Good morning. Thank you for standing by, and welcome to Telefónica's January-June 2023 Results Conference Call. At this time, all participants are in a 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 turn the call over to Mr. Adrian Zunzunegui, Global Director of Investor Relations. Please go ahead, sir.

Good morning, and welcome to Telefónica's conference call to discuss January-June 2023 results. I'm Adrian Zunzunegui from Investor Relations. Before proceeding, let me mention that the financial information contained in this document has been prepared under International Financial Reporting Standards as adopted by the European Union. This financial information is unaudited. This conference call and webcast, including the Q&A session, may contain forward-looking statements and information relating to the Telefónica Group. These statements may include financial or operating forecasts and estimates or statements regarding plans, objectives and expectations regarding different matters. All forward-looking statements involve risks and uncertainties that could cause the final developments and results to materially differ from those expressed or implied by such statements. We encourage you to review our publicly available disclosure documents filed with the relevant securities market regulators. If you don't have a copy of the relevant press release, please contact Telefónica's Investor Relations team in Madrid or London. Now let me turn the call over to our Chairman and CEO, Mr. Jose Maria Alvarez-Pallete. Jose Maria Alvarez-Pallete: Good morning, and welcome to Telefonica's second quarter results conference call. With me today are Angel Vila, Laura Abasolo, Eduardo Navarro and Lutz Schuler. As usual, we will first take you through the slides, and we'll then be happy to take your questions. During the second quarter, we continued to focus on our strategic objectives and delivered on our goals. We improved our position in all core markets. In Spain, retail revenue growth improved, and we progress towards OIBDA stabilization. In Brazil, FDA minus CapEx performance was outstanding with more than 30% annual growth, while revenue grew above inflation, thanks to a strong operational performance. In Germany, the first half results showed a strong performance and continued momentum with excellent progress in 5G deployment to 90% pop coverage in a normalized CapEx-to-sales envelope. Finally, in the U.K., we accelerated the network rollout in Ultra broadband and 5G, along with a sequential improvement in revenue and OIBDA growth based on synergies. We are executing above plan. We see opportunities from in-market consolidation in Spain and the U.K. over the next years. In Spain, copper switch off in April 2024 is an important milestone. In Brazil, we focus on growth and lower capital intensity and the B2C consistent opportunity. In Germany, good customer demanding of more for more tariffs underpins future growth ambitions. And in the U.K., we will benefit from synergy realization until 2026. Group-wise, Telefónica Tech continues to outgrow its market with solid revenue growth and continue to be a source of value while Telefónica Infra further develop our fiber vehicles and looks for consolidation opportunities. Telefónica span announced two important deals, the MOU network sharing agreement in Colombia with Tigo and the agreement with KKR and Intel Chile to create the largest neutral wholesale fiber co in Peru. 32 telcos have already joined open gateway initiative, and we are fostering the development of artificial intelligence-based use cases. Finally, from a regulatory point of view, the next months are key for fair share regulation and consolidation among others. Please turn to Slide 3 for our second quarter results that show increasingly profitable and sustainable growth. This is the fifth consecutive quarter of reported revenue growth, thanks to a strong commercial momentum in value accesses backed by increasing coverage of next-generation networks that helps us strengthening the relationship with our customers with