Telecom Italia S.p.A.
Q3 2016 Earnings Call Transcript

Published: 7 Nov 2016

[Executives:]

Alex Pierre Bolis - Telecom Italia SpA Flavio Cattaneo - Telecom Italia SpA Piergiorgio Peluso - Telecom Italia SpA

[Analysts:]

Dhananjay Mirchandani - Sanford C. Bernstein Ltd. David Wright - Bank of America Merrill Lynch Carola Bardelli - Deutsche Bank SpA (Broker) Mandeep Singh - Redburn (Europe) Ltd. Mathieu Robilliard - Barclays Capital Securities Ltd. Fabio Pavan - Mediobanca Banca di Credito Finanziario SpA (Broker) Alberto D'Agnano - Goldman Sachs International Justin Funnell - Credit Suisse Securities (Europe) Ltd.

[Alex Pierre Bolis - Telecom Italia SpA:]

Good morning to, everyone. Here's Alex Bolis speaking, Head of TI Investor Relations. I welcome you to Telecom Italia's Third Quarter 2016 Results Call. The call will be led by our Group CEO, Flavio Cattaneo, who will summarize the positive last quarter performance, and will then give us a guidance update. Our CFO, Piergiorgio Peluso, will brief us as usual on the main operational and financial trends. At the end of the presentation, we'll be taking questions. I wish to remind you of our Safe Harbor disclaimer contained at the beginning of our presentation, and I now hand it over to Flavio.

[Flavio Cattaneo - Telecom Italia SpA:]

Thank you, and good morning to all of you. (00

[Piergiorgio Peluso - Telecom Italia SpA:]

Thank you very much, Flavio, and good morning to everybody. Let me start by giving you some positive insight in Domestic performance that has posted solid results. Three quarter 2016 (12

[Flavio Cattaneo - Telecom Italia SpA:]

Thank you, (19

[Alex Pierre Bolis - Telecom Italia SpA:]

The Q&A session is now open. I may ask each participants to keep it only to one point, but we can open the discussion as much as possible please? We can start.

[Operator:]

The Q&A session is now open. Thank you. First today's question comes from Mr. Dhananjay Mirchandani of Bernstein. Mr. Mirchandani, please?

[Dhananjay Mirchandani - Sanford C. Bernstein Ltd.:]

Thank you very much for taking this question. I'd like to stretch our horizon and look to your sense, on how far down the path are you in achieving your current ambition to reduce Domestic costs by €800 million on a run rate basis?

[Flavio Cattaneo - Telecom Italia SpA:]

For the operating costs, we have during this day many meeting with the trade union that we have proposed the organization. We have already started the new process. I can remember here that (23

[Piergiorgio Peluso - Telecom Italia SpA:]

Yes. Since we started with the efficiency plan, we had objective of €250 million of cash cost reduction in 2016. And now we are more than 80% achievement, but we are fully on track with this plan.

[Flavio Cattaneo - Telecom Italia SpA:]

That means we are very confident also for this quarter that we catch our targets.

[Dhananjay Mirchandani - Sanford C. Bernstein Ltd.:]

Perfect. Thank you very much.

[Alex Pierre Bolis - Telecom Italia SpA:]

Thank you, Dhananjay. Next question, please?

[Operator:]

Next question comes from Mr. David Wright of Merrill Lynch. Mr. Wright, please?

[David Wright - Bank of America Merrill Lynch:]

Yes; thank you very much. Guys, you launched a series of new Mobile promotions in September. I was wondering if you could give us some indication of how that's progressing? You've obviously talked very positively about some of the Fixed and Pay TV promotions. So if you could give us an update on Mobile? And maybe on the same subject, obviously, the TV is selling very, very well. Is there is a subsidy associated with that, that could possibly disrupt the margin also in Q4? Thank you.

[Flavio Cattaneo - Telecom Italia SpA:]

Regarding the Mobile sector, we're running very well, because (26

[Alex Pierre Bolis - Telecom Italia SpA:]

Thank you, David. Next question, please?

