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Telecom Italia SpA (NYSE:TI)

Q2 2013 Earnings Call

August 2, 2013 6:00 AM ET

Executives

Alex Bolis – Head, IR

Franco Bernabè – Chairman and CEO

Piergiorgio Peluso – CFO

Marco Patuano – Managing Director and COO

Analysts

Georgios Ierodiaconou – Citi

Mathieu Robilliard – Exane BNP Paribas

Giovanni Montalti – UBS

Simon Cooke – Insight Investment

Sam Morton – Mizuho International

Mandeep Singh – Redburn Partners

Micaela Ferruta – Intermonte

Justin Funnell – Credit Suisse

Sharon Chen – MetLife

Luis Prota – Morgan Stanley

Hannes Wittig – JP Morgan

Wilton Fry – Merrill Lynch

Jean-Francois Paren – Credit Agricole

Alex Grant – Macquarie Research

Operator

Good afternoon, ladies and gentlemen, and welcome to the Telecom Italia Group’s First Half 2013 Conference Call.

I would like to remind you that this presentation contains forward-looking statements within the meaning of the Private Securities Litigations Reform Act of 1995. Actual results may differ materially from those in the forward-looking statements, as a result of various factors.

Analysts are cautioned not to place undue reliance on those forward-looking statements which speak only as of the date of this presentation, and are encouraged to consult the company’s periodic filing which are on file with the United States Securities and Exchange Commission.

I now hand over to Mr. Alex Bolis.

Alex Bolis

Thank you very much. Good afternoon, ladies and gentlemen. Alex Bolis speaking, Head of TI Investor Relations. Today we have with us the speakers in sequence, Mr. Franco Bernabè, Chairman and Chief Executive Officer; Mr. Piergiorgio Peluso, Chief Financial Officer; and Marco Patuano, Managing Director and Chief Operating Officer.

As usual, this event is being recorded and all participants will be placed in a listen-only mode during the company’s presentation. After TI’s remarks are completed, we will be pleased to take your questions. There is a simultaneous webcast that may be accessed through the company website, www.telecomitalia.com. The slide presentation may be downloaded from that website as well. Please feel free to view the slideshow during the conference call.

I’ll turn it now over to Mr. Franco Bernabè.

Franco Bernabè

Thank you Alex, and good afternoon, ladies and gentlemen, and thanks for attending today’s Telecom Italia conference call. In the second quarter of 2013, our Group had to deal with a weaker macroeconomic environment and a strong drag coming from domestic regulation.

In Italy, our revenues and EBITDA trend mirrors such context. Nevertheless, our fixed operations show once again their resilience. And in mobile, if we normalize the revenues from the effect of MTR changes and roaming cap, the quarterly performance is in line with the ones of the other European players, while less volatility from quarter-to-quarter becomes evident.

In Brazil, we highlight a solid cash flow generation, resulting from an EBITDA trend in line with our expectations, and a careful CapEx management also leveraging on the new RAN agreement with Oi. Our local management is continuing to perform well in commercial innovation and is constantly monitoring and improving both, quality of service and network capacity, that we know are key to meet the strongly growing demand of mobile data.

In Argentina, revenues in EBITDA double-digit growth indicate a healthy performance. CapEx of which more than 50% is devoted to our network evolution is in line with planned disbursements allowing a double-digit cash generation growth.

At this point, before reviewing with you the Group performance highlights of the first half, I would like to spend a couple of minutes pointing out certain discontinuities which occurred in the second quarter as reported in slide three.

First of all, we received unexpected and unsupported decisions from AgCom for 2013, and a fine from the Italian Antitrust, both worth in aggregate around EUR200 million as shown on the left hand side of the slide. The NRA copper price proposal will presumably result in about EUR100 million negative impact on our top line, and EBITDA on a full-year basis, and is currently being examined by the European Commission.

The Antitrust Authority fine has already impacted for the year only on second quarter reported EBITDA. Anyhow, any possible related cash out is not expected before 2014. In the center part of this slide, we highlight the worsening of the economic scenario, and of the unemployment rate in Italy, together with a further declining consumption and a lower GDP growth expected in Brazil.

