Telefonica SA

MAD:TEF

Earnings Call Transcript 2022-Q1

[Operator]

Good morning. Thank you for standing by, and welcome to Telefónica's January to March 2022 Results Conference Call. [Operator Instructions]. As a reminder, today's conference is being recorded.

I would now like to turn the call over to Mr. Adrián Zunzunegui, Global Director of Investor Relations. Please go ahead, sir.

[Adrián Zunzunegui, executive]

Thank you. Good morning, and welcome to Telefónica's conference call to discuss January-March 2022 results. I'm Adrián 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 and the slides, please contact Telefónica's Investor Relations team in Madrid or London.

Now let me turn the call over to our Chief Operating Officer, Mr. Ángel Vilá.

[Ángel Vilá Boix, executive]

Thank you, Adrián. Good morning, everybody, and welcome to Telefónica's first quarter results conference call. With me today are Laura Abasolo, Eduardo Navarro and Lutz Schüler. As usual, we will first walk you through the slides, and we'll then be happy to take any questions.

I would like to start highlighting our clear strategic execution while delivering growth in Q1 '22. First, we reported another quarter of sustainable growth, which accelerated sequentially and for the first time in many quarters, supported by local currency appreciation. Our new operating model is also adding digital capabilities and efficiency levers. All this allowed us to manage inflationary pressures extremely well this quarter.

Second, we reinforced our position in our core markets. In Spain, we launched last week, miMovistar, the new portfolio through which B2C customers will be able to choose the products and services they need in a simple, customizable and flexible way. We also signed a 5-year agreement with DAZN to secure the highly valuable La Liga content with a 15% net cost deflation.

In Brazil, we gained further scale after closing the acquisition of the Oi mobile assets and expect to capture synergies of BRL 5.4 billion. This game-changer deal happens at a time when service revenue growth accelerates and legacy exposure is reducing. In the U.K., synergies are starting to kick in, we'll remain in the gigabit leader in the market. And Germany, further enhanced its network quality, supporting its growth and profitability momentum.

And third, we continue to build optionality in many areas. In Telefónica Infra, we are having very constructive conversations with many investors for the creation of Spain and U.K. fiber vehicles. While Telefónica Tech is completing the build-out of a fast-growing business with the acquisition of BE-terna to reinforce capabilities in the DACH region. In Hispam, we continue moderating our exposure whilst increasing profitability with optionality increasing. And of course, the prospects in market consolidation in Spain will bring benefits for customers and operators alike.

Turning to Slide 3. You will see we have had a strong start to the year with sustained growth momentum. We are delivering another quarter of sustainable revenue growth together with cost efficiencies, which allowed to manage inflationary pressures. All this was supported by currency appreciation.

In the first quarter, revenue grew by 3.2% year-on-year organically with robust growth across all business lines.

Despite raising inflation, OIBDA growth accelerated to 2.1% year-on-year on an organic basis with a broadly stable margin. We continue to prioritize investments in growth, managing to achieve a benchmark 12% of organic CapEx to sales in Q1. Free cash flow was strong at EUR 513 million, an increase of EUR 480 million versus Q1 2021. Net debt stood at EUR 27.5 billion, increasing versus December '21, primarily due to FX appreciation, which in contrast, has been extremely supportive in growth terms.

On Slide 4, we have set out the key financial metrics for the quarter. In organic terms and once aggregating 50% of VMO2. Revenues grew 3.2% year-on-year, OIBDA by 2.1% and OIBDA minus CapEx by 6.4%, a clear improvement from previous quarters. Reported revenues and OIBDA declined year-on-year mainly due to changes in the perimeter of consolidation that deducts some 15 percentage points to reported growth. This more than offset the positive FX impact of EUR 242 million on revenues, EUR 95 million on OIBDA and EUR 53 million on free cash flow in Q1 '22, mainly due to depreciation of the Brazilian real.

At the net debt level, FX had a negative impact of EUR 1.3 billion. And as stated in the previous slide, free cash flow surpassed the EUR 500 million mark in Q1 '22 and net debt declined 23.3% year-on-year to EUR 27.5 billion.

On Slide 5, you will see that Telefónica stands stronger under current uncertain times. Despite increased inflationary pressure in other regions, group revenues and OIBDA growth improved sequentially in all countries of operation. Furthermore, in reported euro terms, top line is growing double digit in Brazil and Hispam. Mid-single digit in Germany and the U.K., whilst improving growth in Spain. Furthermore, we achieved double-digit OIBDA growth in reported terms in Brazil and mid- to high single-digit OIBDA growth in Hispam, Germany and the U.K.