sustained high NPS levels along these lines, service revenue grew 3.4% year-on-year, showing the pricing power we built in our business. B2B that grow 6.9% year-on-year remains a strong driver as well as we continue to outgrow both our peers and the markets in which we operate. The above also results into low churn levels with coupled with cost efficiencies and digitalization measures helps to improve organic OIBDA growth sequentially as much as 2.4 percentage points versus the last quarter to 3.5% year-on-year growth. This trend is visible in all core units. This operating leverage in the business is the main driver behind the higher margin contained capital intensity and active management on all free cash flow items, notably in our debt cost, helps operating performance to flow through free cash flow, which is almost twice what we generated in the first quarter of the year and grows year-on-year to €842 million for a total of €1.3 billion in the first six months of the year. To sum it up, improve EBITDA and free cash flow momentum. Moving to Slide 4 for a detailed financial update. In organic terms, revenue, OIBDA and OIBDA minus CapEx grew in the second quarter by 3.3%, 3.5% and 3.4%, respectively. In reported terms, revenue grew 0.9% year-on-year and EBITDA was stable despite the negative FX impact this quarter. Net income increased 44.5% in the second quarter of this year to €462 million, reaching €760 million in the first half of the year. Free cash flow reached €842 million in the quarter and €1.3 billion in the first half of the year, while June net financial debt declined 3.9% year-on-year to €27.5 billion. Moving to Slide 5. We show a strong first half of the year performance and the expected evolution of our business, thanks to a strong commercial and operating momentum give us confidence to upgrade our group guidance for this year. We are moving up from our previous guidance of low single-digit growth for both revenues and OIBDA to organic revenue year-on-year growth of around 4%, organic OIBDA year-on-year growth of around 3%, while we keep our CapEx to sales organic guidance and change at around 14%. This upgraded guidance at both revenues and OIBDA coupled with unchanged capital intensity levels make us extremely confident with free cash flow generation for the year. We expect to stand above latest consensus estimate and generate significantly more free cash flow in the second half of the year for a full free cash flow figure that excluding spectrum should not be far from the €4 billion mark. Furthermore, we will propose to the shareholders' meeting the adoption of the corresponding corporate resolutions for the cancellation of 1.4% of shares held as treasury stock at the 30th of June 2023. This, together with our confirmed €0.3 per share dividend implies a very attractive shareholder remuneration scheme, a consequence of our strong confidence in our free cash flow generation capacity. Turning to Slide 6. I would like to provide a glimpse of our progress across the pillars of ESG. On the environmental side, VMO2's net zero targets has been validated by the renowned science bank targets initiative, a validation received by Telefónica Group last year, the first in the sector to achieve it. We have also introduced take back reducing our recycling targets in line with the sector push to address the circularity of devices. With regard to the social pillar, we continue to connect more people directly and via network agreements to improve and extend coverage. We also helped to boost around 1.2 million people's employment prospects via our foundation. Within the Company, women now represent just over 32% of executives positioning us well on track to achieve our 2024 target of 33%. On the governance side, we highlight the award by Global Capital for our sustainable finance issuance, the launch of our ESG Academy to provide training for our employees and that we are protecting our customers from cyber attacks. I will now hand over to Angel to give you an overview of the progress across the operating business.