On right hand side of the slide, we briefly elaborate on the domestic consumer context that made us decide to invest on EBITDA, in order to preserve precious customer base. As you know, the MTR glide ban has now come to an end, and this will create a different context which will simulate the change in our competitors’ commercial strategy.

We took strong actions to make evident to the home market that we will no longer tolerate losing to others, our customer base. As a consequence in July, we enjoyed a robust mobile number portability performance, with successful offers like TIM Special and the Convergent Sconta e Raddoppia, as Marco will further detail to you in his presentation.

All of these events determine that overall we still grew Group quarterly performance. At the same time, we are not losing focus on the big game, which I briefly wish to summarize for you in the slide number four.

Telecom Italia’s permanent goal is to stabilize domestic EBITDA. While maintaining a strict and effective approach in cash cost savings, a key contribution to this goal will come from the execution of our fiber plan. I am still convinced that the best way to get there is through our fixed access structure separation projects which is gaining consensus with AgCom and with Italian and European institutions.

Of course this line of action on fixed, need to be accompanied by further progress in their position of TIM Italy to which Marco and his team are devoting considerable energies. While we trust that our domestic mobile consumer price war is coming to an end, we continue to believe that the most effective way to stabilize our mobile market is through a reduction in the number of players, and we will come back to this point later.

Let’s now move to the first half results. On slide six, we show how reported Group revenues decreased by 7% year-on-year organically, the Group top line declined by 2.7% year-on-year. Reported Group EBITDA was down 10.6% year-on-year. Organic performance was down 6.8% on the same basis reaching EUR5.4 billion. These results as we already mentioned benefited from both TIM Brazil and Telecom Argentina’s contribution, as well as from continued Group cash cost control.

Net income before goodwill write-down was around EUR1 billion ante-minorities, which translates into around EUR0.8 billion post-minorities. In line with sector standard practices, we have run an impairment test in our business units and the outcome was EUR2.2 billion of goodwill write-down in domestic operations.

As you know, this is a non-cash item and leaves Telecom Italia with capital reserves available for distribution of around EUR2.3 billion. Our liquidity margin amounts to EUR12.8 billion, confirming our commitment to cover with cash our financial requirements for the next 18 to 24 months.

The adjusted net financial position which stood at EUR28.8 billion at the end of 2013, recorded a EUR1.5 billion reduction versus the first half of 2012 net debt figure, and a temporary increase of EUR0.5 billion versus EUR28.3 billion at the end of last year after the payment of Group dividends for about EUR500 million.

On the top left hand side of slide seven, you can see that first half Group revenues decreased organically year-on-year by 2.7%, a EUR13.760 billion while organic EBITDA reached EUR5.355 billion, down 6.8% year-on-year. Reported growth rates were mainly negatively impacted by Forex effects dragging around 4 percentage points in revenues and 3 percentage points in EBITDA, as well as by marginal changes in the perimeter coming from the sale of La7 Srl and of Matrix.

Overall, the Group posted a solid margin of 38.9%. As you can see on the right hand side of the slide, Group CapEx stood at EUR2.193 billion in the first half, up 1.5 percentage points versus the same period of last year. EBITDA with CapEx decreased organically year-on-year by 11.8% standing nevertheless at a sizable level of EUR3.162 billion.

Let me draw your attention on the details of the contribution to year-on-year change for revenues and EBITDA, clearly demonstrating the domestic activities have been impacted by regulation, economy and competition.

Slide number eight, gives you an update of our main results by core markets. Contribution to our Group results from Brazil and Argentina in the first half of 2013 represents around 40% of our revenues and 27% of our EBITDA. These results prove once again how our Latin American operations play a relevant role in our overall performance.

In Italy, revenues stand at EUR8.104 billion, down 10.5% year-on-year. Organic EBITDA reached EUR3.943 billion, down 10.9% year-on-year, while the margin remains the highest by industry standards, slightly decreasing to 48.7%. Marco will elaborate on this, so we’ll take you straight to some details of our Latin American operations reported earlier this week.