As much as 80% of our revenue base has tariff mechanisms that protect us against inflation, including inflation-linked tariffs in most of our LatAm exposure. On top, we are adding revenue growth from T.Tech and the new digital ecosystems in our core units. We believe that first quarter results have proven that we have a more efficient cost base than most of our peers. Our personnel cost base represents 14% of revenue driven by consistent efficiency gains. Through our focus on digitalization and fiber, we'll reduce expenses and have already a significantly lower exposure to legacy networks than our peers. Finally, a benchmark setting CapEx of up to 15% of revenues provides an additional protection under current uncertain times.

Moving to Slide 6. We are well on track to achieve our 2022 outlook. As you might remember, we provided our guidance the day the Ukraine war started. And since then, the macroeconomic outlook has significantly worsened. Despite this high uncertainty and increasing inflationary pressures, we delivered Q1 results within our guidance, which we reconfirm. We even delivered revenue growth at the high end of our guidance range.

In addition to Q1 OIBDA growth in line with our guidance, we see tailwinds in the second half of the year. While inflationary pressure should be more evident in first half, such as energy cost in Spain, we will continue to accelerate efficiencies in the business to offset these pressures as best we can. We will benefit from the workforce reduction and lower content costs in Spain later in the year. And synergy realization in the U.K. and Brazil will add to OIBDA growth as they ramp through the year.

On shareholder remuneration, we canceled 139 million shares, and we will be paying EUR 0.15 per share, the second tranche of the '21 dividend through a voluntary scrip dividend next year. As for the 2022 dividend, EUR 0.15 per share will be paid in December '22 and another EUR 0.15 per share in June '23, both in cash.

On Slide 7, Telefónica demonstrates its commitment to sustainability by setting ambitious goals across the 3 main pillars of ESG. Our key environmental objectives include becoming net-zero by 2040 across the business and our value chain, with an interim target of Scopes 1 and 2 in Brazil, Germany and Spain by 2025, and zero-waste by 2030.

We are working towards these goals with initiatives such as the Telefónica Forest, which helps us reduce our carbon footprint and the Eco Rating scheme now available in all our markets, which is enabling our customers to make environmentally informed decisions.

On the social side, we have set tangible targets to bridge the digital device and to progress in our human capital management. We are continuing to roll out fiber and mobile connectivity to underserved areas. This includes the target to reach 90% to 97% rural mobile broadband coverage by 2024 in Brazil, Germany and Spain. We are also ensuring equal opportunities in the workplace through collective agreements like the Equality Plans just signed in Spain.

Finally, we wish to lead by example with solid objectives in governance. In the first quarter, we have remained on track with our sustainable financing commitments and continue to lead in transparency as verified by Transparency International's latest report on IBEX-35 companies. These are just some examples of how Telefónica is moving forward, working to build a greener, more inclusive unfettered world.

Moving now to Slide 8, where we show the results of our domestic market in Spain. In Q1, Telefónica Spain improved its commercial performance following a tariff upgrade in February. We successfully reduced convergent churn to its lowest level in 5 years, while simultaneously increasing convergent ARPU by 1.5% year-on-year to EUR 91.1. Furthermore, our NPS reached record levels of 43%, the highest ever, delivering proof points of our customer-centric strategy.

Throughout the quarter, we continued to enhance our services. miMovistar customers will now have access to all La Liga matches for next 5 seasons, thanks to our new agreement with DAZN. Importantly, the net cost for Telefónica to access all La Liga games is 15% lower than in the previous cycle. Furthermore, last week, we announced that our customers will be able to enjoy a new convergent portfolio miMovistar that is more flexible and complete with new added services beyond connectivity.

In Q1 '22, year-on-year revenue growth accelerated due to handset and service revenues with double-digit growth in IT sales. The decline in OIBDA was mainly due to the significant increase in the cost of energy and the higher growth in lower-margin handset revenue partially offset by the generation of efficiencies. We nevertheless expect the peak energy cost impact to be behind us. We continue to prioritize investments in growth and maintain a sound organic OIBDA minus CapEx margin of 27%, the benchmark in the sector.

Moving to Germany on Slide 9, which had a strong start to the year, delivering sustained operational and financial momentum in the quarter on the back of core business strength and high customer demand for the O2 Free portfolio. Telefónica Deutschland reconfirmed its good rating in the Connect network test, and 5G now covers 40% of the population and is on track to achieve 50% population coverage by the end of this year.

Looking at financials. Revenue grew by 5.2% year-on-year organically in the first quarter, reflecting sustained mobile revenue growth on the back of continued good commercial traction of the O2 brand and some support from the recovery of international roaming. OIBDA posted strong organic growth of plus 7% year-on-year in Q1 '22, with improved operational leverage in both fixed and mobile, reflecting own brand momentum, further efficiency gains as well as some international roaming tailwinds.