Thank you, Jose Maria. Moving to Slide 7, we review Telefónica Spain performance. Q2 results again confirmed a stronger commercial momentum and OIBDA trend improvement. Fixed broadband and contract customers simultaneously grew year-on-year for the first time since the pandemic. Our leading churn remained at historic lows and our industry-leading convergent ARPU kept growing year-on-year. MPS remains best-in-class and increased by 10 percentage points year-on-year to 48%. This allowed us to increase customer lifetime by 23% year-on-year to nine years. All this proves the leading position of Movistar in a competitive but rational market and the benefits of our strategy to focus on value share. As such, we continue to build on our smart bundling experience and premium assets. Recently, we have announced the update of our conversion portfolio, adding more value and the launch of a new over-the-top proposal, another step to further boost commercial activity and top line growth. Service revenues in the second quarter maintained momentum. While retail revenue year-on-year growth accelerated by 0.2 percentage points versus the first quarter on the back of tariff update improved commercial activity and sustained double-digit growth in IT revenues. OIBDA declined slow to minus 1% year-on-year, and it is progressively stabilizing, plus 0.7 percentage points improvement versus Q1, driven by lower content costs and network transformation efficiency all of which gives us confidence to continue aiming for stabilization at some point in the second half of the year. OIBDA minus CapEx margin remained at benchmark low levels despite a higher CapEx intensity in Q2, which will soften in the second half of the year. Moving to Germany on Slide 8, which continued its robust growth path, with another quarter of good operational action and sustained financial performance. The Company implemented its more for our strategy across all brands and portfolios, which has been well received by customers. There has been good commercial traction on the back of strong own brand momentum and normalized churn rates. Telefónica Deutschland made good progress with densification and further rollout of its 5G networks, all within a normalized CapEx envelope. As a result, 90% of 5G pop coverage target set for the year was already achieved in Q2. Organic revenue was up 4.4% year-on-year, while OIBDA grew 2.8% year-on-year, accelerating 1.1 percentage points quarter-on-quarter, supported by improved operational leverage mainly in mobile, which was partially offset by anticipated cost increases. Finally, the Company narrows the full year '23 revenue and OIBDA outlook to upper range of low single-digit growth on back of strong first half performance and continued momentum. We now move on to Slide 9 to the U.K. and our joint venture Virgin Media O2 that continues to focus on expanding the ultra-broadband network. We now cover a total of 16.4 million premises and with 5G connectivity now available in over 2,800 cities. Amidst the tough economic climate, fixed and mobile price rises were implemented during April and May and are starting to flow through to Q2 figures. O2 mobile contract churn showed improvement to 0.9%, driven by loyalty initiatives. Revenue growth accelerated to 6%, whilst OIBDA reached 3.7%, both sequentially improving underpinned by nextfiber construction revenue and the implementation of price increases. OIBDA performance reflects ongoing synergy realization which stands above plans and which will support future OIBDA growth. VMO2, within its ambitious better connections plan has announced a reduction in carbon emissions of 29% Scope 1 and 2 against the 2020 baseline and its net zero targets across the value chain were validated by SBTi. Moving to Brazil on Slide 10. We will continue to achieve very strong results despite OE deal amortization since Q2 '23. We have been consistently increasing our market share since the OI-Mobile acquisition reaching a mobile market share of 39% or 44% in the contract segment. The improvement of the accesses quality, coupled with upgrading and price increases result in 8% growth in mobile ARPU while contract churn continued its declining trend to 1% its lowest level ever. Revenue grew by 7.6% year-on-year in Q2 '23 while above inflation which together with cost discipline and the reduction in CapEx intensity allows us to deliver an exceptional plus 29.2% year-on-year growth in OIBDA minus CapEx in the first half of the year. Slide 11 reviews the performance of Telefónica Tech, our leading IT provider for B2B digitalization. T-TECH has completed a three-year cycle as a fully operational company, achieving a leading position as a provider of highly integrated solutions in EMEA and the Americas. Telefónica Tech is now entering a new cycle with a new organizational model. Businesses and portfolio have been unified to provide the best service and maximize the opportunity in all markets. Cloud will be the enabler of IoT, big data and AI and cybersecurity will be embedded in all the processes. This new operational model, together with the global extension of capabilities will create synergies and make Telefónica Tech more efficient and further increase its contribution as a key differential growth driver for Telefonica's B2B revenue. In Q2, Telefónica Tech performed the market again with 36% year-on-year revenue growth. In constant perimeter, revenue growth accelerated by 2 percentage points to 29% year-on-year. Our highly skilled team of over 6,000 professionals with close to 4,000 certifications in strategic partners technologies continue to be the key asset for Telefónica Tech to deliver a differentiated digitalization journey. Our visibility of future revenue is high, supported by an increase in last 12 months bookings of 35% year-on-year. On Slide 12, at Telefónica Infra, we crystallized the value of our assets and capabilities. First, we continue to execute and scale up our fiber plans, and have already passed 90 million premises in underserved and/or low density areas after incorporating PangeaCo in Peru. Telefónica Infra continues adding to Telefónica Group leading worldwide position in fiber-to-the-home deployment. A few weeks ago, Telefónica Hispam reached an agreement with KKR and Intel Peru and will hold 36%, 54% and 10% sticks, respectively, in the new fiber company. It will be the first nationwide open access wholesale fiber co with a target of passing 5.2 million premises at the end of 2026, doubling the current footprint. To highlight also that nextfiber in the U.K. is in zoom commercially live and consumers can already connect to nextfiber's hyper-fast network with the latest XGS-PON architecture. Telxius, the critical digital infrastructure with seven next-generation subsea cables built since 2018, posted the sixth consecutive quarter of organic OIBDA growth and expanded OIBDA margin by 1.7 percentage points to 53% in the first half. I will now hand it over to Laura, who will review spams operations and the group financial results.