During the first half of 2013, Brazil shows continued positive performance on a year-on-year basis. During the second quarter of 2013, Brazil further accelerated its top line trend. The year-on-year performance was up 8.7% driven by both service and handset sales. EBITDA increased by 1.3% in the second quarter of 2013 totaling EUR456 million.

Let me specify that second quarter revenues and EBITDA performance was affected by one-off impacts related to interconnection, dispute with other carriers. Excluding this one-off, both end our material improving quarter-on-quarter.

In Argentina in a complex macroeconomic situation in the second quarter, Telecom Argentina registered a double-digit growth in both top line and EBITDA. Revenues grew by 26.6% year-on-year reaching EUR973 million, underpinned by the continued positive performance in the mobile business, where the customer base grew to 19.3 million SIMs.

Personal is now the leading operator in revenues share and in growth. EBITDA reached EUR266 million in the last quarter, confirming a marginality of over 27%. As you can see in the upper right hand side of the slide year-on-year EBITDA marginally dropped by 1.8 percentage points due to stronger commercial activity and inflation driven costs.

Moving now to slide 13, in consideration of what we have outlined so far, we thought it was reasonable to adjust our EBITDA organic guidance from the consequences of the tough competition and domestic consumer mobile, as well as for the copper price reduction decided by AgCom in July.

We updated our target to accommodate for a slight deviation in 2013 EBITDA margin guidance respectively for domestic from less mid-single digit to less high-single digit, and for the Group from less low-single digit to less mid-single digit. But as you will in details in the following slide, we confirm our commitment to meet our debt and deleveraging targets.

Our net debt target for 2013 remains unchanged below EUR27 billion. Net cash flow generation together with additional actions in our three business units will allow the Telecom Italia Group to maintain the year-on-year net debt adjusted EBITDA reported ratio stable versus the one we posted at the year-end 2012 at around 2.4 times. This will allow to maintain, quite importantly, our year-end net debt to EBITDA ratio as adjusted by Moody’s within 2.8 times, as the agency indicated this as a key condition to guarantee our rating stability.

In response to recent press speculation, I wish to underline to you that we will not need a capital increase not to sell Brazil to reach this target. Piergiorgio, will finally elaborate on this slide detailing all the actions that we are implementing to reach the target.

Let’s now move to give you some timing updates in connection with our fixed access network separation project. As you see in slide 16, after AgCom’s positive decision released on July 26 at the beginning of September, Telecom Italia will submit a paper detailing the equivalence of input model for both copper and fiber access that drives our separation project.

After various steps, AgCom is expected to come to its draft decision by the end of 2013, which will allow us to move on. Before closing my presentation, I would like to underline the importance of the structural changes we depict in this slide could have an acceleration on our domestic EBITDA stabilization goal.

Wrapping up, first on our fixed access structure separation project, let me tell you that creating a wide consensus on the benefits that this project will have for the entire country will determine the right conditions to accelerate related investments and returns for Telecom Italia. This is the reason why I am currently dedicating my energies and a considerable part of my time, to personally ensuring AgCom will receive all the necessary elements which support up our investment wholesale access framework in line with the guidelines that the DG Connect is drafting for fiber investments.

In order to go ahead, our project will need to be supported by 2014, 2016 new AgCom fiber and copper pricing after the temporary setback which came from their 2013 ULL decision, to explaining and detailing to the government and to the parliament, the importance of this separation project has for the country, and drawing their attention on the fact that this is a project for the whole Italian system, were increased digital penetration and usage need to be supported by our FTTCab cost effective rollout, and also to be driven by growing awareness of the Italian policymakers of the importance for Italy to comply with the European 2020 Digital Agenda.

And third, to increasing my personal involvement with DG Connect in Europe. I am making the point with European Commission that only concrete opportunities – that the only concrete opportunity that Italy has to meet the goals of the European 2020 Digital Agenda is our project, through which we are prepared to accelerate our fiber investments opening up to the financial contribution of our minority partner.

