Telecom Italia S.p.A.
Q2 2016 Earnings Call Transcript

Published: 27 Jul 2016

[Executives:]

Alex Pierre Bolis - Head-Investor Relations Flavio Cattaneo - Chief Executive Officer & Director Piergiorgio Peluso - Chief Financial Officer

[Analysts:]

Mandeep Singh - Redburn (Europe) Ltd. Fabio Pavan - Mediobanca Banca di Credito Finanziario SpA (Broker) Luis Prota - Morgan Stanley SV SAU Justin B. Funnell - Credit Suisse Securities (Europe) Ltd. David Wright - Bank of America Merrill Lynch Stefano Lustig - Equita SIM SpA Alberto D'Agnano - Goldman Sachs International Andrea Randone - Intermonte Sim SpA Luigi Minerva - HSBC Bank Plc (Broker)

[Alex Pierre Bolis - Head-Investor Relations:]

Good morning to everyone. This is Alex Bolis, Head of Investor Relations, and I would like to welcome you to Telecom Italia Second Quarter of 2016 Results Call. Our Group CEO, Flavio Cattaneo, will start by giving us a review of the positive developments that we have scored during this quarter, which, as you will see, provide an important base for future positive evolution. Then, our CFO, Piergiorgio Peluso, will update us on the main operational and financial elements, giving us some further insight. After a wrap-up from the CEO, we'll be taking questions. I wish to remind you that our Safe Harbor disclosure (0

[Flavio Cattaneo - Chief Executive Officer & Director:]

Thank you, Alex Bolis. Good morning to everybody. It's a pleasure to have you with us today. Last May, we said how important delivery is for us. Well, second quarter has been my first quarter as a CEO, and I'm proud to announce it is TI Domestic best quarter since 2009, demonstrating that the actions taken to date are bringing significant results. Let's continue on Domestic on slide five. Our mobile service revenue consistently improved, the positive trend driven by backlog LTE penetration of our customer base. As you know, the introduction of our TIM Prime repricing was postponed to mid-June according to the regulator. And so, today, results only include the very limited impact from this repricing, which will definitely support revenues in the second part of the year. ARPU was up to €12.1 and our 21.2% churn continued to be, by far, the lowest in the market. On fixed, consumer trend is in line with the previous quarter while the business segment was marginally affected by the year-on-year discontinuity of Expo-related (2

[Piergiorgio Peluso - Chief Financial Officer:]

Thank you very much, Flavio, and good morning to all of you. On slide 13, we give you a comprehensive view of our main results for the quarter. Group total revenue stood at €4.7 billion, of which €3.7 billion come from our Domestic operations, where NGN has reached 51% households coverage and LTE reached 94%. Brazil contributed to group top line for €1 billion. Also, LTE coverage increased, reaching 64% of the urban populations in 579 cities. Consolidated EBITDA before non-recurring items stood at €2 billion. Domestic contributed with a record performance of €1.7 billion, driven by our effective cost control that did not affect commercial and industrial levels. Also, Brazilian EBITDA improved with a €0.3 billion result. On INWIT, as the CEO explained to you before, the decision has been to keep it in the current perimeter and grow it further. As of June 30, our net financial position stood at €27.5 billion, incorporating since the beginning of the year a pure accounting impact for IAS 17 treatment of leasebacks for €116 million, an exchange rate impact due to the devaluation of the Brazilian real of €165 million. Let's now move into some of the Domestic detail, slide 14. The Domestic revenue stood at €3.7 billion, minus 1.2% year-on-year in reported terms, resulting from the combination of minus 4.1% year-on-year on total fixed revenues and a continued growth of 2% year-on-year for mobile. Service revenues were €3.5 billion, minus 1.1% year-on-year in reported terms, improving by 1.3 percentage point versus first quarter 2016. We already commented on our organic Domestic EBITDA trend. We now come to mobile, slide 15. Total mobile revenues confirm their positive performance in plus 2% year-on-year, driven in particular by a strong consumer performance. Calling customer base reached 86.1% of the total customer base, plus 0.6 percentage points year-on-year. As already indicated by the CEO at the beginning of his presentation, ARPU was €12.1, plus 1.5% year-on-year. On the lower right-side of slide 15, we showed the continued and strong progression of the LTE penetration on our mobile broadband customer base, which has now reached 48.8% of a total figure of €11.8 million. Slide 16. Total fixed revenue stood at €2.6 billion, down 4.1% year-on-year due to the unfavorable quarter-on-quarter comparison with Expo-related (15