Thank you, Angel. Moving to Telefónica Hispam. We continue with the execution of our strategy to reduce the exposure to the region and make the business more profitable. On June 12, Telefónica Colombia, signed an MOU with Millicom for sharing the mobile access network in Colombia. This agreement will help improve the quality of mobile services and lead to a more efficient use of resources. In addition, Telefónica Hispam reached an agreement with PangeaCo in Peru, as Angel mentioned before. Overall results were solid. Revenues were vitally stable year-on-year despite the tough competitive environment, while OIBDA continues to be affected by the growth of commercial costs driven by fiber commodity. However, we expect a better OIBDA trend in the next quarters, and we maintain our ambition to grow OIBDA minus CapEx in 2023. Turning to Slide 14. The Telefónica maintains about 80% of its debt into fixed rates, mainly in Europe, with an average life of 12.4 years, which places us in a comfortable position to face any market environment. We maintained a solid liquidity position of €21 million that together with the live maturity profile allows us to cover the maturities over the next three years. Meanwhile net financial debt declined around €28.6 billion in June 2022 to €27.5 billion in June 2023. Net debt-to-EBITDA ratio improved 0.79x to 2.62x in the same period. We have also contained our debt-related interest costs at 3.47%, thanks to active refinancing exercise undertaken along previous years and the solid position at fixing rates in strong currencies that allows immunization to the environment of raising interest rates. I will now hand back to Jose Maria, who will explain the completion of our transformation journey and wrap up. Jose Maria Alvarez-Pallete: Thank you, Laura. Now at the end of the presentation, let me talk about the transformation process we have gone through enabling us to deliver these strong results and allowing us to update the guidance and making us feel optimistic about the future. At Telefónica, we have always been at the forefront of technological change to ensure our success in the future. Change is on our DNA. We transform the way we serve our customers, turning our customers into next-generation infrastructure that transport more and more data with systems that store more and more information with massive processing capacity. We were early to invest in fiber and 5G are now the first scale telecom operator to shut down its copper network, but that is just the most visible technological change. We have virtualized and summarized our networks and used AI since several years ago. We are now at a stage where we can do real-time service customization and are able to offer network as a service and network slicing. Technology has helped us transform our revenue functions, and we now generate 75% of our revenues from ultra broadband connectivity and digital services, up from 46% in 2015. We made our organic revenue growth again for the last nine quarters. We grow in B2C, where we hit record lows in churn levels when, at the same time, NPS has never been higher, thanks to this new way to interact with customers. We build digital ecosystems to capture new revenue opportunities. We have outgrown both our peers and the market in B2B, and we have increased our wholesaling capacity. We have as well transformed our OpEx and CapEx functions. 83% of our processes are now digitized from 50% back in 2016. We have taken huge steps in virtualization, softwarization, automation towards zero touch networks. Capital intensity continues trending downwards from 16.7% back in 2016 to 40% at the end of 2023. Deployments are mostly behind and legacy shutdowns are mostly digested. With this technological transformation, we have positioned ourselves to full benefit from the next wave of growth and emerging business opportunities. We are ready for the future. Moving to Slide 16. We have further confidence in our ability to continue to deliver a strong and growing free cash flow generation in the coming years. To be precise, we are projecting free cash flow growth in the next three-year strategic plan, which we plan to detail in our Capital Markets Day to be held in Madrid on November 8, together with our Q3 results release. As said, free cash flow growth is the ambition behind this new plan on which we have been working since late last year, based on these three main pillars. Our company and sector vision, including a new company program based on growth, profitability and sustainability. With our customers at the center through technology and automation, we will continue to have a better understanding of our customers' needs and create better customer experiences, always aiming a long-term satisfaction with customer empathy at the core. Technology and AI to continue the transformation process of Telefónica. We have been using technology for years to shape our company for the future. We will continue doing so both internally and externally. With efficiency as the ultimate driver of decisions and a clear focus on free cash flow growth to increase financial flexibility, reduce leverage and reward shareholders. Key levers behind free cash flow growth are the following. Revenue growth, we are growing again our revenue since the second quarter of 2021 organically. We aim to maintain this strong momentum backed by a growing digital business, including tech and digital B2C ecosystem. The ARPU up policies across our B2C operations, our differential B2B growth and a new API-based ways to monetize next-generation networks to allow us to continue this path of profitable growth. And again, efficiency. We continue exploring sources of efficiency at both the OpEx and leases level, deriving from legacy decommissioning, AI-driven softwarization of networks and CRM, content optimization and others which we will share with you at our Capital Markets Day. We also aim to continue to optimize CapEx via legacy switch-offs, traffic optimization, AI softwarization sharing and others that should allow us to further reduce capital intensity. We are very much looking forward to beating all of you in our premises on November 8, where we will share all the details. To recap on Slide 17, Q2 posted good earnings momentum and continue to deliver value for our shareholders. First, we remain confident in our strategy and in our ability to maximize value for shareholders. Revenue and OIBDA grew organically and OIBDA grew sequentially on the back of our operating leverage. Second, we continue to build on our network leadership and remain on track to expand our fiber to the home and 5G coverage. Thanks to our pioneering in digitalization and AI applications, we are in the best position to increase efficiency and capture new opportunities such as open gateway. Free cash flow improved in the second quarter, and we expect this to continue along 2023. As such, we remain committed to maintain an investment-grade credit rating and to leverage reduction. Third, Guidance for 2023 is upgraded based on the strong revenue and OD momentum. We will amortize 1.4% of treasury stock, and we confirm our dividend for 2023. We expect this strong momentum to continue going forward. Save the date for the Capital Markets Day. We are calling for the next November 8, where we will present our new 2023-2026 strategic plan and company vision with a clear focus on growing free cash flow. We have been working on this plan for several months, and we are excited about what we are going -- what we are seeing. Full details will be shared then, but we have a solid starting point for a bright free cash flow outlook for the next years. Thank you very much for listening. We are now ready to take your questions.