I am expecting the delivery of the fiber recommendation as approved on July 11 by Qualcomm by September. In addition, I am also endorsing the DG Connect proposal for a new framework of rules promoting the European Single Digital Market as regards to the increasing harmonization and simplification of the fiber wholesale regulatory regime. The draft regulation is expected to be submitted to the E Council by October.

While all these endeavors are progressing, we noticed that in the last few weeks, all stakeholders are showing a better insight and understanding of our project, and this is exactly what I am aiming at, because I think that this will create the right conditions in terms of profitability for our investment.

Moving to the mobile front, as we saw in the German market last week, the European mobile market is asking for consolidation. We continue to believe that the most effective way to stabilize our mobilize market is through a reduction in number of players. We would continue to pursue any concrete opportunities that should become available on that front.

As you know, we have closely considered the opportunity of 3 Italia, but talks with their shareholders were interrupted because of differences on evaluations. So we’ll continue to be on the watch for a non-organic solution.

At this point, I would like to thank you for your attention, and I would like to pass the floor back to Alex.

Alex Bolis

Thank you, Franco. Mr. Piergiorgio Peluso will commence for you now his presentation.

Piergiorgio Peluso

Good morning to all of you. Thank you, Alex, and good afternoon to you. I will spend a few minutes to update you on Telecom Italia’s net financial position as of June 2013.

Starting to look at net debt evolution on the slide number three, we can see how in the first half, it increased by EUR539 million to reach about EUR28.8 billion, compared with a decrease of EUR54 million last year. Our net debt was stable quarter-on-quarter, while about EUR500 million of dividends were paid out.

On a year-on-year basis, our net debt figure decreased by about EUR1.5 billion from the end of June 2012. I would like to remind you that our operating free cash flow was impacted by a seasonal drop in capital absorption and from the operating disclosed amount of around EUR500 million one-off effect coming from the deferred payment to suppliers in Italy and from the Brazilian frequency payment.

Under disposal, we mainly refer to the La7 Srl deal. We generated a negative one-off impact of EUR114 million. This gives me the opportunity to remind you that in the second quarter, we completed the La7 Srl sale as well as we progressed on the MTV disposal for which the transfer agreement has been already signed and is authorization has been already obtained, we expect to finalize the sale by September 2013.

The overall outcome for TI Media is a more focus and sustainable business position with a positive and predictable cash flow open to value creation options. Back to the slide, cash financial expenses and financial accruals were very stable, while cash taxes and other impacts for a total EUR398 million included mainly Latin America cash income taxes above EUR200 million and financial charges related to the Italy financing.

Let’s move to slide number four and take a closer look at the first half ‘13 Group operating free cash flow generation which stands at about EUR1.3 billion, down by EUR966 million from the second half of 2012. The absorption was essentially closed by the year-on-year revenue reduction by about EUR1 billion of which more than EUR600 million are due to foreign exchange variation, and is partially offset by EUR410 million OpEx reductions, and by about EUR500 million one-off which affected a working capital dynamics. CapEx were almost stable at EUR2.2 billion.

Let’s move to slide number six, as Franco told you before, our Group is going to enact in the second half set of additional deleverage measures in order to maintain our below EUR27 billion net debt target for the year, while ensuring that at year-end we will have the same net debt EBITA ratio of approximately 2.4 times which we had at the end of 2012.

To the Group net financial position reduction effort, Italy will continue with EUR450 million, Brazil will EUR280 million, and Argentina will deliver another EUR80 million.

On the next slide, we will give you the detail of the actions and the amounts that are behind this plan. Before giving you the details of these extra net financial position performance, let me add that we shall ensure the achievement of our debt reduction and our debt ratio stability by creating an additional deleverage buffer, given the complex macro and operating context in which operate coming from further non-operating non-organic actions.

In this sense, I remind you that we have decided to proceed in the valorization of our real estate portfolio including the sale of certain assets which we will have a positive impact in 2013. TI Media remains a non-strategic asset available for value creation, derived from its unique broadcasting assets.

We will continue proactively to persuade the Group leverage, a broad efficiency plan including mobile network sharing agreements with other operators.