CapEx was up 16% year-on-year organically in Q1 '22 as Telefónica Deutschland continued to execute its investment for growth program according to plan in its final year.

Moving to the U.K. and our joint venture, Virgin Media O2, which has started ramping up network investments while improving products and services with big challenger decisions, including not reintroducing EU roaming fees. Fiber to the premise upgrade pilots were completed in February, paving the way for the planned deployment of full fiber across the entire fixed network commencing later this year with completion in 2028.

The VMO2 network already delivers gigabit speeds to over half of all U.K. premises, making it the biggest contributor to reaching the government's broadband target. VMO2 delivered resilient trading at the same time as implementing fixed and mobile price rises, which will support revenue growth in future quarters.

Looking at the financials, revenue was broadly stable in the first quarter, whilst OIBDA grew by 2.6% on an organic basis due to cost savings following the migration of the Virgin Mobile MVNO base, lower sales and commission costs and the start of the flow-through of cost synergies, which will ramp through the year.

Moving to Brazil on Slide 11. Vivo started the year reinforcing growth trends seen in recent quarters. Consistent growth in high-value accesses reaffirmed Vivo as the telcom with best quality and value proposition.

In mobile, contract accesses increased by 7% year-on-year, whilst maintaining churn at a low level of 1.2%.

In fixed, fiber-to-the-home connections almost reached 5 million, thanks to the implementation of alternative fiber-to-the-home expansion models. This translated into stronger financials. Vivo accelerated its organic year-on-year top line growth to 4.6%, with strong results in both mobile and fixed services. Legacy exposure continues to decline at the time service revenue growth expands. OIBDA grew 1.6% in organic terms despite inflationary pressures and lower margins from new digital services.

In euros, top line growth stood at 18% year-on-year and OIBDA at plus 15%. And finally, on ESG, Vivo continued to advance its commitment to sustainable growth by adding 23 power generation plants with the aim of having 80 plants in operation by the end of 2022.

Moving on to the next slide, we reviewed the acquisition of Oi's mobile assets in more detail. On April 20, we successfully closed the acquisition of our portion of Oi's mobile assets, which will allow us to further improve the profitability of our business and at the same time, consolidate Vivo's leadership in the market.

With this acquisition, we will add 43 megahertz to Vivo's spectrum portfolio. 12.5 million mobile accesses, of which 37% are in postpaid and 63% in prepaid and 2,700 mobile sites. This acquisition will benefit Vivo by generating synergies with a net present value of approximately EUR 1 billion beautifully matching the investment. Our synergy estimate conservatively exclude all revenue synergies at this stage.

Turning now to Slide 13. I would like to take the opportunity to recap on the successful buildup of our fastest-growing business unit, Telefónica Tech. Telefónica Tech is progressing rapidly towards becoming a next-generation IT services provider with cutting-edge solutions in cybersecurity, cloud IoT, big data, artificial intelligence and blockchain.

At the end of Q1, Telefónica Tech acquired, Incremental, a large Microsoft Dynamics partner, complementing the acquisition of Telefónica Tech, U.K. and Ireland. And this week, T.Tech acquired BE-terna, reinforcing its position in the German and DACH market. These acquisitions, coupled with our in-house capabilities, allow Telefónica Tech to be a global company with around 5,400 highly skilled employees reaching more than 5.5 million B2B group customers. Revenue is significantly outperforming the markets where we operate with a well-balanced and difficult to replicate revenue mix.

What I just shared with you is further proven on Slide 14, where we show Q1 performance for Telefónica Tech. Revenue growth accelerated to 80.6% year-on-year, significantly outperforming the market. This was driven by strong performance across the businesses and the integration of operations in 2021. Cyber is performing above expectations with all service revenues in IoT growing double digit in Q1. Recent acquisitions have reinforced T.Tech's growth potential as shown by Q1 numbers. Ultimately, a larger and stronger Telefónica Tech is critical in a market where digitalization is a must something we expect to remain a key growth lever for Telefónica.

Moving to Slide 15, we review the latest developments at our infrastructure portfolio manager Telefónica Infra. In Q1, we continued to drive value creation across our portfolio and to execute initial phases of work on our new fiber JVs, having started discussions with potential investors in the U.K. and Spain.

