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UPDATE 2-Spain's Telefonica targets higher profitability in 2017 to cut debt
February 23, 2017 / 12:27 PM / 10 months ago

UPDATE 2-Spain's Telefonica targets higher profitability in 2017 to cut debt

* Core profit up 14.3 pct as business recovers, costs drop

* Cash flow to keep improving in 2017, helping to cut debt

* Sees stable revenue this year, improving margins (Adds comments by CFO on reducing debt, M&A)

By Julien Toyer and Andrés González

MADRID, Feb 23 (Reuters) - Telefonica reported rising underlying profits on Thursday, saying it aimed to reduce its mountain of debt further this year, helped by improving its profitability, and would not be rushed into selling more assets.

The firm, which turned a corner last year after a long crisis when core profits halved, is still mired in debt, slowing its transformation into a more content and data-driven firm.

But its operating income before depreciation and amortisation (Oibda) rose 14.3 percent to 15.118 billion euros ($15.95 billion), as an improving business and lower restructuring costs more than offset negative currency effects.

Telefonica’s debt stood at 48.595 billion euros at the end of December, down 1 billion euros from the previous three months thanks to an improving cash flow.

It is expected to fall by a further 1.275 billion euros following completion of the sale announced this week of a 40 percent stake in its telecom masts business Telxius to private equity firm KKR.

Telefonica is also still trying to sell part or all of its O2 UK business after its sale to CK Hutchison for over 10 billion pounds ($12.5 billion) was blocked by competition regulators.

Chief Financial Officer Angel Villa said the company was still working on those plans, including a potential initial public share offering, but would wait for the right conditions.

For now, Telefonica will focus on cutting debt from within the company, with further improvement in cash flow expected to come from lower capital spending, cost savings and selling higher-margin premium services such as super high speed Internet and pay TV.

“We’re going to focus on organic cash flow generation and organic deleveraging... and M&A, if conditions are right, if it creates value and makes strategic sense, will also play a role in our efforts,” Villa said.

The company said it expected total revenues this year to be little changed but its profit margin to improve by 1 percentage point and to reduce its investment-to-sales ratio by 1 percentage point.

With the bulk of restructuring costs linked to a plan to cut thousands of staff and investments in new high-speed fixed line and mobile broadband networks already accounted for, these goals are seen as realistic, analysts say.

Free cash flow, which rose 24 percent in 2016 to 4.37 billion euros, will also be helped this year by a lower dividend, which is expected to save around 1.9 billion euros.

Telefonica reaffirmed its new dividend policy announced last October when it cut the planned payout from 0.75 euros to 0.55 euros for 2016 and to 0.40 euros for 2017.

Shares in Telefonica were up 2.3 percent at 9.56 euros at 1142 GMT when the Stoxx Europe 600 telecoms sector index was up 0.6 percent. ($1=0.9476 euros) ($1 = 0.8024 pounds) (Editing by Susan Thomas, Greg Mahlich)

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