We move now to slide number seven. For domestic the extra NFP reduction contributors are Law Decree 35 of 2013 which provides for the acceleration of pass the new public administration payments. Our conservative estimates of this cash-in is approximately EUR100 million; further optimization of working capital leading to a benefit of about EUR150 million; lower cash taxes payments in 2013 worth around EUR200 million.

Brazil will contribute with working capital optimization including renegotiation with suppliers with improved handset terms of payments worth approximately EUR200 million, CapEx optimization of EUR80 million. Finally Argentina will improve free cash flow generation of EUR80 million.

And now let’s move to slide number eight. In this usual Group financial position update, we would like to give you the picture as of June 30, 2013 of our well-distributed debt maturities profile, providing us with financial flexibility, and of the important liquidity margin of EUR12.8 billion that makes us considerable time headroom in refinancing the forthcoming maturities.

With this, I would like to thank you very much for your attention, and pass it onto Alex again.

Alex Bolis

Thank you, Piergiorgio. It’s time now for Marco Patuano’s domestic performance update.

Marco Patuano

Thank you. Thank you, Alex, and good afternoon to all of you. In the context that Franco and Piergiorgio have described, we have worked during the past quarter to ensure that Telecom Italia domestic operations protect size and market share of mobile and preserve and further develop the resilient performance in fixed.

We have fought back against competitive pressure, unfavorable economic environment, and regulatory challenges. As you will see before the adverse impact of AgCom decision of July 11 on corporate wholesale access, our overall domestic top line and EBITDA would have been slightly improving, but the impact of the new 2013 prices for regulated fixed services shifted our course causing us to revise our domestic EBITDA guidance for the year.

My presentation would start by showing you how we have already built a better foundation for the second half of 2013, that will update you – then we’ll update you on main domestic results showing you also how we are maintaining speed and focus on ultra-broadband deployment. And finally offer you some evidence on how already in the second quarter we have stabilized our operating and commercial performance in certain areas.

Let’s start from slide three. This quite structured and comprehensive slide shows you how the mixed bag that was served to us by competition, economy and regulation in the first half was met with the determination to pave the way for this set for a better second part of the year.

Let me guide you expressly through the red marks rather than the other ones, so that I am sure you will be able to sort out later with the help of our investor relation department.

Mobile consumer, the quarter remained challenging, while competition especially during the first part of the period didn’t ease pressure. And while the MTR impact remained constant, we took the strategic decision to give a clear and final message to all the competitors, price war is not our goal, but we will not stay watching our customer base going away. This war destroys value, and it should be reversed soon but that we do not intend to leave any free food on the table.

Domestic wholesale, a sharp top line deterioration was caused by the introduction on July 11 of new copper access regulated prices which have retroactive effect from January 1. This mean that second quarter figures are including the impact of the whole first semester, meaning the value of around EUR50 million. EBITDA was impacted by the mobile competition effects on top line by the spending review on the corporate segment, and by the full effect of regulated prices. While fixed repricing and new labor agreement contributed positively, we decided to invest in customer base defense, both on the consumer and the corporate fronts in order to preserve long-term value.

We think we have made a good choice. Macro is started to give early and shy signs of improvements, the impact from MTR fall is fading away and markets willingness to further endure the price war that some of our competitors have generated, seems to be close to fade away. ULL and bitstream cuts were beyond our control, as well as the Antitrust fine that was notified to us earlier this year for an amount of EUR104 million with effect on our reported results.

We would respond in the second half with another cost cash program, including more site sharing and other network efficiencies, as well as extraordinary actions such as in real estate. Cash cost saving would not cause to cut down ultra-broadband CapEx, which keeps a coherent pace between Fiber to the Cabinet and LTE, where we have already covered almost 3 million households with fiber and 25% of the population with 4G.

Let us now proceed with a quick analysis of our domestic quarterly results. Reported total top line closed at minus 10.9% clearing an amount of EUR4.1 billion. Once normalized for regulation and other discontinuities, underlined total domestic services show a slight improvement quarter-on-quarter moving from minus 7.5% year-on-year in Q1 to minus 7.3% in Q2.