[Flavio Cattaneo - Chief Executive Officer & Director:]

Thank you, Piergiorgio. It's time now for wrap-up. The result of this quarter are the first important steps of seeing turnaround. Domestic EBITDA is back to growth year-on-year, both on quarterly and first half basis. The Fastweb deal further boosted our NGN leadership. INWIT has an increasing value not fully priced yet. Leverage projection for 2018 has improved with a net debt/EBITDA ratio below 2.7 times. We are working on our top line in a systematic way and we are in good condition to face the second part of the year. The new management team is now set. I have just appointed the new Head of Consumer, Business and Network, and I asked them to make young talents grow. We are an incumbent with the mind of a newcomer and we'll look to the future. Let us work and you will see the result. Thank you very much for your attention and now, we are ready to begin Q&A.

[Alex Pierre Bolis - Head-Investor Relations:]

Thank you. The Q&A session is now open. May I ask each participant to ask only one question so that we can open the discussion as much as possible? Please. We can start now.

[Operator:]

The Q&A session is now open. Thank you. First, today's question comes from Mr. Mandeep Singh of Redburn. Mr. Singh, please.

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

Thank you for taking the question. It's one question but slightly a multi-part one. First of all, I would just like for you to clarify what the EBITDA basis organic for 2015 against which you are guiding for low single digit growth. And as a follow-up, really, the leverage target of 2.7 times, if we take your €27.5 billion of net debt, the cumulative free cash flow and the impact of the mandatory convertible, the implied EBITDA for 2018 is actually 8.9 times on a leverage ratio of 2.7 times. Consensus is currently sitting at about €8.1 billion. I'm not asking you for a three-year EBITDA number as a guidance, but are there expected to be inorganic items in that deleveraging and can you just clarify that my understanding of that mathematics is correct? Thank you.

[Alex Pierre Bolis - Head-Investor Relations:]

Thank you, Mandeep. And so, the first question was what is the organic EBITDA base 2015 on which we will benchmark the 2016 performance. The second one was sort of a clarification of the trends that we see for the future on EBITDA and given our update on the leverage. But also, Piergiorgio will tell you on both and will give you a little more detail on the comment on the leverage.

[Piergiorgio Peluso - Chief Financial Officer:]

Yeah. Thank you. The reference for our guidance for EBITDA is the 2015 organic EBITDA, which is €6.6 billion. So, we are referring exactly to this number. As you know, we use our organic number excluding non-recurring items that in 2015 have been very significant. In terms of the guidance – sorry, the leverage ratio, let me say that, of course, this is not the result of the new plan. The new plan, as you know, will be released in February. So, this is, let's say, the old plan, the February plan adjusted for two components. The first one is the INWIT sale that in the February-March was included. And of course now, we have excluded having decided to keep it in within the perimeter. And the second adjustment is the cost-cutting exercise that we have announced in May, and that you have seen right now, full on track. So, it is not a new plan exercise. It is the old plan adjusted for these two changes. I don't know if this is clear, or you want me to comment back to this point (24

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

If you could follow up. I'm still struggling to get to – we know about the €1.3 billion mandatory convertible. You are giving guidance on cumulative free cash flow of €2.1 billion, at least €700 million organic debt reduction. So, I'm really just trying to get to how you arrived at the leverage ratio. Are inorganic items included, or should we just focus on this being based on what you think the EBITDA could look like in three years' time?

[Piergiorgio Peluso - Chief Financial Officer:]

No, no, this is reported number. Of course, the guidance for EBITDA that we discussed before, the 2016 EBITDA guidance, is a reported guidance – sorry, is an organic guidance. This leverage ratio is, of course, calculated on reported numbers. And of course, you should consider both the – there are various changes, of course, on EBITDA level and on the total debt, and include also Brazil. And it has the same, let's say, principle and assumption that we discussed in the February plan, which means that we exclude the spectrum and, of course, considers the full impact of the full consolidation of Brazil.