[Operator:]

Next question comes from Ms. Carola Bardelli of Deutsche Bank. Ms. Bardelli, please?

[Carola Bardelli - Deutsche Bank SpA (Broker):]

Yes. Good morning. Congratulations on the results. A question on CapEx. You say you're achieving more, spending less. So I also say that CapEx to sales was far below 20% in the medium-term. I was wondering if we can start to see a slight fall in the CapEx to sales already in 2017, and as part of this question, obviously, if we can see a continuation of the revenue growth in the Domestic side that we saw in this quarter, but a little bit helped (28

[Flavio Cattaneo - Telecom Italia SpA:]

Regarding the evolution of CapEx on sales, it is consequently the consequences of investment of the NGN, while we reach the target, we cover all the country automatically, (29

[Piergiorgio Peluso - Telecom Italia SpA:]

Thank you, Flavio. Carola, as you know, we have not given a guidance for the net debt year-end. So I will not comment on this. I can only tell you that, in the last quarter, we are envisaging a trend more in line with last year. We start to see – just to give you an idea, since the most important topic usually is working capital, if you want to consider that working capital last year and last quarter was positive for €1 billion. But consider that last quarter, working capital was benefiting from also the DTT provision, which were, as you know are very high. Excluding the impact of this provision, in organic terms, we envisage for last quarter a trend more or less in line.

[Carola Bardelli - Deutsche Bank SpA (Broker):]

Very clear. Thank you.

[Alex Pierre Bolis - Telecom Italia SpA:]

Thank you very much, Carola. And we can move on to the next one now.

[Operator:]

Next question comes from Mr. Mandeep Singh of Redburn. Mr. Singh, please?

[Mandeep Singh - Redburn (Europe) Ltd.:]

Hi, thank you for taking the questions. I just wanted to see if you're getting to see any evidence of Enel rollout, customers being connected, even though it's very early days, have you seen any evidence that Enel is making progress in any cities; and where are you seeing that? Any color on that will be helpful? Thank you.

[Flavio Cattaneo - Telecom Italia SpA:]

For what we know, no news or evidence we know. But I repeat it, again, we work very hard in our plan. And our intention is cover as soon as possible all the country. And the rest are not our business. Thank you.

[Alex Pierre Bolis - Telecom Italia SpA:]

Thank you very much, Mandeep. We can now move on to the next one.

[Operator:]

Next question comes from Mr. Mathieu Robilliard of Barclays. Mr. Robilliard, please?

[Mathieu Robilliard - Barclays Capital Securities Ltd.:]

Yes. Good morning. Mr. Cattaneo, I think you were in Brazil, a few weeks ago, and I wanted to know, if you could share with us what were the main takeaways and how that has changed your long-term view (32

[Flavio Cattaneo - Telecom Italia SpA:]

Well, I not only stayed in Brazil many times, but I have via video every week in some case, four times a week, several times a week meeting with them. (33

[Mathieu Robilliard - Barclays Capital Securities Ltd.:]

Thanks (35

[Alex Pierre Bolis - Telecom Italia SpA:]

Thank you, Mathieu. Next one?

[Operator:]

Next question comes from Mr. Fabio Pavan of Mediobanca. Mr. Pavan, please?

[Fabio Pavan - Mediobanca Banca di Credito Finanziario SpA (Broker):]

Yes. Hello. Thank you for taking my question. You managed to reduce (36

[Flavio Cattaneo - Telecom Italia SpA:]

Line losses will be always better. We work every day to improve acquisition; even though there is a seasonality, as you know, but we can improve not only acquisition, but also the open access increase not only for TI, but for everybody, the activation. In this case, the double effect, more activation and more activation means reducing line losses. As I said before, our objective is to reach as soon as possible the parity.

[Alex Pierre Bolis - Telecom Italia SpA:]

Thank you very much, Fabio. Let's move on to the next one.

[Operator:]

Next question comes from the Mr. Alberto D'Agnano of Goldman Sachs. Mr. D'Agnano, please?