As you can see in the regulatory normalization box, MTR accounted for 2.4% erosion and ULL bitstream – plus bitstream for another 1.2%, totaling a negative contribution of 3.6%. Mobile contracted by 17.8% year-on-year minus 10.6% net of regulation, slightly weaker than the minus 16.4% of the previous quarter. The difference is almost entirely explained by lower handset sales.

On fixed, the upward revisions of the retail monthly rental fee and the related price simplification did deliver the positive contribution in line with what we did anticipated in the last quarter which in this quarter is worth about EUR15 million. Total reported figures shown a slight decrease in revenues minus 8.2% year-on-year versus minus 7.7% in the previous quarter, and the difference is more than explained by the wholesale corporate price reduction.

Retail service revenues and reported trend remains in line at minus 11%, and it will be our main focus later on. International wholesale performance has improved by about five percentage points with the respect to the first quarter. Italian wholesale stand out as a clear logger shifting into negative double digit territory to minus 11.7% year-on-year in comparison to minus 3.7% in the previous quarter.

Organic EBITDA was down 11.9% posting a quarterly result of close to EUR2 billion, again regulation takes a significant toll of more than 3%.

On slide five, we show how macro continued to impact negatively on the overall market trend. Overall in Italia the turnover in telecommunications services shows a decline year-on-year, affected not only by the hard competition, but also by the difficult economic phase and by lower spending. The business segment continued to show a negative balance between companies entering and exiting the market, resulting from both weaker registration and stronger cancellation.

Consumer segment was impacted by these adverse general context, and its normalized trends to slightly weaker and minus 6.4% year-on-year with respect to the minus 5.3% for Q1. Corporate performance is starting a trend of inversion closing the quarter in normalized terms at minus 10.2% year-on-year in line with the previous quarter of minus 10.3%.

We are pushing ahead with the execution of our domestic ultra-broadband plan we have presented to you in February. On fixed, we have now launched 30 megabit services in 29 main cities, reaching as of today about three million households. The nature of buzzing of which we are starting to offer VDSL is formed by the fast ADSL clients. As we were finally authorized by the regulator to launch fiber services from June 22, it is only since a few weeks that we are fully operational.

Sales have grown a good take-up. At the same time, with the LTE we have already reached 25% of the population. Demand is developing in a steady way on the back of growing number of LTE-ready devices such as last generation of tablets and iPhones.

On slide seven, you can see the details of our six month operating free cash flow. In order to face this decline, we are even stricter in identifying every possible cash cost reduction where we are well in excess of 50% of the full year cash cost efficiency target. On CapEx, we maintain full priority on innovation and we cross-financed the growth in innovative technology through substitutive approach on traditional investment.

On working capital, the absorption of about EUR400 million in the first six months was caused by the reversal effect of supplier payments deferral of 2012, the negative impact in payables related to lower cash costs, and the reduction of receivables both driven by faster connections and the effects of a lower top line.

Slide number nine. Let me now enter into the mobile starting from the consumer segment. TIM was up. After months of on all the rationale approach that did not pay, we decided to strongly react with a zero tolerance tense to the risk of losing further market share during the Sempre campaign season.

Our TIM special summer offer was met with an overwhelming positive response and together with convergent offers it changed to the sign to our mobile number portability weekly net balance from more than negative 20,000K per week to a positive balance of more than the same amount. We have proven to our competitors our determination in preventing further market share erosion. I was not looking for a price war. I am not pleased to play it. We will do whatever is necessary to stop it.

On this slide, number 10, we will find the evidence of how useless a competition only driven by prices is. In the last two years, the total number of SIM cards was almost stable. Market shares barely moved. The only growing KPIs were churn and related commercial effort. I am convinced that from a reversal in trend of prices, all the metrics can benefit without affecting customer base satisfaction and market shares. We could recover our profitability and safely invest on innovation and quality.

On slide 11, we summarized three drivers of our mobile consumer strategy. Our paramount value lever is in convergent offers, where we have acquired about one million customers in just few months which are showing a much lower than average.