[Operator Instructions] We will now take the first question from the line of Yemi Falana from Goldman Sachs. Please go ahead.

A couple of questions from me. Firstly, the Spanish macroeconomic picture is beginning to look uniquely strong in the European context with improving growth and low inflation, how does that impact how you're thinking about pricing into 2024? And then secondly, maybe a bit more big picture. Free cash flow remains strong, and I believe you're now targeting €4 billion this year, which looks ahead of consensus as far as I can tell, into the CMD, how are you thinking about rewarding shareholders alongside that free cash flow growth? And any kind of high-level and thought processes that would be super helpful.

The first one on the Spanish macro, we are seeing no impact of the current economic conditions on any significant way on our performance. You have seen that the first -- the second quarter or the first half of the year, we have had positive momentum commercially. We have had the highest NPS and lower churn in spite of what could be the highest price increases we have passed on to our customers historically. We see this commercial momentum, if anything, improving in the second quarter, and revenue clearly has been accelerating, OIBDA has been on track clearly towards the stabilization that we remain at or for this year on the B2B segment. We are also in particular, which could be -- or has been other moments in the past, feeling the impact of macroeconomic implications. We are seeing a very solid growth in the B2B business. So, we feel that our business is well adjusted to manage the evolving macro conditions, regarding potential pricing implications going forward in the next year or so, we will adjust to market conditions as we see it. Jose Maria Alvarez-Pallete: Taking your questions on the free cash flow, as we have been stating, we are starting from a solid position this year. And now we have been mentioning our vision of approaching the €4 billion mark this year, excluding spectrum. According to the job that we have been doing, we are projecting free cash flow growth for the next year, based on the lever that we have also shared with you, and we intend to use this free cash flow to keep reducing debt to gain financial flexibility and for sure, reward our shareholders. Details will be shared on the Capital Markets Day.

Thank you. We will now take the next question from the line of Keval Khiroya from Deutsche Bank. Please go ahead.

I have two, please. So firstly, Q2 showed modest conversion to ARPU growth in Spain, perhaps impacted by the temporary switch off of the football packages, should we expect conversion ARPU growth to accelerate in H2 versus the 1.5% growth you delivered in the first half? And then secondly, can you share with us how you're currently thinking about leverage? On Slide 16, you highlight reduced leverage and increased financial flexibility within the pillars where would you like leverage to trend to? And to what degree in organic actions help you get there? Jose Maria Alvarez-Pallete: Thank you, Keval, for your questions, regarding convergent ARPU which is €91.5 growth, 1.5% year-on-year in the second quarter, driven by the pricing update and fewer promotions, some other issues remain a drag as the lower out-of-bundle consumption, the growing O2 penetration and less advertising contribution. If you compare it quarter-on-quarter, which I think was your question, the trend in Q2 is lower than in Q1 due to the more evident decline of out-of-bundle revenues, some mixed erosion. But in particular, it's the end of the poor season. We see this every season when summer these connections take place at the end of the season. And most of the customers join again at the start of the season. We are aiming to see ARPU to continue having year-on-year growth in the second half.

Keval, on your question on leverage, as you know, we have a very strong public commitment to maintain an investment-grade credit rating. So leverage as Jose Maria said deleverage remains a priority for us. Our main driver is going to be free cash flow and not only is very strong and will be very strong this year, but we also see a growing trajectory for the coming years. That's based on a steady organic OIBDA improvement and a CapEx peak being definitely behind us. So you should expect that free cash flow to be the main revenue and also the most sustainable driver for deleverage. It's also very important to mention that we prioritize this balance sheet strength with a very prudent debt management that has allowed us to be very resilient in the current environment. We have a very strong liquidity position and a line maturity profile. And we are anticipating much of the liability management, and we really tap the markets at the right moment. On top of that, obviously, we will continue with a very strict capital allocation. And inorganically, we could also complement the deleverage impact because we have a top quality asset base, but the main driver is going to be that resilient and recurring free cash flow that you've seen in the past years and it won't be the exception for the coming years either.

Thank you. We will now take the next question from the line of Georgios Ierodiaconou from Citi. Please go ahead.

My first question is on free cash flow. And I know probably a lot more details at you to be given at the CMD. But you did highlight the potential for growth going forward. And Laura, you spoke about EBITDA and CapEx drivers. I was wondering if you can also give us a couple of insights as to how we should think about financial costs, which are coming down, even the rate is coming down, whether that is sustainable and what is behind it? Also, if you can come a bit about the recap in the U.K., which is a significant driver of your cash flow in '23, whether that is something we should expect going forward? And any comments on working capital as well will be greatly appreciated. And then my second question is about the U.K. market and I know Lutz addressed this at conference call the other day around the churn for Virgin being lower than expected in broadband, given the scale of the price increases. Just curious to follow up, given now we have more data points from some of your main competitors? It does look like the market as a whole might be shrinking or the alternate making more inroads perhaps on previous quarters. So just curious to hear your thoughts, which of the two explanations sounds more credible to you? And if it is a case of market growth stalling, whether there's any insights you can share on the timing of any recovery?