In Germany, UGG has approximately a 1/4 million premises under MoU signed with municipalities. While in Brazil, Fibrasil continues to be on track to meet its deployment target, reaching 2.2 million premises passed in Q1. On ON*NET Fibra, in Chile continued with its accelerated rate of deployment with 200,000 additional premises passed, maintaining its fixed broadband leadership in the market. Meanwhile, in Colombia, the transaction with KKR was closed in January '22 after receiving all necessary regulatory approvals and expect to pass 4.3 million premises in 3 years.

During Q1 '22, Telxius Subsea Cable maintained strong commercial momentum, evidenced by the 65% growth in full contract value, which contributed to high single-digit year-on-year OIBDA growth in reported terms.

I will now hand over to Laura, who will review our Hispam's operations and the group financial performance.

[Laura de Baquedano, executive]

Thank you, Ángel. Slide 16 shows the solid performance across the Hispam region. Firstly, we continue our fiber transformation across our operations with almost 3 million new premises passed in the last 12 months, showing a clear acceleration versus the previous period's deployment.

Secondly, our revenue and OIBDA remained robust with revenue growing in all countries and new operational model offsetting inflationary pressures. It is worth noting the appreciation of LatAm currencies which had a strong positive effect on euro-denominated growth. And lastly, capital employed was reduced 14% on a year-on-year basis, thanks to new asset-light models with an efficient use of our resources.

Turning to Slide 17. We highlight our strong balance sheet derived from a prudent debt management that has allowed us to benefit from a long average debt life close to 13 years. We have over 80% of our debt at fixed rates and report group interest costs below 4%. So we are well positioned to face new market dynamics. Our robust liquidity position that exceeds maturities beyond 2024, help us to comfortably face any market environment. We have made a lot of progress to increase local debt and aligning more closely with our FX exposure.

I will now hand back to Ángel, who will wrap up.

[Ángel Vilá Boix, executive]

To wrap up on Slide 18, the first quarter showed a strong start to the year with sequential improvement in organic and reported growth across the whole group, beating inflationary pressure on which we expect the work to be refined.

FX provided support in this first quarter, allowing for strong double-digit reported growth in Brazil and Hispam. From a commercial point of view, we maintained strong momentum, boosting fiber to the home, enabling us to increase relevance and engagement with our customers. Looking ahead, synergies are starting to materialize at VMO2 and will soon start to flow through from Oi, and we continue to position Telefónica to sustainably grow in all business units. Finally, we reiterate our guidance for 2022 and confirm 2022 dividend.

Thank you very much for listening. We are now ready to take your questions.

[Operator]

[Operator Instructions] Our first question comes from the line of Mathieu Robilliard from Barclays.

[Mathieu Robilliard, analyst]

First, I have a question around net neutrality. I think you've been very clear over the past few years about only Big Tech to contribute towards net costs, the streaming is probably 70% of European [indiscernible] network traffic. I note from recent public comments that the [indiscernible] Breton seemed supportive, and they promised to come back by the end of the year with a framework that could enable European telcos to get a contribution from Big Tech.

So my question really is, how confident are you that this could come through? So what is the time line? The reason I'm asking is that investors, at least some of them seemed quite skeptical about a positive outcome there, notably in terms of how to implement this.

And then the second question is around Spain. I note that the convergent ARPU is up year-on-year, not the first time in a while. And I was wondering what was behind that. Is there less spin down, is competition less impactful, although we are seeing still a lot of aggressive promotions. So I guess the underlying question is, is that ARPU trajectory sustainable in your view?

[Ángel Vilá Boix, executive]

Thank you, Mathieu, for asking about the topic of net neutrality and fair share regulation because this topic we think as -- as I think you do in your latest 2 reports, we think it brings a positive optionality for the whole sector. As José María, our Chairman, together with heads of DTV Vodafone and Orange commented in a letter to financial times. The exponential growth of traffic in our networks associated or linked to a limited number of content platforms is requiring all of us to do continued investments to meet the demand, and this is an increasing challenge in the context of declining profitability in retail markets.

And traditionally, the large digital content platforms are not compensating the telco sector for the use of networks. The traffic they inject into the networks, and therefore, the costs and investments that they induce in the networks. We have invested, of course, in international transport and CDNs, providing some relief for our costs. But most of this traffic still has to be delivered through our national networks and access networks were than most of the cost and investment is located. So this is why we are calling for a fair contribution to our costs to make this sustainable.

There were 2 recent reports delivered by, I think, Frontier Economics and Axon that delves into the cost of Big Tech's traffic on European networks, the asymmetry of negotiating powers. The potential impact in Europe on socioeconomic terms of -- that would bring if Big Tech would cover part of this cost. So we think that this should be the turning point where European policy makers are determined to take steps towards solving this problem, and we welcome the initial positive remarks by commissioners for [indiscernible] Breton regarding this note. So we think that -- and we have hopes that fair share regulation should mark the end of the fee rate for over the top.