Lock-in offers such as TIM perte [ph] are another important marketing pillar and they secure high ARPU clients, continued to these brief – our multi-segment approach follows and entire different profiles well diversified offers, tailored communication and a unique caring.

Slide 12. I would like to draw your attention to the positive trend of the total mobile revenues that are in the business segment where we posted a 3% increase month-by-month since January. Last year in the same period, we have lost 6%. This result have been made possible through our continued positive performance in public sector and top client rates which compensated the ARPU decline in small medium enterprise customers.

In this segment in fact, we had to reposition our offer since the cheaper pricing in the consumer space become a hard benchmark. This proves that stabilizing certain areas of our business is already a concrete story.

In mobile broadband we are again confirming growth on both consumer and business KPIs with double-digit positive performance on small screen and a lower trend on large screens where dongles are in a mature phase and tablets for the time being don’t seems to be easy to fit with the adverse – with the average family budget.

On consumer, browsing revenues despite some volatility risen month trend is progressing in the low teens. On the business front, where in the previous quarter we posted a negative performance due to a downward price adjustment on high value customers, the trend was back in positive territory.

Slide 14 shows how the fundamental metric of business generated perform negative year-on-year by 11.7% excluding European roaming impact still affected by outgoing price pressure that given the increased penetration of bundle offer were not offset by elasticity in volumes.

Mobile service revenue posted in Q2 minus 18.3% year-on-year, excluding the MTR effect and other discontinuities, performance is minus 10.7%. Handsets sales even if are 10.4% lower than the last year, shows constant progress in smartphone penetration including new LTE devices. We stay prudent on subsidies.

Moving now to the domestic fixed. The negative evolution of our reported second quarter’s performance was fully determined by the revision of the regulated copper price. The underlined normalized trend posted in the second quarter, an improvement of one percentage point versus previous quarter landing at minus 6.7% year-on-year. This trend was driven by a better result in international wholesale that closed at minus 13.1% year-on-year in the second quarter versus minus 18.4% year-on-year in Q1, still managing the reduction of low margin transit contracts.

A stable trend on core services, posting a performance of minus 6.1% in Q2 versus minus 5.9% in Q1. These results were reported by consumer segment, which as you know benefited from the adjustment of the monthly rental fee and the price simplification, and the deterioration on business segment where we invested some ARPU in order to defend our leading market share on large customers.

Slide 17. The overall size of the Italian fixed line market is for sure something that deserves a comment. In the first half, the total market shrinks to about 350,000 accesses and it now stood at 20.8 million lines. TI line losses performance was substantially in line with the first quarter standing at minus two times – 200,000 [ph] area, and OLO’s registered a negative figure increasing the churn among themselves.

This market line erosion is due to an acceleration on fixed mobile substitution for voice-only customers caused by a combination of another lower spending capacity in the crisis period and the appealing coming from cheaper mobile prices. In any case, TI’s market share remains stable at about 64%.

In fixed broadband, TI ARPU was up again reaching EUR19.1, and conforming a solid progression trend. Even if total broadband lines slightly decreased, we performed an improve in high value connections since our commercial strategy is fully rented to flat contractors.

Wrapping up, I would like to share with you some takeaways. Our mobile market is still one of the most interesting in Europe. It can still grow substantially through the higher smartphone penetration and the ability of our superior mobile network to deliver high performance standards in mobile data. TIM network is rated one of the best in Europe. Price war destroys marginality. I consider it a missing opportunity for the whole Italian market.

Fiber-based broadband is under fast development, and it is proved to be a catalyst for renewed demand of fixed services. We assume, it is even more true in a country without cable operators.

We play the convergence game supported by a multi-device strategy and by faster networks both, fixed and mobile. Financial resources must top flowing into churn and come back into value. We are working hard on new efficiency stream; one, an increase in mobile passive network sharing; two, a faster in-sourcing of activities previously outsourced; three, a better valorization of our real estate and a cheaper facility management; four, a more efficient mix in advertising and communication spending; five, a linear company with less SG&A; six, a less expensive IT reducing our branding costs.