Thank you, Georgios for the question. On free cash flow, indeed, in Q2, it has improved. It has grown year-on-year, almost doubling the Q1 figure. And this year is not exception. Free cash flow is usually back-end loaded, and we see free cash flow growth accelerating through the end of the year. OIBDA minus CapEx will be according to our improved guidance. So that's going to be a main contributor. And below that, we will continue optimizing every line as we do. Working capital, which had a negative impact in the first half of the year will have a positive impact in throughout the year and very much into our commercial activities. On financial payments, you should expect us to optimize it as we have done in the past. I mean, the cost per se is one of the KPIs to follow no doubt, but we also have to find a balance between currency, the life of the debt, the liquidity position and the smooth path of maturity refinancing that we are always aiming for now. But I think you should expect us to keep on optimizing them as we have done in the past, we have 80% fixed. And what is variable is more in Hispam and Brazilian currencies, and that should start going down in terms of interest rate. So we feel comfortable with the management we have at the moment and that being able to continue. Regarding the U.K., no changes. We have guided the JV to stay at the upper end of a 4x to 5x net leverage range. It's a cash-generating business with organic and synergy-driven opportunities to grow. It has a strong current capital structure. The debt tenure is 6.5 years, excluding vendor finance and the cost of that debt is €4.7. So it's not forced either to go into the markets and in opportunity times. And it's going to have a growing EBITDA, which will lead to a natural deleverage. So as you know, that's going to be in the line. We said at the beginning of the year in that €4 billion reference we gave for free cash flow in 2023, the cash distributed to shareholders is anticipated to between £1.8 billion to £2 billion and that's included in our outlook for the free cash flow we provided this morning.

Yes, on your question regarding the U.K., Georgios, so a year ago, we had a growth of 7,000 customers in Q2 after a price rise of 6% or 8%. This year, we have a price rise of 13.8%, so more than double of it. And we are shrinking by 15,000. So the delta is 22,000 between the two years while doubling the price rise. So we attribute really the delta to the significantly higher price rise. And as you know, the impact of it, in our case, it has materialized entirely into Q2, right? Because customers are having a 30-day cancellation right and this obviously is not the case anymore from Q3 onwards. Having said that, when you look at gross adds, I think your observation is right. So the gross ad market is slightly smaller. But as I said in the Liberty Global call, we are actually doing better because we have expected a bit higher reaction on the price rise. So all in all, we are pretty pleased with the overall number. I hope that helps. Maybe last comment, Boardnet, well, right in areas where they are offering sales at very aggressive promotions. We see some of these impacts that our share on gross sales are lower in these markets. We see it significantly less on churn. And we think the reason for that is that the majority of our customers have more than one product, right? And as you know then, the convergence game is that people are not necessarily switching broadband if they don't have the night video product or mobile product.

Thank you. We will now take the next question from the line of David Wright from Bank of America. Please go ahead.

I guess just -- it's two follow-ons from Georgios, but just picking on the detail a bit. I mean when we think about this free cash flow you guys generating, a lot of it is borrowed, right, effectively from VMO two with the borrowing cost of debt, as you've just said, Laura, the high 4s. So I'm struggling to understand that contradiction with the need to delever, but borrowing at nearly 5% to O2 to support cash that you're paying out to investors. Does it not make more sense to reduce the leverage in O2 which is at a higher blended cost of debt? And also given that they arguably have a requirement to accelerate the CapEx to build fiber over time. So it just seems a contradiction to me that you're borrowing in the U.K. to pay out in Spain when you should be potentially looking to delever? And then I guess, Lutz, I'm also not understanding your answer. I thought the data that you've given us is only the Q2 customer losses, but I think a lot of those price rises in the U.K., the announcements we made in May. So there will be more customer losses following in Q3 were they not? You said it was the full impact in Q2, but I think you'll probably get more customer losses in Q3 as that price rise is phased in -- is that not the case, too. So just a couple of clarifications there, please.

David, thank you for your question. On the U.K. and the impact in free cash flow, it is a part of our free cash flow, no doubt, but not a significant part. I mean we are guiding on €4 billion, this will be about €1 billion. And you have seen the results of Germany or Brazil, or I mean, we have very strong core assets generating very resilient and recurring free cash flow. So that's the ballpark, as I said at the beginning and the main driver for deleveraging. As you rightly mentioned, I mean, obviously, the agreement we have among the shareholders on the leverage range was done in a different scenario in terms of interest rates. So definitely, we will reevaluate that. But it's worth mentioning the capital structure of the JV is prudent in terms of life, in terms of cost, in terms of not going in a rush, we were successfully financing ourselves in the first part of the year at good cost in the current scenario. But that's something that within our strategic capital allocation decision and free cash flow drivers, we will evaluate going forward. And more importantly, OIBDA is growing there, and they have a lot of synergies still as we haven't achieved the run rate yet, but we are in a very, very good trajectory and synergies are being delivered as expected. So that's -- but a very important thing, David, is that from a leverage perspective, you know SMP and also Moody's looks at that number as well, they account for the debt we have in the U.K. in a proportionate basis. So if we had a different mix between dividend and a less leveraged JV from a rating perspective, it will be very much neutral from Telefónica site so it is consistent, whether we continue with a four to five or we make any changes there, that should be agreed with our partner in the JV that will not affect our rating quality.

