Telefónica, S.A. (TEF) Earnings Call Transcript & Summary

Good morning. Thank you for standing by and welcome to Telefónica's January to September 2026 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. Torsten Achtmann, Global Director of Investor Relations. Please go ahead, sir.

Good morning, and welcome to Telefónica's Conference call to discuss January to September 2026 results. I'm Torsten Achtmann 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 [indiscernible] 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. Now let me turn the call over to our Chief Operating Officer, Mr. Emilio Gayo.

Good morning, everyone, and welcome to Telefónica's Third Quarter and 9 Months Results Call. I am here today with Juan Azcue, Chief Financial Officer; Santiago Argelich, CEO of Telefónica Germany; Borja Ochoa, Director of B2B Spain; Telefónica of B2C Spain; CEO of We will walk you through the slides, and then we will be happy to take your questions. We are pleased to report a strong third quarter results. with further evidence of our execution and the transformation of our operations. First, commercial traction, again, continued to be outstanding with a solid performance in Spain and Brazil. Second, growth in key financial metrics accelerated both in real and cost terms. Topline growth reached 2.2% year-on-year, boosted by the ramp-up in service revenue and the return to growth on handset sales. Adjusted EBITDA growth accelerated to 22.8% versus the third quarter of 2025 and that being by robust performance in Spain and Brazil. Our transformation continues to deliver efficiency gains through simplification, programs, digitalization and AI. These gains supported an acceleration in adjusted operating cash flow after leases growth to 7.2% alongside margin expansion. Third, acceleration in free cash flow throughout the year is significant, increasing 3.2 fold in the third quarter, and we have further developed Net debt declined to EUR 25.2 billion as of September. Finally, we are upgrading our full year guidance of just EBITDA, adjusted operating cash flow after leases and free cash flow mainly on a strong operational and momentum, especially in Spain and Brazil, expected improvement in Germany and the progressive improvement in operating leverage year-on-year. Revenue guidance is adjusted to 1% to 1.5%, mainly due to handset [indiscernible] revenue performing well, and we expect to grow around 1.5% in 2026. The 2026 dividend of EUR [indiscernible] will be paid in June 2027. Moving to Slide 2. We continue to progress across every strategic pillar of our transform and grow platform. We are better serving our customers as reflected in our low term rates and increase in NPS. In Spain, the network growth is resilient amid record traffic growth. In Germany, more than 80% of the customer interaction are now supported by AI. And in the U.K., we launched a new voice AI agent to handle broadband phone calls. In B2C, we continue expanding our offering, and we are reaching an outstanding cost and growth of 3.9% year-on-year. In Spain, O2 brands now include Disney+ and Movistar+ optionally across the all packets. In Brazil, Vivo has become the first mobile operator with a nearly 100% coverage in the country, leveraging the partnerships with Starlink. In Germany, we are enhancing our fixed broadband offer with additional fiber-rich to be the new partners with Net Berlin and In B2B, we are growing close to 6% year-on-year, while strengthening our capabilities for future growth, particularly around cloud, defense and cybersecurity. For example, in Spain, we launched new cybersecurity services for Vivo's its partnership with Palo Alto Network and O2 Germany relaunch its business portfolio combining mobile with integrated service for digital security and international use. On technology, on top of further enforcing our network capabilities across markets, I would like to highlight [indiscernible] Vodafone. Finally, we are taking key steps towards a simpler and more agile organization. In Spain, our new operating model will help us accelerate growth, capture synergies and execute with greater agility. The model pivots around 3 business units with differentiated customer and dynamics, B2B, B2C and wholesale, to focus on growth opportunities and scale digital services. The B2B segment brings together the capabilities of Telefónica Spain with those of Telefónica Tech. It also implies a new vision for all our support functions in Spain. In Germany, the 2026 voluntary lever program was well accepted and executed according to plan. We are working on further resizing measures and have entered into an agreement for the sale of 2 call centers in coming months. VMO2 is taking action to create a simpler company, reducing costs and prioritizing investments to improve customer experience and commercial performance. Moving to the operating business and starting with Spain on Slide 3. In the third quarter of the year, Telefónica continued to improve its strong commercial and financial performance. Of note, contract mobile net adds increased quarter-on-quarter, reflecting positive portability results, well above 2025 average. It is the second quarter ever with positive results with all players. Growth in fixed broadband was supported by more convergent, connection and secondary homes. TV accesses increased by 6% year-on-year, driven by our unmatchable current offering. TV penetration in grows 7 percentage points year-on-year. Convergence, the lower churn rate ever is maintained 0.7%, while ARPU, the best in the market, grew 1.2% year-on-year. driven by the excellent management of a sports customer between football seasons. This momentum reflects our loyal customer base to a continuous improved value proposal for our investment on differentiated assets and customer service. Our 100% fiber and 5G networks are the largest in the country and capable to cope with extra traffic loads. Mobile data traffic in the quarter were the highest ever and saw the biggest year-on-year growth in 3 years. It demonstrates our ability to deploy high-quality networks which have strong financial discipline. We have a higher improving year-on-year supported