills from Goldman Sachs. Please go ahead. Your line is now open. Joshua A. Mills - Goldman Sachs International: Thank you. Two questions from me. First on Hispam, so first is Q1 last year, obviously, the CapEx-to-sales ratio has come down and actually in part that's actually due to help from the FX effect. So, my question is, what level of CapEx to sales do you see as sustainable longer term, assuming a kind of stable FX rate in that Hispam region ex-Brazil? And secondly, coming back to Spain. We're talking about More 4 More strategies from the main operators, but you are seeing some extension of commercial periods, I'm looking here at Orange, Jazztel and MÁSMÓVIL, is still – it's being quite competitive. So, have you seen any change in competitive intensity over the last quarter or the slowdown in net adds really due to a slightly larger price increase versus this time last year? Thank you. José María Álvarez-Pallete López - Telefonica SA: I would start by the second one. Thanks for your questions. I will start for the second one, and then move on to the Hispam, if you allow me. If we do see signs of fatigue again on the More 4 More strategy, the answer is so far no. Certainly, not on the mid to high end. We see some intensity on the low end because of the MÁSMÓVIL, namely the MÁSMÓVIL moves. But, again, because of the structure of the MÁSMÓVIL capital structure, the room for significantly deteriorating the current environment in Spain is, in our opinion, limited. So, it is true that we have some more intensity – slight more intensity in these last months. But it is also true that it is certainly below the levels that could be anticipated. So, on the low end of the market, a little bit of more tension. We are rethinking our strategy there. But certainly, on the high and mid end, we think that the More 4 More strategy is pretty solid. So, overall, I think that in our opinion, you should not expect the Spanish market to deteriorate in the next quarter, the competitive environment. And in terms of CapEx over sales in Hispam, it is roughly around 1 percentage point lower than in 2016, which is in line with the group guidance on CapEx over sales, which would be roughly 1 percentage point down compared with the previous year. We are already covering more than 50% – I think it's 56% of the total Latin American territory with LTE, and we are already doing significantly improvements in our fiber-to-the-home ultra-broadband networks in the countries in which we have wireline operations. So, we're pretty comfortable with the levels of CapEx that we have in Hispam. We do not see significant increase. And in the mid to long term, CapEx intensity in the whole of the group should be heading down. Pablo Eguirón Vidarte - Telefonica SA: Thank you, Josh. Next question, please.

Thank you. And we'll take our next question from Julio Arciniegas from RBC. Please go ahead. Your line is now open. Julio Arciniegas - RBC Capital Markets: Yes. Hello, everyone. Thanks for taking my question. Coming back to Spain, it's true that the high-end proportion of customers has increased this quarter to 21, right? But I can also see that the proportion of the low-end customers has also increased. Do you see some risk that the upside from higher-end customers could be reduced by the increase in low-end customers now that you are actually thinking in pushing maybe further the low end of the market? That's my first question. And my second question is regarding Latin America. From the 5 million home passed in Hispam, do you include in this figure VDCL (59:17) technology and if you do, approximately, roughly, what is that figure? And additionally, some of your competitors, they have been saying that, for example, the deployment of cable and fiber, let's say, in Colombia which is a big market, is roughly $100. Why doesn't Telefónica, considering that the cost is actually similar to Spain, decide to basically move from a copper network to a cable fiber network in Colombia? Thank you. José María Álvarez-Pallete López - Telefonica SA: To answer your question, taking the first one on Spain. Out of the Fusión total customer base, the high end has increased 5 percentage points. The mid end has decreased 5 percentage points. We are rounding. And then the low end has increased 1 percentage point because we are also doing some promos and, therefore, we are also incorporating some new customers, which is the way going forward because once we have incorporated new customers, we try to upsell then and to encouraging again through promos to move outwards (01:00:36) on the trend. So, we are not detecting a significantly downward trend on the customer base of Fusión. Rather, the – I would say, the opposite. We are upselling our customers and through the different promos, we are also being able to increase their average ARPU. And you should expect us to keep doing the same. And it's something to be a little bit more active on the low end. And in terms of Hispam, we are pretty pragmatical with the technological evolution. In some places where it is more effective and where the foreseeable average ARPU of the different customer layers in some regions could not justify deploying fiber. We are increasing our copper capabilities with fiber-to-the-cabinet and, therefore, we are mixing technologies in Latin America. The reasons for moving from one deployment to other, it's directly depending on the foreseeable ARPU that we foresee out of the customers and the data needs that are foreseeable in the different regions. So, you should expect us to keep going into that direction. And remember that we have the largest fiber, I mean, ultra-broadband network in Latin America, overall. And then, on Colombia, just to focus on Colombia, we are advancing significantly. We are advancing significantly namely in fiber deployment. We have connected more than 33,000 homes this quarter, and we have passed 360,000 homes in Colombia. So, pretty active. And sorry, but we do not disclose the average cost per connection. Pablo Eguirón Vidarte - Telefonica SA: Thank you, Julio. Julio Arciniegas - RBC Capital Markets: May I follow up? Are these homes in Colombia VDCL (01:02:36) or fiber? José María Álvarez-Pallete López - Telefonica SA: Again, it's a mix of both. A mix of both. Pablo Eguirón Vidarte - Telefonica SA: Thank you, Julio. Julio Arciniegas - RBC Capital Markets: Okay. Thank you very much. Pablo Eguirón Vidarte - Telefonica SA: Next question, please?