I just -- if I may add, it just seems perhaps a little imbalanced because you're effectively keeping your borrowing at 5% and your blended cost is 3.5. Liberty's objectives maybe are a little different because they're using the cash to buy back their shares, you're just paying out a dividend. So it just feels that every time you're boosting your cash flow with the distribution, you're actually blending your cost of debt upwards because you're borrowing that cash at 5%?

Arithmetically, you are right. And that's why we will definitely take a look at this. But so far, the JV is delivering. So far, the JV is committed to the dividend we had for the year, and obviously, that will be evaluated. But it was very important to mention that this is not the way to deleverage the Company. We are not deleveraging the Telefónica side throughout the dividends from the JV first. If we change the dynamic, we will have a less leveraged company from an S&P rating position. So we will be very neutral. And second, our core assets plus growing business units are delivering and they are the bulk of the free cash flow of the Telefónica Group.

Okay. And maybe Lutz, just clarify, please.

Yes. Sorry for the confusion, David. So I think we have to distinguish a bit here. So we have sent the price increase letters to customers in April and May. Customers do have then a 30-day extraordinary cancellation right. Therefore, all of this has happened in Q2. Now 60 days after the customer has received the price increase letter, the higher prices will be charged with the exception of customers who are still in their promotion period. So they get it then from the beginning of the promotion period. But they don't have another cancellation right when they are getting charged with higher prices. So therefore, both actually fits very well together. The churn has materialized out of it into Q2, while the vast majority of the revenue is coming in across H2. I hope that helps.

Thank you. We will now take the next question from the line of Mathieu Robilliard from Barclays. Please go ahead.

I had a question about the copper switch off, which obviously you are leading in terms of that process in Europe. And you've mentioned in the past that it could lift EBITDA margins by 1.8%. I was wondering what would be the impact on CapEx, if you could give us also a little bit of color there. And as a follow-up on the copper switch off, I realize that means that you get your hands on a lot of copper. And my understanding is that you're selling it. And I wanted to understand how material that was in terms of the contribution to EBITDA for the Spanish on the group business. And then a very last one on free cash flow, when you talk about the free cash flow, excluding spectrum, getting close to €4 billion. I just want to clarify how we should compare that to consensus because indeed, I think the latest consensus you published was for €3.3 billion of free cash flow. So that would be materially higher, but my understanding is that consensus includes spectrum. So I don't know if you can give a little bit of clarification here. What would be a like-for-like comparison? Jose Maria Alvarez-Pallete: Thank you, Mathieu, for your questions. I'll take the first one on the copper switch off. As you said in the past, we have quantified that we have already captured what an estimate of 3.8 percentage points in EBITDA margin from permanent deficiencies from corporate commission up to 2022. And we expect further improvements in the next few years, which we could quantify on at least an additional 1 percentage point on OIBDA. You were taking then the question, what does this imply to CapEx. We already clearly passed the CapEx peak in Spain. You have seen that the CapEx intensity of Spanish operation is well below the one in the group. And if I may, if you allow me not to spoil some of the messages of our new Capital Markets Day, we will be quantifying the target of CapEx going forward, which will lead to this free cash flow growth that Jose Maria was highlighting in his speech.

Mathieu, on your free cash flow question, you are right. When you mentioned the €3.3 billion, that is including spectrum with estimates that the market may have be around 200, 300, that's the consensus figures on spectrum. They can not disclose any of our own view on that. If we exclude the spectrum consensus is more between 3.6% to 3.7%. So, that's why we say we are extremely comfortable with that. And even we are going forward to €4 billion mark. Regarding the spectrum that could come, part of it is already flowing because it derives from previous auctions, the main one in Germany that you already know the figures around that. Spain already happened, so certain there, and it was a very -- was at the reserve price. Uruguay already happened, and it's being paid only 25% this year, and it was also at reserve price. And then we have uncertainty about the Ecuador concession renewal because of the political changes, it may be delayed and also Argentina, there's 3.5 gigahertz, but we are not sure if it will be end of this year or maybe a year from now. And in Colombia, we are asking for a very short period renewal on AWS linked to the agreement we are going to sign with Millicom because we need less spectrum in that scenario. And on those that are still pending. I'm not sure that will happen in 2023. I remind you that in Hispam, in general, but you have seen in Hispam, we are being very pragmatical and financial driven to spectrum. So that's going to be quite limited. But going to the first question, the €4 billion mark compares with 3.6% to 3.7%. So we will be out well above the consensus at this moment.