Then moving to your second question on the Spanish ARPU, we have been able to grow our ARPU 1.5% year-on-year in this quarter to EUR 91.1 for the first time since the end of 2019. This growth in comparison of ARPU is driven by the strategy that we have been deploying. And if I cover the moving parts on the positive side of the evolution of this ARPU, the more for more move that we did in February which still has not impacted the full quarter, of course. In legacy portfolio and also in the packages that include Netflix, we also had a positive that comes from the lower effect of promotions. Another positive is higher consumption out of the bundle and the fourth positive would come from new digital services.

On the other hand, this has been mitigated by higher weight of no-frill packs. And there was a ruling against betting entities doing ads on TV that reduced part of our income. So more for more, less promotions, higher out of the bundle and new digital services were the positives driving our ARPU up.

[Operator]

Our next question comes from the line of David Wright, Bank of America.

[David Wright, analyst]

A couple of questions from me, please. It's only Q1, but your growth run rate against guidance already looks quite conservative. And I know that within your proportionate EBITDA, Spain and U.K. represent about, give or take 50%, and we can clearly see easing Spanish comps with energy costs, content and employee costs. We can clearly expect an acceleration in U.K. EBITDA with only one as you get the full effect of price increases.

So against that, you've had a strong start in Germany, but Germany also looks like a potential guidance upgrade. So I just wonder what headwinds we could imagine in the other business units? I mean Brazil is talking about another paid ARPU rise too. So what headwinds are out there that means you can't continue to beat this guidance? That's part one.

And then part two, just for Laura, perhaps, LatAm, noncore Hispam, I guess, what is the potential still to maybe monetize any of those assets? Is that something you're stepping away from a little now? You've decapitalized the businesses that are performing well? Or is it quite the opposite now as we come out of COVID it's back to the negotiating table? Those 2 questions.

[Ángel Vilá Boix, executive]

Thank you, David. On the first question of the guidance, as I was saying in my speech before, we provided guidance when we presented full year results, which happened to be the day that the war was -- this terrible war was started and the macro context has worsened significantly since then, increasing uncertainty and inflationary pressures. But still, we are managing to bring Q1 results especially, for instance, in revenues at the high end of our guidance range, and we have been beating consensus expectation of revenue OIBDA, operating cash flow and free cash flow levels now. These results demonstrate our ability to cope with inflation, and we showed sequential improvement in revenues for OIBDA and OIBDA minus CapEx in organic terms. And thanks to FX tailwinds and even larger improvements in the reported terms.

So this gives us confidence in spite of the adverse macroeconomic scenario to reiterate our guidance in 2022 of low single-digit growth in revenues and OIBDA and up to 15% CapEx to sale despite these pressures. We will, of course, monitor the evolution across the year and make, if needed, any upside adjustments to this, but we think it's not the moment to make any upward adjustment.

[Laura de Baquedano, executive]

Thank you, David, for the question. First, our strategy remains intact regarding Hispam. As we said a couple of years ago, we remain committed to modulate exposure to the region with creating the conditions to maximize its value via growth, consolidation and potential corporate transactions. I think the last 2 years since the decision of spinning off from an operational point of view, the region has been critical. We have transformed the operations and executed definitely a turnaround.

We have approached the region, as you have been able to follow with a very disruptive model both from an organization perspective and also from an infrastructure perspective. And I think we have achieved very solid results with that new management model, and it's being based, as I said in the past, with very thorough execution and pulling main levers.

As you say, if any, now we have definitely a more favorable framework not only because we have built the pillars for a better outlook for Hispam, but also because it seems we could have a more stable macro and sector trends and also FX tailwinds. So we think we have created value in Hispam. It has a lot of optionality, and we could consider things as we will do for any asset without -- within our portfolio if it creates additional value. So we will definitely look at everything. But what I can say is that the Hispam is no longer dragging financial or management resources, and I think it has a good optionality also from running the operations as we have been doing. And in fact, I humbly say that we've been beating consensus almost every quarter since we came with this new model.

[David Wright, analyst]

And Laura, just quickly, is deleverage the absolute priority if you were to monetize any of those assets? Or could you now be persuaded even into share buyback territory?

[Laura de Baquedano, executive]

You came with the third question, but deleverage is definitely a priority. It's not an absolute priority in the sense that we have to deleverage while creating value and becoming a more sustainable company going forward, but deleverage is definitely a priority for us. We are strong committed to an investment-grade credit rating. The one -- and regarding shareholder remuneration, we came back to a full cash dividend of EUR 0.30, which is attractive, which is sustainable. And obviously, if there's excess free cash flow, you have to look at all potential uses of that free cash flow and deleverage could be one. And we will take the proper decision as we manage our balance sheet and our credit rating, great. So that will be it.