[Alberto D'Agnano - Goldman Sachs International:]

Hello. Good afternoon. So just on cost cutting, can you share some detail on what causes the significantly higher rate of employee reductions that you achieved in the quarter? And on the same point, we've seen that, volume-driven costs were down year-on-year for the first time in the third quarter. Can you share some thoughts on what's starting the pace?

[Piergiorgio Peluso - Telecom Italia SpA:]

Personnel, as you know – sorry, I didn't really get well the question, but the point is on the personnel, you know that in the second quarter, we had €6 million of savings related to the full-year 2015 related bonus. So this was all in the second quarter; in the third quarter, we don't have any other impact on personnel. In terms of extraordinary provision, we have some provision for the retirement plan, but this is a number in the region of €56 million, if I remember well. So these are the numbers on personnel. On volume-driven, sorry, let me get the numbers. On the volume-driven cost in third quarter, we had an impact of €23 million in third quarter this year compared to third quarter last year. And the component related to (38

[Alberto D'Agnano - Goldman Sachs International:]

Okay. Thanks. Thanks very much. And just on the...

[Piergiorgio Peluso - Telecom Italia SpA:]

Thank you.

[Alberto D'Agnano - Goldman Sachs International:]

...on the employees, I'm just referring to the reduction in the number of head count this quarter at 482 (39

[Piergiorgio Peluso - Telecom Italia SpA:]

In terms of Domestic, I don't think there is a meaningful reduction. Probably, you're referring to the Brazilian component. As you know, we have some extraordinary (39

[Alberto D'Agnano - Goldman Sachs International:]

Okay. Thank you very much.

[Piergiorgio Peluso - Telecom Italia SpA:]

Not in the Domestic.

[Alex Pierre Bolis - Telecom Italia SpA:]

Thank you very much, Alberto. I think we have room for one more question.

[Operator:]

Next question comes from Mr. Justin Funnell of Credit Suisse. Mr. Funnell, please?

[Justin Funnell - Credit Suisse Securities (Europe) Ltd.:]

Yeah. Thank you. So this is the last, can I possibly ask one and a half? Just on the Infratel contract, if I've got the name for it right, these government-backed subsidies for rollouts in the low-density areas, could you give us an update on how many – what percentage of these you're winning so far, and what percentage do you expect to win overall? Would you expect to win half of them or more than that or less? And secondly, just a little question on your numbers in Mobile business. There was a really big pickup in your visitor and other revenues, about nearly €96 million of revenue in Q3, pretty much it doubles from Q1. Is this all to do with increased visitor roaming volume, and does this mean good news for next year as we get more usage of roaming or is it something to do with your MVNO contracts with Fastweb? Thank you.

[Alex Pierre Bolis - Telecom Italia SpA:]

Okay, Justin. The first part of the question, Mr. Cattaneo will take, and then the second part, Piergiorgio.

[Flavio Cattaneo - Telecom Italia SpA:]

Well, regarding the Infratel auctions, the processes are going. We cannot comment in detail because there is not news coming from their side (41

[Piergiorgio Peluso - Telecom Italia SpA:]

Yes, Justin. The €96 million we're referring to in the Wholesale Services are almost related to revisiting (42

[Justin Funnell - Credit Suisse Securities (Europe) Ltd.:]

And just (42

[Piergiorgio Peluso - Telecom Italia SpA:]

Yeah, it's growing. I would say, it's growing. Look at the evolution, the seasonality is there because in the second quarter, we have an impact of €72 million; in the third, €96 million with the same evolution also last year. So (42

[Justin Funnell - Credit Suisse Securities (Europe) Ltd.:]

Okay. Thank you.

[Alex Pierre Bolis - Telecom Italia SpA:]

Thank you very much, Justin. So, we are wrapping up now. Thank you very much for being with us today to all. And of course, Investor Relations will be available as usual for any follow-on question. Thank you and have a nice rest of the day.

[Flavio Cattaneo - Telecom Italia SpA:]

Thank you.

[Operator:]

Ladies and gentlemen, the conference is over. Thank you for calling.