by exceptional service delivery with year-to-date claims reducing 28% year-on-year. In B2C, we continue to leverage the richest digital ecosystem offer in the market. Our alarm service surpassed 650,000 connections. We recorded more than 450,000 activation of our in the first 9 months of the year. Regarding devices, more than 2/3 of our customers from us. In B2B, our complete solution on digital services and proven expertise make us the most trustful partner for enterprises and public administration in their digital transformation. In August, the European Commission approached for one of the European AI Gigafactories, a key strategic project that will strengthen our cloud proposition in combination with our premium edge and cybersecurity capabilities. More recently, we have been selected in a partnership with by the European Central Bank to deploy the communication and security infrastructure that will underpin a future digital euro. In addition, we have reached an agreement with to refinance and secured communication capabilities. Furthermore, we acquired a 10% stake of the company OGA to drive advanced AI solutions. Financial results are strong, delivering a solid cash generation fostered by consistent top line growth. Growth in revenue was 2.6% year-on-year in the quarter, posting the highest growth in the first 9 months in more than 15 years. Of particular note, retail revenue grew about 4% with double-digit growth in digital services, more than offsetting lower wholesale and other revenue. Adjusted EBITDA accelerated to 2.6% year-on-year, due to higher revenue and larger savings from the plan with operating cash flow after leases up to 2.8%. To sum up, Telefónica sustains a solid momentum of financial growth. As anticipated, we expect a better year-on-year behavior in H2 versus H1. Leveraging this strong momentum, we are progressing further in the transformation with a new operating model, as explained before, to speed up growth and accelerate simplification. On to Slide 4. Vivo delivered another quarter of solid operational and financial performance with continued strong momentum. Commercial performance remained robust across both mobile and fixed businesses, driving above-inflation growth in key financial metrics. Operationally, growth in our highest value accesses continued, supported by the attractiveness of our [indiscernible] we maintain progress price adjustment across our customer base. In mobile, we delivered premium growth with the highest contract net adds in 11 quarters, sustained strong ARPU levels and very low churn. These results reflect the strength of our premium value proposition and the quality of our network, recently recognized by as the fastest finding network in the world. It fits our transformation towards fiber with convergence and quality as key differentiators. We were ranked #1 in 4 broadband Internet performance categories in our worldwide The addition of around 200,000 fiber connection per quarter supports a higher value and more profitable fixed revenue mix. On financial results, Vivo delivered a solid top line momentum with revenue growth about 7% for the fourth consecutive quarter, driven by the ongoing transformation of the revenue mix. B2B performance remained strong supported by connectivity and digital services. New digital services revenue grew close to 40% over the last 12 months with OTT services and consumer electronics up 30.5% and 69.4%, respectively. Vivo continue to enhance its B2B offering and some examples are a new prepaid flexi offer, featuring, and Google Cloud storage. New streaming bundles combining up to 6 services at a fixed monthly fee on a single bill. Vivo has also become the first telecom operator in Latin America to offer B2B continues to scale with best-in-class solutions. B2B digital services maintained solid momentum with double-digit growth in cloud and cybersecurity revenues. In addition, the launch of AI-enabled security operational center with Palo Alto Networks will further strengthen security capabilities and digital solution offering for companies or of sizes. The consistent growth in adjusted EBITDA and the high margin is supported by top line growth and cost efficiencies. Adjusted operating cash flow after leases growth accelerated 21.5% year-on-year in the third quarter, reflecting also the benefits of gains from migration-related asset sales and the strong cash generating profile of the business. Overall, Vivo further reinforced its leadership position by combining a strong commercial momentum, sustaining financial growth and continued expansion of its digital ecosystem. Looking ahead, we expect these positive trends to continue along the year, supported by the strength of our assets and disciplined execution. Moving to Slide 5. In Germany, we continue to see signals of our promotional activity in the market. Telefónica Deutschland is progressing in its transformation, focused on profitable and sustainable growth. mobile plus bundle has been by the market and are supporting our value strategy. We see first benefits with O2 contract trends stabilizing quarter-on-quarter. However, it will take some more time to flow through the customer base. Mobile contract net additions accelerated quarter-on-quarter, while O2 contract churn remained low. Our objective was to uphold our postpaid market share while improving the value of our customers. The IoT business expanded driven by emerging technologies such as 5G for smart metering gateways. In addition, we continue to enhance partnerships like and Revolut to capture new growth opportunities in the B2B segment. In fixed broadband momentum remains healthy. We record the fifth consecutive quarter of successes growth. As already mentioned, we have enlarged our fiber reach with new partnerships. We also maintained a strong pace of network rollout with around 1,100 new sites going [indiscernible] We are making significant progress in the simplification of our operating model. The voluntary lever program was successfully executed with cost benefits starting in Q4. We are now addressing the and additional restructured demand of up to EUR 155 million, subject to concrete measures of the