That's very clear. If I can come back to the question about the sale of copper, if that's materially in any way in terms of the contribution to the group EBITDA. Jose Maria Alvarez-Pallete: One, the efficiencies from the copper switch off and the sale mitigate expenditure effort of doing that. It's not significant in the numbers that we have been posting.

We have time for one last question, please.

We will now take the last question from the line of James Ratzer from New Street Research. Please go ahead.

Yes, good morning. Thank you very much indeed. So, two questions, please. The first one was, again, just coming back to the €4 billion free cash flow figure, which undoubtedly is very strong. And just looking at the Q2 results, it looks as if your financial payments are quite low. So my understanding is you're maybe generating now some interest on your cash balances. So I was wondering if you could give us any more guidance on not sort of interest you're actually now receiving on your cash balances. And also within the €4 billion, you might have to pay in Peru on the tax and interest charges. To what extent is adding your €4 billion figure. And then the second question I had, please, was just regarding the European recovery fund. I mean if something Vodafone, I think, talks a bit more about in Spain than you do but would just love to hear your thoughts on how you think that could potentially be a positive impact on your business and forward dividend?

Yes. On your question on free cash flow for the remainder of the year and financial payments, the financial debt related costs that has decreased versus the previous year. It's a combination of the mix of currencies and it's also that we are being, as you said, rewarded for our cash position. We are around and that's been part of that, but not only that. I mean, as I said, the fact that we had a very resilient 80% fixed, plus the 20% variable has also contributed and this is also the result of our very prudent financing policy and liability management over the years. But we are indeed being rewarded for the cash balances at market prices. With regards to Peru, we had already some payments included in this first half of the year. And going forward, it could be the case, and we are considering that within our outlook of reaching the €4 billion mark. But there's still a lot of uncertainty around that. We are waiting for the -- from the tax authorities on the final amount and settlement indication, some recent rulings are questioning the embedded interest charts in similar proceedings that would be good news for us. So we still need to wait and see. But we are having our own estimates on this. We are also working on different payment alternatives, functioning of payments and all of that is being embedded in our aim to reach that €4 billion mark. I cannot be more precise on that because it's confidential, it's work in progress, and we still have uncertainty around the different rulings and the actual payment dates.

Regarding the European recovery funds, the nonrefundable for Spain reached €77 billion to be executed around five years with €20 billion dedicated to digitalization. By the way, the period to execute is 2021 to 2026. So we still have significant horizon ahead of us. This focuses on three lines, public administration, SME digitalization and connectivity. And Telefónica is gradually securing a reasonable share of these funds in public administrations which could be in this period an opportunity of €5 billion. We are getting a relevant share mainly in central administration projects, such as defense and economy ministries projects. In SME, digitalization, which is an opportunity along this period of around €5 billion, the execution and maybe this is what other competitors are talking about execution. It's a bit low to date. But we're already capturing on the digital grid projects, we are capturing part of this opportunity. The connectivity opportunity, which is around €4 billion in this period, these are direct subsidies to engineer investments in fiber in 5G. We have already been awarded a significant amount, we are committed to extend the network deployment across the national territory. And then on 5G and mobile projects, there have been some limitations regarding high-risk vendors, which are not present in the Telefónica network. So those should be accessible to us and maybe they are not to some of the competitors that you were alluding to.

Of the €20 billion figure you mentioned there for the whole project, how much of that has actually been allocated so far and how much is still to come by 2026? Jose Maria Alvarez-Pallete: Let me see if I have this figure. I don't have that number here, but I'm sure IR will be able to give it to you, sorry. I don't have this number.

No problem. But conceptually, I mean it's still a relatively low numbers being allocated. -- hasn't and there's still more -- quite a bit more to come. Jose Maria Alvarez-Pallete: Yes. Yes. And in particular, in the SME, digitalization, this has been the slowest to execute. There have been awards, but the execution of those awards is flowing slower on the connectivity side. The awards have been substantial already and in the public administration continues ongoing, so -- but I would say that more than 3% or far more than 50% is still to come.

At this time, no further questions will be taken. Jose Maria Alvarez-Pallete: Thank you very much for your participation, and we certainly 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.

Telefonica's January-June 2023 results conference call is over. You may now disconnect your lines. Thank you.