Thank you. And we'll take our next question from Justin Funnell from Credit Suisse. Please go ahead. Your line is now open. Justin Funnell from Credit Suisse, your line is now open. Please go ahead, proceed with your question Justin Funnell - Credit Suisse Securities (Europe) Ltd.: Yeah. Thank you. Can you hear me now? Just two questions. Just follow-up questions. In Mexico, there's a plan to roll out a national wireless network backed by the governments, and there seems to be a similar plan in Argentina, although it's less developed. I just wondered what your thinking was about these. I mean, could you actually shift towards perhaps being an MVNO in these markets and perhaps investors' capital would make better returns. And then secondly, in Spain, again, the regulators made a few comments, made it clear that you've got a few concerns about the level to which prices have risen in Spain. Is that going to affect your strategy on how you put through price increases going forward? Thank you. José María Álvarez-Pallete López - Telefonica SA: Well, thanks for your question. On the first one, allow me to make a more general reflection on the environment in Latin America. I would say that all the players in Latin America, including ourselves certainly much more open to network sharing and, therefore, you will see – and, in fact, we have already been doing some network sharing, I would say, bold network sharing agreements namely with Millicom in Colombia, and we're analyzing network sharing agreements – I would say, significant network sharing agreements with different players – with all the players in Latin America. So, I think that all of us being much more rational in terms of CapEx deployment is something that you should score into your models. Again, it's similar to the theme that we have done in Spain with the fiber network with Vodafone. So, we will analyze every single possibility of taking advantage of further deployments, but we will need to run the different numbers. I'm not sure, I mean about the Red Compartida in Mexico, I would not comment because it's on an earlier stage. But we see opportunities of doing different things with different players in Mexico, not just with Red Compartida. As I was mentioning before, all the players are now open – much more open-minded to that. So, the answer is, should you consider us running in some regions of Latin America on other's network? That's perfectly possible. And in terms of Spain, well, the regulator, in terms of the More 4 More strategy, that does not imply unitary price increases. In fact, if you divide the prices of Spain per gig or per megabit per second, including the TV content, price per unit keeps declining in Spain. So, I don't think that this should be a concern going forward, especially at a time that Spain has become the leading country in Europe in terms of ultra-broadband deployment. There is more fiber in Spain than in the sum of the UK, Germany, France and Italy together. And this is something that should be protected because we can go even further. There is roughly a 65% household coverage penetration of fiber in Spain, this is far beyond any other country in Europe. So, we think that this More 4 More strategy is providing significantly value to our customers. In fact, churn levels are low and have not been significantly impacted by these price upgrades. So, we do not feel that there is any need to be concerned around that in Spain going forward, but of course, we will monitor. Another factor that should be taken into consideration is the prices that are going to be proposed by the regulator in Spain for the local NEBA, which is also going to be conditioning our further deployments of fiber in Spain. Justin Funnell - Credit Suisse Securities (Europe) Ltd.: Okay. Thank you. Pablo Eguirón Vidarte - Telefonica SA: Thank you, Justin. We have time for just one final question, please.

Thank you. And our last question comes from Luis Prota from Morgan Stanley. Please go ahead. Your line is now open. Luis Prota - Morgan Stanley SV SAU: Yes. Thank you. Two questions, please. First is a follow-up on the wholesale revenues on the agreement with Vodafone. I would like you to elaborate, if you don't mind, on the rationale and the benefits for Telefónica of giving access to Vodafone to the non-regulated and regulated areas. And also, I would like to get your thoughts on the potential for Orange to join this agreement. They have just announced accelerating the fiber deployment, but whether you think that they eventually will join this wholesale deal. And the second question is on whether you have any update on how to recapitalize Telefónica Colombia. Thank you. José María Álvarez-Pallete López - Telefonica SA: Well, thanks, Luis. I'm very happy that Ángel has got a question, I mean, in this conference call. On the wholesale agreement with Vodafone, the rationale behind that. Well, you know that there are geographical segmentation in Spain. And therefore, in non-regulated areas, the price of the NEBA access is liberalized, so to say, and in regulated areas, it's going to be liberalized. We think that having reaching an agreement with Vodafone allow us to set the standard for those two benchmarks. And I think that it makes little sense not to take advantage of the fact that we can have extra revenues coming from this very intensive capital deployment effort in Spain, at a time that in some of the regions, that would not be a competitive advantage, and in other's regions, in the regulated regions, we'll have to give them access anyhow. So, we think it's better to negotiate that directly on commercial terms with them and, therefore, setting the level of the precedent and, therefore, giving some sign of rationalization also on CapEx deployment in the Spanish markets. So, you should include that on the capital optimization of the different players, but also (01:09:58) on strategic terms. Are we ready to take others on board? The answer is yes. This is not an exclusive agreement, it couldn't be. And, therefore, yes, and we are having conversation with other players. Ángel Vilá - Telefonica SA: Hi, Luis. Well, with respect to recapitalization of Telefónica Colombia, we are making progress with the Colombian government. They need to go through a very specific process that includes some government action, advisors have to hired, which they have been, and we are making progress in those talks, which would lead to a potential recapitalization of the company and repayment of this type of liability. Luis Prota - Morgan Stanley SV SAU: Okay. Thank you.

Thank you. And at this time, no further questions will be taken. José María Álvarez-Pallete López - Telefonica SA: (01:10:57) much for your participation. We certainly do hope that we have provided some useful insights for you. Should you still have further questions, we kindly ask you to contact our Investor Relations department. Good morning, and thank you.

Telefónica's January to March 2017 results conference call is over. You may now disconnect your lines. Thank you.