further resizing of our customer service organization and retail footprint. We expect this provision to be booked in Q4. In this context, Telefónica Deutschland has entered in an agreement for the sale of its to TV, a leading provider of digital customer services at the of the year. We are committed to an annual run rate savings of around EUR 185 million in 2028. Financial performance in the third quarter reflected improving trends. Furthermore, temporary headwinds in the partner business that will last until started to ease, and finally, handset sales have started to normalize. Revenue recovered significantly to minus 2.9% year-on-year. Mobile service revenue improved sequentially, reflecting the resilience of the core business and some support from international roaming. Fixed service revenue grew for the 15 consecutive quarter on improved value mix and good trading momentum. sales returned to growth. customer demand for O2 remains healthy with additional support from the launch of new devices in Q3. We assume trading select sale channels following improved device availability, maintaining our focus on profitability. Improved revenue trends were not reflected in adjusted EBITDA performance due to: first, the higher mix of revenue with lower margin. costs were higher than expected, mainly in the context of the FIFA World Championship. Second, the extraordinary high marketing expenses linked to the launch of the new O2 plants bundles, commercial campaigns to foster growth. Third, the nonlinear facing efficiency measure compared to a strong contribution in the third quarter of 2025. In Q4, we expect service trends to continue to recover. We expect a major uplift to adjusted EBITDA following the revenue trends. In summary, Telefónica Deutschland continues to execute its transform and growth strategy, leading the to profitable growth in 2027. Let's move to Slide 6. VMO2 remain on track to deliver its 2026 guidance. This reflects the resilience of the business despite a challenging market environment, particularly in fixed. VMO2 continue to take important steps to strengthen its competitive position and support long-term value creation. During the quarter, introduced a new AI-powered customer service tool supporting after the solution of selective broadband and the ongoing digital transformation of customer care. In addition, the rollout of broadband service has been extended across its existing cable or network, making multi-gigabit available over its cable network for the first time. As a result, more than 9 million U.K. household can now access VMO2 faster broadband services. VMO2 also extended the naming rights agreement for the O2 Arena through 2038, further strengthening the long-standing partnership behind one of the world's most successful entertainment venue. From commercial perspective, trends continued to improve quarter-on-quarter. Mobile net losses narrowed during the quarter. At the same time, our value management strategy supported a 2% year-on-year increase competition remains intense, particularly from the Even so, customer losses decreased during the quarter by 5% year-on-year, mainly due to competitive pressure and the phasing of our annual price rises. In wholesale, the company maintained its leadership position in the MVNO segment. Turning to financial performance. Service revenue declined by 3.5%, reflecting pressure in consumer and enjoying a of the B2B portfolio. Adjusted EBITDA decreased by 2.6%, remaining at the top end of the guidance range. Let me now turn to VMO2 transformation program on the next slide. VMO2 has the reduction of its upcoming strategic plan and cost reduction measures. The plan will create a simpler company with prioritized investment to improve customer experience, commercial performance and cash generation, with a commitment to reduce leverage. VMO2 is targeting approximately GBP 800 million of run rate OpEx and CapEx savings by 2029. Savings will build progressively from around GBP 400 million in 2027 to around GBP 600 million in 2028 and approximately GBP 800 million in 2029. Around GBP 300 million of the 2029 savings are expected to come from an evolution in the size of our workforce. This represents about 50% of the company's total people costs over the next 2 years with the majority of the evolution coming from the noncustomer-facing roles. Restructuring costs are expected to be GBP 250 million with a payback of less than 1 year. VMO2 will make greater use of AI tools and digital channels to drive efficiency and productivity, while improving the customer experience. VMO2 will focus on projects with clear paybacks and where there make strategic sense. For example, VMO2 will have further fiber aggression is existing commitments. The company's cable network will continue to deliver a market-leading broadband at scale with a low-cost upgrade being deployed to bring 2 giga services to the majority of the network. Where any future fiber investment will be supported by our balance sheet and only in the non-outlet areas. The company is also exploring wholesale agreements to support the expansion of its services to off-net areas not covered by VMO2 for next fiber networks, providing an incremental revenue opportunities and flexibility for future with minimal CapEx. Overall, this action will create a leaner and more focused business with a stronger cash generation and a clear commitment to reduce leverage. On Netomnia, we remain fully committed to the acquisition with fundamentally disagree with the CMS interim report. We believe the report is flawed with conclusion and counteracts that not reflect the commercial and financial reality of the U.K. market. Even more with the recent developments, acquisition of and stood in process and fiber base announcement. Finally, VMO2 is reviewing its option regarding the planned cash distribution to shareholders in 2026. An update will be provided in Q1 2021 when BI announced its full year results and knows the outcome of the Netomnia transaction. The full strategic plan and financial guidance will follow. Now I will now hand it over to Juan, who will provide a more detailed overview of our financial performance and ESG.