[Operator]

Our next question comes from the line of Fernando Cordero from Banco Santander.

[Fernando Cordero, analyst]

The first one is on Hispam and particularly on the news, one B2C offering, the miMovistar new platform. In that sense, I would like to understand which are the key strategic targets from the side with this new platform? And particularly at which extent are you prioritizing to increase the value per customer to increase the number of services per customer versus to increase the absolute volume of customers given also what is the structure of the offer?

My second question is related with Telefónica Tech. You have already explained quite well and the recent developments there. But I would like to understand which is still the pending M&A or inorganic growth road map in Telefónica Tech? And at which extent are you still open to incorporate, let's say, financial partner in order -- sorry, to keep funding the inorganic growth in Telefónica Tech, as you highlighted back in the past?

[Ángel Vilá Boix, executive]

Thank you, Fernando, for your questions. We launched on May 15, the new portfolio of miMovistar. We revamped after having had the portfolio of Fusion for 10 years, we revamped the comparison portfolio to make it more flexible. It is a portfolio which is modular. It starts with connectivity to which models can be added to include television offer devices and then value-added services such as health, gaming, security to build more complete and adapted formula for the customers.

Existing Fusion customers can choose to continue with their current tariff or switch to miMovistar. Prices are similar to those of Fusion. So for comparable packages, there would not be a relevant impact on customers. However, we're aiming this portfolio to be service revenue accretive. We are aiming to have more traction commercially, especially in the mid ARPU segment of the market. We continue to hit a punch above the rest of the players in the high ARPU segments of the market.

We have competitive offers now in the now fields, but what we have been seeing is that especially in the mid ARPU segment, we were not offering the flexibility that our customers wanted, customers that wanted to upgrade from mid packages to include additional content, but didn't want to take many more features, couldn't do so easily, and we are now providing that opportunity.

So we are aiming for additional commercial traction. We're aiming, of course, there can be also some repositionings by some customers but we're aiming to provide easier options for upgrading to medium ARPU customers and reducing the churn in that segment, and therefore, increase the B2C service revenue in -- with miMovistar.

Regarding Telefónica Tech, you can see on Slide 13 how we are building up the company. First, we did the carve-out of the units. We have then been executing many transactions either to strengthen the geographic presence, particularly in the U.K. and the German market or capabilities.

Now we move to the next stage, which is a focus on integrating these acquisitions and of course, continuing the growth momentum of Telefónica Tech. So no significant further M&A pending.

And of course, we will aim to communicate and explain Telefónica Tech as well as we can to the market to start seeing it in the sum of the parts of our group. Our focus is to integrate these acquisitions, continue to deliver momentum, continuing to build quarter-on-quarter track record of Telefónica Tech which, of course, post acquisitions is going to have a run rate of revenues by the end of this year, exceeding EUR 1.5 billion.

And we have seen interest from potential investors, but we will choose the right time to bring anybody in, and we think that there is still potential of growth for this unit. So we'll pick the right time which probably now is -- now it's the time to integrate and continue to deliver growth momentum and not continue doing M&A and trying to convince you to show this in the sum of the parts of Telefónica.

[Operator]

Your next question comes from the line of Keval Khiroya from Deutsche Bank.

[Keval Khiroya, analyst]

Two questions, please. So firstly, we saw a step-up in the Q1 lease liabilities to EUR 8.7 billion. Are you able to discuss how we should think about that number going forward and also the evolution of the lease payments in the cash flow?

And then secondly, you had a strong EBITDA performance in group other reflecting tech and also lower group costs. It's a line which perhaps is a bit more difficult for us to model, but can you provide some color on how we should think about the EBITDA evolution for this group other line?

[Laura de Baquedano, executive]

Thank you, Keval. On leases, the increase, it's a natural consequence of the Telxius deal we closed in 2021. So you should be a step change in that, and then we will be more on a recurrent level. Having said that increase in leases, as you know, the net leases -- net debt plus leases reduction was significantly with this transaction. We actually reduced the net debt-to-OIBDal pro forma at 0.3x in ratio on top of all the benefits now in financial optimization, redeploy these resources of the towers into other core operations, the value creations with a very high multiple, increasing vendor diversification in the tower space in Europe and so on. But that had the impact in leases as we explained when we announced the transaction.