[Alex Pierre Bolis - Head-Investor Relations:]

Thank you very much, Mandeep.

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

Okay. Thank you.

[Alex Pierre Bolis - Head-Investor Relations:]

Again, thank you. Can we move on to the next question, please?

[Operator:]

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

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

Hi. Good morning. And thank you for taking my questions. You were previously suggesting that the performance bonus had an impact on quarterly cost base. So, my question is, can you please provide us some more color, some update on implementation of the efficiencies plan? Thank you very much.

[Alex Pierre Bolis - Head-Investor Relations:]

Piergiorgio will take this question. Thank you, Fabio.

[Piergiorgio Peluso - Chief Financial Officer:]

Okay. Let's comment a little bit. The second quarter results, that I tried to give you an indication for the second half. In the first half – sorry, in the second quarter, we had a decrease in OpEx by €155 million. And this number is, as I said – anyway, you can see in the back half, is composed by, I would say, three components

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

Thank you very much.

[Alex Pierre Bolis - Head-Investor Relations:]

An additional comment from Mr. Cattaneo.

[Flavio Cattaneo - Chief Executive Officer & Director:]

(29

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

Thank you.

[Alex Pierre Bolis - Head-Investor Relations:]

Thank you very much, Fabio. Next question, please.

[Operator:]

Next question comes from Mr. Luis Prota of Morgan Stanley. Mr. Prota, please.

[Luis Prota - Morgan Stanley SV SAU:]

Yes. Thank you for taking the question. What I would like to understand is the dynamics behind the 14% decline in voice wireline revenues. My understanding is that with Tutto Voce flat fee from May last year, voice plus access revenues should be much more stable now. I'm probably very dependent on line loss, which is only down 5% and much less than the 14% decline in revenues. So, if you could help me to understand that gap and what to expect in the coming quarters would be great. Thank you.

[Alex Pierre Bolis - Head-Investor Relations:]

Okay. So, Luis, the question was on the – you're saying basically on fixed. Your comment is, what's the effect of the Tutto Voce because obviously Tutto Voce flattened out the pay-per-use voice into a €29 a month tariff. So, your question is, what is your outlook on this cluster of the business.

[Piergiorgio Peluso - Chief Financial Officer:]

Yeah. Okay. Let me – the evolution of the second quarter wireline is more or less in line with the previous quarter. And, of course, the decline is very much related to the access only voice that declined, of course, with an important pace. And, of course, we are recovering with the new further proposition. In the second part of the year, we expect this number to reduce with a progressive improvement considering first the line losses reduction that we have seen that has been declined – the decline has been reduced from the first quarter and we expect to have the similar evolution in the next two quarters. Then, we will have a smaller repricing in the fixed component. And there will be also – there will be (31

[Luis Prota - Morgan Stanley SV SAU:]

Thank you. That is definitely very helpful. But my question was a bit more a theoretical one. So, I really want to understand how, if you have a flat fee for voice and access which is an opt-out tariff and which generated, I think it's 3% or 4% only, how you can have voice and access revenues coming down 14% if line loss is only – or line decline is only 5%. So, the gap between the line decline and the voice and access revenue decline is 5% to 14%. And this is what I don't understand. Thank you.

[Piergiorgio Peluso - Chief Financial Officer:]

Yeah. It's a customer-based mix because we have a customer base decline in the access, voice and increase in the (33

[Luis Prota - Morgan Stanley SV SAU:]

Okay. Thank you.

[Alex Pierre Bolis - Head-Investor Relations:]

Okay. Thank you very much, Luis. Next question, please.

[Operator:]

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

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

Thank you. Yeah. I mean, obviously, (33

[Alex Pierre Bolis - Head-Investor Relations:]

Justin, I would like to concentrate on your second question, I guess. The second question is a comment on the possibility of this new agreement with Fastweb to be open to other players as well, if I understand well, and if we envisage any antitrust issues.