Thank you, Emilio. Slide 8 shows how the strong underlying momentum has translated into tangible financial results. This is the fourth quarter in a row of constant and real growth across the board. Real growth rates exceeded constant growth. Revenue growth in constant currency of 2.2% accelerated 2.2 percentage points sequentially. Service revenue growth accelerated by 0.9 percentage points to 1.8% year-on-year in constant terms. This was driven by improving B2C growth to 3.9%, thanks to strong ecosystem expansion and B2B growth of up to 5.6%, thanks to digital services. Handset sales returned to growth of plus 7.4%, driven by German handset sales. Adjusted EBITDA and operating cash flow after leases ramped up in the quarter to plus 2.8% and plus 7.2% year-on-year, with margin expansion of 0.8 percentage points year-on-year in Q3. In the 9 months, operating cash flow after leases grew of 4.2%, demonstrated solid operating leverage in the business. CapEx of our revenue stood at 12% in the 9 months, in line with our full year target of approximately 12%. Free cash flow amounted to EUR 1.18 billion, improving EUR 407 million versus the second quarter. For the 9 months to September period, free cash flow reached EUR 2 billion, plus 10.7% higher than 1 year ago. Net financial debt declined to EUR 25.2 billion as of September, 11% lower than a year ago. Moving to Slide 9. Free cash flow has improved quarter-by-quarter in absolute terms. In Q3, it showed a significant momentum and was 3.2x higher than in the third quarter '25. Nine months free cash flow grew by 10.7% year-on-year. Q3 free cash flow reflected good execution in our operating performance and the positive cash in of the tax refund in Spain of EUR 334 million. We expect free cash flow to continue to improve again in the fourth quarter. As such, the Q3 performance and the expected Q4 improvement gives us confidence to surpass our free cash flow guidance for '26 and to upgrade it to approx EUR 3.1 billion from the previous EUR 3 billion, having reached EUR 2 billion in the first 9 months of the year. Good operational momentum, driving the second adjusted operating cash flow after leases upgrade is the main driver of our free cash flow upgrade. Moving to Slide 10. I would like to highlight our commitment to our investment-grade credit rating. We have a clear deleveraging strategy in place with a target of 2.5x by 2028. We have made significant progress over the first 9 months of the year and remain on track to achieve this target. As of September, our net debt-to-EBITDA ratio decreased to 2.63x from 2.78x in December '25. While at the same time, our net debt decreased in absolute terms by EUR 1.6 billion to EUR 25.2 billion. To highlight that the net debt evolution, this is the largest net debt reduction in the first 9 months of the year since 2021. Our interest cost payments decreased in the last 12 months from 3.05% to 2.85% as of September '26. We maintain a strong liquidity position and have fully covered the maturities for the next 3 years. In summary, we keep reducing our net debt and leverage, have a long debt life, contain interest costs and are well protected in the current volatile market environment. Slide 11, for examples of how our sustainability plan is driving competitiveness and innovations since 2 decades. We continue our transformation through sustainable finance, enable network modernization and renewable energy projects in Spain, Germany and Brazil, while avoiding more than 1 million tonnes of CO2 emissions since 2019. We also strengthened circular asset management through the new customer premises equipment with 70% of recycled content. At critical moments, such as the summer wildfires, will help affected communities and emergency teams connected. We strengthened business resilience and trust through ESG supplier audits and employee training. Finally, ESG leadership continues to be recognized externally in a record ISS rating of B+ in October, up 3.7 points year-on-year with A+ in environmental management and in ecoefficiency. Now I would like to hand over to Emilio, who will cover the main takeaways.