We also have some impact from the FX revaluation of Brazil and also Hispam band, but mainly Brazil. And that could continue if the FX remains strong, which could be good for the revenue and OIBDA, no doubt, no -- but I think that increase has much to do with the Telxius build. And from the free cash flow perspective, the explanation could be similar. I mean we have the lease payments from the tower deal and also some FX revaluation.

On the other, unfortunately, Keval, this is a very difficult line to give you any color because it does have the impact of consolidation perimeter, and that's negative because we are excluding this year what we had included last year on towers, Costa Rica and El Salvador, so that's going to have a negative impact in the valuation. It also includes restructuring expenses that this year should be definitely lower. So that could be a positive.

And apart from that, we have a holding and global unit cost in which we have been saying and that's already impacting the others. We have been going through a lot of efficiency, and we are a much leaner company in the corporation and global units in general. And we also have -- so that's good news. And we also have the other subsidiary is not included in the core OBs or Hispam. So there, we also have good news because we have the growth of some of the tech services. We also have a very strong start of the year of our producing unit. We also have a very strong cable, which I don't think you are taking into account in the consensus, and we have low-teens revenue growth in the cable unit.

So in general, that would be good news together with the efficiency. But unfortunately, if we -- the perimeter changes and we have any restructuring or capital gains, which are not part of the core OBs should also be there. So difficult to predict, but the structure behind that is definitely in the right direction.

[Operator]

Your next question comes from the line of Georgios Ierodiaconou from Citi.

[Georgios Ierodiaconou, analyst]

If I could start with a question around the fiber JV processes in the U.K. and Spain. I just wanted to clarify a couple of things. Firstly, whether there's the perimeter you are considering is just what you show in Slide 15 or whether there is any scope either in the U.K. or Spain to potentially go beyond the rural areas in Spain and beyond the 7 million greenfield in the U.K.?

And also specifically in the U.K., if you don't mind just updating us on the progress you had in finding some wholesale partners. And I heard whether I'm right in thinking that given wholesale adds value to the asset. Is it fair to assume in the event that you do find a financial partner before you announce a wholesale deal that then it becomes less likely or whether that's too simplistic? I'd be interested to get your feedback on that.

[Ángel Vilá Boix, executive]

Thank you, Georgios. I will take the first question, and I will ask Lutz to respond the second one on the wholesale partners. On the first one off of the fiber joint ventures, on the Spanish one, we decided to launch a fiber company covering a subset our network, carving out part as brownfield of our fiber in areas which are less than 20,000 inhabitant towns. So it's designed for the rural areas, which are not served partially yet, where there is still a greenfield opportunity to build there and also where there is an opportunity for potential consolidation of other players that have been bidding in some of these geographies.

We did this because it's an industrial project, not just a pure financial engineering. One, it has a growth perspective. It is eligible for fiber subsidies. And from the brownfield contribution, it has cash flow generation from day 1. And this would be the an animal that then because we will continue to consolidate it accounting wise in our accounts would not put any pressure on our financial position. This is already -- this project that we have already initiated talks with investors. We are seeing a very healthy level of interest. We're expecting first round nonindicative offers later this month. And this would be the project that we are aiming for fiber in Spain, not a different perimeter.

With respect to the U.K., we have, on one hand, a project that we're doing 100% at VMO2, which is the upgrade from the current cable network to fiber that we will deploy between now and 2028, the pilots are confirming our estimates of cost for the upgrade. So that's going to be done by VMO2 completely. And the fiber joint venture that we are already also in talks with investors, it's up to 7 million greenfield homes passed outside the current footprint of Virgin Media O2. It will be 50% an investor and the other 50% held by Telefónica Infra and Liberty Global. The process has been launched. We already got the first round indicative bids. We're actively engaging with investors, and we see a strong interest in that process as well.

For the second question, I'll pass it to Lutz, please.

[Lutz Schüler]

So I mean, first of all, you've seen our guidance for this year, right, that we will be growing OIBDA mid-single digit. I'm saying that because, yes, we are in wholesale negotiation, but we are doing this out of a position of strength, so that's #1. #2, I mean, what do we have to offer if we have the ambition to cover 23 million homes out of the U.K., that means we are 1 out of 2 national fiber networks. And of course, we want to have a certain share of the wholesale business. But we have to act in a balanced way because on one hand side, we offer higher speed to a possible wholesale partner and may be also some discounts. On the other hand side, we don't want to disrupt the wholesale market that we devalue the entire fiber infrastructure, we are all spending our money.