[Flavio Cattaneo - Chief Executive Officer & Director:]

We're all concerned (35

[Piergiorgio Peluso - Chief Financial Officer:]

Yeah. Of course, this is an investment vehicle that we created with Fastweb, and as the CEO said, we are regulated. So, we have the obligation to sell as in line with the current regulations to other alternative operators. With the antitrust, of course, we have – in discussion in order to understand if there is anything. But we don't expect anything being this is an investment vehicle, as I said, regulated by the current regulation.

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

Okay. Thank you.

[Alex Pierre Bolis - Head-Investor Relations:]

Thank you, Justin. Next question, please.

[Operator:]

Next question comes from Mr. David Wright of Bank of America. Mr. Wright, please.

[David Wright - Bank of America Merrill Lynch:]

Yeah. Good morning, guys, and thank you for the call. So my question is on the redundancy costs you've just agreed for the senior managers. Within my question, I guess, two parts. First of all, it's expected by – the full saving, I think, is expected by 2018, but when should we see the impact of the first redundancies? Could that come as soon as this year? And, also, on the same subject, how will you account for this? Will you provide for the redundancy costs up-front and then take all of the salary out of OpEx? Will that be the accounting treatment we could expect from this? Thank you.

[Alex Pierre Bolis - Head-Investor Relations:]

So, the question, David – David, the question was how this accelerated the departures, also due to Legge Fornero, what we provided in the second half of 2015 for, will build up over time.

[Flavio Cattaneo - Chief Executive Officer & Director:]

As you have read in our statement some days ago, we have signed also an agreement for the reduction of 25% of our executive. And the plan has already started and by the end of this year would be realized for the major part of this. Regarding the articolo 4, so-called articolo 4 for pre-retirement is well on track and, at the moment, all with the characteristics before their obtain (38

[David Wright - Bank of America Merrill Lynch:]

So, could I just check...

[Alex Pierre Bolis - Head-Investor Relations:]

David, can we perhaps follow up on this one offline, just for the sake of keeping (38

[David Wright - Bank of America Merrill Lynch:]

Yeah. But just to clarify then, Alex, so we should start to see the cost saving benefits at the end of this year and into next?

[Alex Pierre Bolis - Head-Investor Relations:]

Okay. Quickly, Piergiorgio, then on this one.

[Piergiorgio Peluso - Chief Financial Officer:]

One point to follow up your operation because you remember that last year, we had a big provision in the (39

[David Wright - Bank of America Merrill Lynch:]

That's very good. That's the clarity I needed. Thank you.

[Alex Pierre Bolis - Head-Investor Relations:]

Thank you, David. Next question, please.

[Operator:]

Next question comes from Mr. Stefano Lustig of Equita. Mr. Lustig, please.

[Stefano Lustig - Equita SIM SpA:]

Good morning to everybody. I have a question on TIM Prime to understand on the number and percentage of customers that could evolve. And if possible, what are the first reaction of the customers to the TIM Prime and what could be the impact of this tariff package? And also, as you mentioned, a little increase in prices also in the wireline, more in general, from a strategy point-of-view, trying to understand, what were the forces leading you to take the decision that it was a time to consider price increases and that it was not too early, let's say, to consider that.

[Flavio Cattaneo - Chief Executive Officer & Director:]

Regarding the mobile, we have introduced the TIM Prime repricing only in the mid-June. In June, as I said, in the presentation, it is very low. It's the lowest on the market, and the results are in line with our expectation. For this reason, we have changed also the guidance, not only for the cost-cutting, but also because we see the stable level of the revenues. Regarding the fixed line, we have changed also. We are under change the process, internally. Today, we are working our employees, the blue collars also in (42

[Alex Pierre Bolis - Head-Investor Relations:]

Thank you, Stefano.

[Stefano Lustig - Equita SIM SpA:]

Thank you.

[Alex Pierre Bolis - Head-Investor Relations:]

Next question, please.