Thank you, Juan. In the third quarter, we delivered another good set of results through cost and execution of our transform and growth plan. We achieved consistent and sustainable growth in real and constant terms in the main financial metrics for the fourth quarter in a row with growth acceleration in key metrics. We are deepening our transformation with new milestone in simplifying our operational model in Spain, Germany and the U.K. AI is embedded across our strategic plan and is a key catalyst to improve customer experience, commercial performance, network automation and process efficiency. The strong free cash flow is the main driver for our net debt and leverage reduction. We are upgrading our adjusted EBITDA, adjusted operating cash flow after leases and free cash flow mainly in a strong operational and financial performance and significant operational leverage. Finally, we have strategic positions to accelerate European technology Our ambition is to be the best gateway for the citizens to access digital technologies and to become a best-in-class telco in Europe by 2030. Thank you for your time. We are now happy to take your questions.

[Operator Instructions] First question today comes from Andrew Lee from Goldman Sachs.

I had a couple of questions, but all on your debt position. So it's a little hard for us to work out underlying trends today given some tax one-offs and discontinued operations. So I just wanted to ask, is underlying net debt coming down and how material can your deleveraging be over the next year? If we look at Slide 10, it shows a reduction of just over 0.15x over the last 9 months. Do you expect a more rapid deleveraging in 2027? And then -- so that's the question number one. And then question number two, your bonds are implying materially higher rates at the moment than you currently pay, how much of a risk do you see from more expensive refinancing in the coming few years and how can you reassure investors on that front?