And maybe to your last question, are we in a hurry to close the wholesale deal before we are going to sign a deal with an investor on the fiber joint venture? The answer is clearly no. Two reasons for that. One, as you might know, we have currently a penetration of our network expansion program. We call it Lightning of 30% and this delivers a very decent IRR. And obviously, we would commit something similar in this fiber joint venture. And, I think, #2, a financial investor can make up its own mind if he thinks that we are getting a wholesale deal done over the time or not sitting on 23 million fiber homes. I hope that helps.

[Ángel Vilá Boix, executive]

We have time for one last question, please.

[Operator]

Our last question comes from the line of Nawar Cristini from Morgan Stanley.

[Nawar Cristini, analyst]

I have 2 questions, please. The first one is really a quick follow-up on a previous question on the guidance. Could you discuss how the mix has been? It wasn't since the guidance was provided because, of course, it was for Ukraine and a lot has changed since then, so it'd to be interesting to have your assessment about how the different assets have been performing versus your initial expectations, in particular, the areas where probably you are doing better areas where perhaps it's less so. So any comments on the mix will be particularly helpful.

And then I have a question about an area which was at least ahead of consensus expectations in Hispam. Could you discuss a little bit how do you think about prospects here, in particular, given the deteriorating macro backdrop globally? Are you concerned about any impact here any color will be particularly helpful.

[Ángel Vilá Boix, executive]

Nawar, I'll take the question on guidance. As you do know, as you know, we do not disclose guidance by regions for segments, but I will try to give you some color. On the revenue side, as you are seeing, we are growing revenues across the whole footprint, we think -- and we aim for revenue growth in all our units the U.K., which was a bit more muted. Of course, we expect items like the price increases to start kicking in the coming quarters.

As for OIBDA performance, there are factors which make us confident as the year progresses. So for instance, in Spain, the impact of energy is going to be lapping in the second and especially from the third quarter, also the personnel reduction plan that didn't fully benefit in the first quarter is now going to kick-in in every quarter. Also the La Liga renewal with 15% deflation from the third quarter will be coming in, synergies from the U.K. and Brazil consolidation are also being ramping up during the year.

Our German unit has had a very strong start of the year, and they have the tradition to beat the guidance in the last few years, and we are confident that they will continue to stay close to their tradition also this year.

So yes, there are headwinds. There is inflation and effects -- economic effects from the war cost of living crisis, but items like the ones I just described give us confidence to maintain and reiterate the guidance, and we think we are well on track to achieve it this year.

[Laura de Baquedano, executive]

Thank you for the question. I think you were asking about macro, in general, environment outlook about Hispam. So if that's the case, let me answer you a bit on everything around the situation now. I mean if we start with the political situation, there's still some uncertainty with the constitutional reform in Chile and others, but we expect events to evolve with no major distress for the institutional framework. Definitely, we have the inflation that has become an additional source of tension, but we have been dealing with inflation for years in Hispam, and I will explain a bit what we are doing in that front.

And then as in globally, there's been an increase in interest rates. But fortunately, we did a lot of homework in financing last year and the year before, and we have secured very attractive financing. So for that, we should be protected, which by the way, it's a comment that applies to the whole of the group, not only Hispam.

On the other hand, we have the positive impact of commodity prices, and that's also helping FX tailwinds, which in the case of Hispam, it's also important operationally because part of our OpEx and part of our CapEx is U.S. related. On the most, probably the hottest topic, which is inflation, let me tell you that we've been upgrading prices across the Board and in most of our business units. Argentina, we've been talking for long, but we had 63% upgrading tariffs for the last 12 months. Chile, we are updating tariffs 77%, in line with inflation in postpaid, fixed services and B2B is also the case. Colombia, we are updating mid low-end contracts by 4%, Peru, 4% in fixed services, 7% contract, Mexico as well, more in postpaid, 6%, prepaid 3%. So overall, inflation is being factoring the revenue.

In OpEx, with this management model and also we went through labor reductions last year, we are seeing that some of the OpEx lines with high incidence of labor impact us less. And it's worth mentioning that Hispam was really ahead of the curve on digitization. So we have reduced a lot call center costs, shops costs. So there's a lot of it, and you saw already the impact in Argentina, but that's something that would apply across the Board.

And then as I said at the beginning, let me remind you on the important FX LatAm appreciation, which will result in improvements in external and fiscal accounts in the region. So we have a positive outlook rather than negative. And on the negatives, I think we will keep on managing and we are better prepared with a leaner operational model as the one we have now.

[Ángel Vilá Boix, executive]

Well, thank you very much for attending this call in which we are presenting this very strong start of the year and the confident outlook that we have for the rest of the year. If you have any further questions, please do not hesitate to contact our IR department. Thank you.

[Operator]

Telefónica's January to March 2022 Results Conference Call is over. You may now disconnect your line. Thank you.