[Operator:]

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

[Alberto D'Agnano - Goldman Sachs International:]

Hi. Good morning, and thanks for taking my question. So, I would like to focus on the joint venture with Fastweb. So, minus that impact, you were already targeting a 20% Fiber-to-the-Home coverage. So how should we look at the 20% contribution from Fastweb within that? Is that going to reduce your investment outflow, or will that be reinvested? And also, how did you come up with the 80-20 split for the joint venture? Is that reflective of the expected market shares?

[Alex Pierre Bolis - Head-Investor Relations:]

Okay. So, the first question, Alberto, was on the expected increase of our Fiber-to-the-Home coverage due to this agreement. The second question is about the 80-20 proportion. Piergiorgio will now take...

[Piergiorgio Peluso - Chief Financial Officer:]

Yeah. Okay, ratio. You have to look – as I said, you have to look at this transaction as an investment vehicle that we have designed together with Fastweb. And the main objective, of course, of these was for us to accelerate our FTTH program. On terms over, let's say, underlying business plan, there is no significant change with our original business plan. Of course, thanks to this agreement, and particularly commercial agreement that is included in the package. We accelerate the results (45

[Alberto D'Agnano - Goldman Sachs International:]

Okay. Thank you.

[Alex Pierre Bolis - Head-Investor Relations:]

Okay. So, next question, please.

[Operator:]

Next question comes from Mr. Andrea Randone of Intermonte. Mr. Randone, please?

[Andrea Randone - Intermonte Sim SpA:]

Thank you, and good morning. Just a quick follow-up on the deal with Fastweb, in order to get a better understanding on the possible economic impact. I wonder, just to make an example, is it possible that, according to this agreement, Fastweb might migrate from (46

[Alex Pierre Bolis - Head-Investor Relations:]

Comment? Okay. So, you wanted to know about Milano if it is currently in the scope, I'll pass it on to Piergiorgio.

[Piergiorgio Peluso - Chief Financial Officer:]

Yeah. Milan is excluded from this vehicle because today we concentrate on 29 cities which is the same perimeter of our original FTTH plan, which were 30 cities and excluding Milan. Milan, as you know, is part of a different agreement or network so it is excluded from our – covering the investment plan. Of course, in the future, we could have different areas of cooperation in other cities, and we could maybe do something in all the other 29 cities. But for the moment, the vehicle is limited to 29 cities and you can see in the slide there is a note saying excluding Milan. And other areas will be evaluated in the future.

[Andrea Randone - Intermonte Sim SpA:]

Thank you.

[Alex Pierre Bolis - Head-Investor Relations:]

Thank you. Next question, please.

[Operator:]

Next question comes from Luigi Minerva of HSBC. Mr. Minerva, please.

[Luigi Minerva - HSBC Bank Plc (Broker):]

Yes. Good morning. A couple of follow-ups again on the JV with Fastweb. I wanted to understand if the perimeter of the agreement is for new areas to be covered with FTTH or if it's actually related to areas already covered with Fiber to the Street Cabinet, where thanks to this agreement, you plan to actually bring the fiber details towards the premises. So, if this is an agreement that takes the Fiber to the Street Cabinet to Fiber to the Premises in the 29 cities? And just as a follow-up, given this is an investment vehicle, could it be used for the Infotel tenders? Thanks.

[Alex Pierre Bolis - Head-Investor Relations:]

(49

[Piergiorgio Peluso - Chief Financial Officer:]

Yeah. So the second question was on Infotel and the first question was on the FTTH new level (49

[Luigi Minerva - HSBC Bank Plc (Broker):]

So, to clarify, the 29 cities, are they currently covering (50

[Piergiorgio Peluso - Chief Financial Officer:]

Yes, of course. Of course. This is a bit different. There will be a synergy between our cabinet and we say this is just limited to the secondary component of the (50

[Luigi Minerva - HSBC Bank Plc (Broker):]

Okay. Thank you very much.

[Alex Pierre Bolis - Head-Investor Relations:]

Ladies and gentlemen, thank you very much for your attendance. We need to wrap up because we have a hard stop due to other engagements. Thank you for being with us. And, of course, Investor Relations is available to take follow-on questions.

[Operator:]

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