Thank you for your questions. So on the first one, so net debt, you should not measure net debt linearly. The decrease of that doesn't happen quarter -- in a linear way quarter-by-quarter. So probably the best way to see it is to meet year-on-year. So we have decreased EUR 1.6 billion in these 9 months, and we've reached the 263 which is well in line towards the 2.5 that I mentioned. The fact that you're not able to maybe do the math and compute the free cash flow generation of the year -- of the quarter with the figure we're giving is because there are some moving parts below free cash flow. For instance, you mentioned the taxes. So the tax credit of 334, that is included in the free cash flow, you have to take into account that was also included already as a collectible as an asset in our net debt. So that 334 that flows in our free cash flow doesn't move the net debt figure. That's the most important one. There are other topics below the free cash flow line that you already mentioned. So you have the free cash flow of discontinued operation like Mexico, you do have bits and pieces like the share buyback that Brazil The share buyback that we've done, and we announced that we surpassed the 1% a few weeks ago. And that is why probably the math is not working for you. But on the second part of your first question -- because you did 3, actually. The second part has to do with the guidance on '27. We don't guide on '27. We will do that accordingly at the right moment, which is February '26 (sic) [ '27 ]. So right now, we're guiding for the 2.5. We're committed to that ratio and we're on track to do so. Remember, we started the year with 278. If you think about it back a year ago, it was 289 and we were already at 263. So we're progressing towards that. And I would like to stress that once we reach the 2.5, we will keep on delivering. Now on the cost of debt. So let me -- so -- the first thing is that approximately half of that is fixed -- fixed coupon. So that gives us a protection. Then the other one is that we have a solid liquidity position of EUR 17.5 billion, that's EUR 7.3 billion in cash and EUR 3 billion in committed lines. So if there was an interest rate increase that -- as the one you mentioned, firstly, we'll only tap what we have to refinance. And we have a strong liquidity position in case we don't find attractive windows in the market, which we've done in the past, for instance, this year, when we have already financed the full year. So we're reducing net debt we're progressing towards our leverage, and we feel we're well protected in this volatile market times.

Next question is from Ondrej Cabejšek from UBS.

I had 2 questions, please. I guess predominantly focused on Spain. So the first one would be around your conversion ARPU trends, which has been improving in Spain. And overall, I guess, what we observed is that the big 3 players are all seeing improving revenue trends and staying over the past couple of quarters. So I was curious to get your updated view on composition pricing, the kind of saturation of the lower mid-end markets in Spain and whether the improved revenue or service revenue dynamics in Spain are sustainable in your view? That's question number one. And the second question on wholesale, which has obviously been a bit volatile this year, but it improved quite a bit sequentially. So if you could please remind us what are those various major drivers of this over the coming year? And when should the trends see some improvement or stabilization if at all, I guess, including some of the sharing benefits that should be coming in line from Spain? And this is not a pain specific question, just to be far, but overall for the group.

Thank you very much for your question. First of all, talking about Telefónica Spain and the price evolution and revenue evolution. First of all, to mention that our evolution is based on our strong commercial model. And it means that we are able to sustain revenues with a high ARPU with a low churn, even taking account that during all these years, we have been able to rise prices maintaining this channel. We don't see any change in these trends, first of all, because we are very well positioned in the high-end market. We think that our strong offer in content, in digital ecosystem and handset devices to maintain and to have a healthy and sustainable business. In the case of the low-end, there is more pressure, something that we have seen during the last quarter. But again, Telefónica is stable with O2 brand and some products of the Mobistar brand to maintain the position. Remember that we have been able to have a positive portability figures with all the players. Together with the evolution of these market trends, we consider that we are able to maintain the same price strategy for the next coming years. We have proven a lot of times that we are able to manage how to increase prices at the same time that we maintain the low churn on the ARPU. Regarding the wholesale. First of all, to remember that we don't separate revenues from wholesale and others. And we are talking always about wholesale and others. As we mentioned in the last quarter, we we were expecting to reach the peak of the wholesale revenue decline due to the new agreements during this Q3 and it is happening. This Q3 is the peak of the impact of the wholesale agreement. We think we will see [indiscernible] revenues in the next coming quarter and to be stabilized in 2027. Together with the wholesale, we include others that is not linear project mainly and is more difficult to predict. Anyway, we are confident with the evolution with the service revenue with the retail revenue and everything that is happening in this line of revenue is something that we have planned and was predicted. And then it means that when we say that we are confident in the evolution is because we know perfectly how it's going to be this evolution during the Q1 of next year, we'll provide, of course, the outlook of the year to see how we see these positive trends there next year.

If I may have 1 quick follow-up on the low end. Do you consider ourselves pretty well-shielded from this going forward as well or is there going to be some catch-up in terms of the more aggressive campaigns on the lower end translating into ARPU a bit further down the road?

Yes. We think that we can maintain the same trends. So we have demonstrated that we are able to maintain our offers including, for example, ecosystem in the O2 bundles and to maintain, again, churn ARPU in a very low levels in the case of churn at the high level in the case of ARPU. There is something that is important always in this kind of situation that is the customer experience, the customer service. When we highlight the churn we are seeing -- or we can say that clients want to be with us simpler like this. And it is our offer, our customer service experience and our way to provide the services for them. I know that low end of the market has a lot of pressure sometimes. It's true that everybody needs to be profitable and then this has a limit. But anyway, we are very confident to be able to maintain our strong position that we have today.

We will now take the next question and this is from Nick Lyall from Berenberg.

Could I ask a couple of questions on Germany, please. Just -- it looks like your German ARPU for the quarter is starting to rise year-on-year. Is that fair, firstly? Is that just because of the lower promotions this quarter or could you maybe help us out with some of the drivers into next year, please, the family plans and others, do you expect ARPU to rise from here into '27? And then the second question was on M&A in Germany as well. Do you have to reconsider any offers for one-on-one or United Internet now? Do you think it's been a year since the CMD and have you exhausted all options there? What are there any options remaining, do you think?

Thank you for your question. I'm going to answer the second one, and then I hand over to to Santiago to explain a little bit more about the ARPU and the evolution of that in Germany. Just to remember that we always comment that we don't comment anything about M&A. And we are not going to change this strategy as I may say, to -- for us to explain what is our strategy in the decision. Anyway, as we mentioned in we consider all the options, and we maintain open all options that would be interesting for us in all markets, in any situation, but we don't comment about any specific decision in the sale. And regarding ARPU, I'm going to hand over to Santiago to answer your question.

Yes, Nick, on your ARPU question, it was not fully that I will try to answer. If I don't cover fully to just let us know what else you want us to cover. So the quality of our B2C customer base is steadily improving. We see a constantly growing number of customers with multi-SIM and/or convergence contract, and that's supporting the loyalty and service revenue. At the same time, due to our typically 20 more month contract periods, postpaid ARPU and MSR continue to reflect the combination of a higher share of second and third SIM cards and the intense competitive environment of the past years. So it takes time for the improvement to reflect in the front book ARPU and to feed through the postpaid base of 80 million accesses. However, we are seeing early benefits of our value strategies. Our O2 customer contract ARPU declined, stabilized quarter-on-quarter and overall, in line with our competitors' ARPU. What's more important though is that households ARPUs are growing year-on-year, in line with our strategy.

We'll now take the next question, this is from David Wright, Bank of America.

A couple of questions from me. Back to the debt. Obviously, we've seen the Brazilian real devalue recently following the elections. And there still seems to be quite a significant imbalance in the EBITDA coming up from Brazil and the debt that's held in Brazilian real, I think it's like 40% of your group EBITDA was Brazil, around 15%, 16% of your debt is Brazil. So this -- it's a little bit like 2016. Are you at risk with the devaluation that your EBITDA impairs more than your debt and it actually threatens to raise your leverage? How should we think about that, please? And then second of all, you talk about your 2.8x and 2.5x leverage. And obviously, it's a very different equation that the rating agencies use. Do you know where your 2.5x is under the S&P definition, for instance, should we be thinking around about 3x to then compare with their rating outlook? Those are 2 questions.