In total, our original cash cost efficiency target is already overreached and we forecast to exceed the original target for not less than EUR150 million, of course on top of the effects of the interconnection costs.

Thank you to all of you. I return the floor to Alex.

Alex Bolis

Thank you, Marco. Thanks for your attention. Ladies and gentlemen, at this point, we welcome your questions.

Question-and-Answer Session

Operator

Ladies and gentlemen, the Q&A session is now open. (Operator Instructions) First question comes from Mr. Ierodiaconou from Citi. Mr. Ierodiaconou, please.

Georgios Ierodiaconou – Citi

So, good morning and thank you for taking my questions. I have a couple. The first one is around the credit rating agencies. I was wondering whether you had any opportunity over the past few days to have discussions with them around the fact that you are changing outlook, and the performance in the second quarter and the outlook for the second half of the year is perhaps below some of the estimates they had, and if you could comment at all around your intentions regarding the rating whether at all costs you want to remain an investment grade company? My second question is again linked to the credit side. Could you give us an update around the hybrid program, and can you please clarify if I am correct in assuming that as part of the commitments you gave in February of last year you have to place in EUR3 billion in hybrid program within 12 months, and if that’s the case, can you please explain, why we haven’t seen any progress over the last few months? Thank you.

Alex Bolis

Thank you, Georgios. Piergiorgio Peluso will take care of your questions.

Piergiorgio Peluso

Yes, good morning. On the rating agencies, the first question. Of course we have as usual presented to the rating agencies our results, and I cannot comment on what could be the outcome of this presentation, because of course the rating agencies do not share with us the results. So we will – we have presented and this is what we do usually.

In terms of what we will do, when we will know the results, of course I am now in the same position. When we will have results from the rating agencies, we will comment.

So the hybrid, the hybrid program is confirmed. The hybrid was not supposed to be issued within the next 12 months, but it was 18 months program. So we have also have time in the second half and next year to complete the program. And the program was for EUR3 billion.

Georgios Ierodiaconou – Citi

Can I also confirm, are you going to be targeting on investment grade rating at all costs or would you be willing to go below investment grade on present circumstances?

Piergiorgio Peluso

No, of course our position and this is something that we have shared with the rating agencies. We want to protect our rating and this we have commented with them very clearly.

Georgios Ierodiaconou – Citi

Thank you.

Operator

Next question comes from Mr. Mathieu Robilliard from Exane BNP Paribas. Mr. Robilliard, please.

Mathieu Robilliard – Exane BNP Paribas

Yes, good morning and thank you very much. A few questions, first, coming back to the debt side of things, I do understand that you want to preserve your investment grade rating, and you are working hard for that, but could you tell us what could be the implications of a downgrade to high yield, and I understand that some of your debt still at floating rates particularly some syndicated bank lines which costs could be impacted if you are downgraded to high yield, and your spreads increases, I would like to know also if some of the credit lines? And finally, if the EIB loan for more than EUR1 billion would also be recalled? The second question maybe for Mr. Patuano with regards to costs. I think at the Q1 results we discussed the facts that you introduced some measures at the end of the quarter, and that would have an impact on personnel costs for the rest of the year, yet it seems that the decline in personnel costs, basically if I’m doing my math right has slowed down in Q2 against Q1. So I wanted to understand why that was the case whilst the measures have been introduced? And finally, maybe a broader question for Mr. Bernabe at the beginning of the week you issued a press release saying that you didn’t think or that you wouldn’t look for a capital increase and I think you had reiterated today that you don’t think that is necessary, but could you explain to us why you don’t think that’s necessary when you’re under threat of debt downgrade rating where you probably could invest more in Brazil, when you’re lagging in 3G coverage, and 3G is probably going to be the name of the game. And in Italy you seem to be taking a more aggressive stance, and maybe you need resources, and more constructively and probably if you can see there combinations and concentrations, which seems a very good idea you would be in a better position to do that with a stronger balance sheet? Thank you.

Alex Bolis

Thank you, Mathieu. The first one will be answered by Piergiorgio Peluso, and as you suggested second by Marco Patuano, and third by Franco Bernabè.

Piergiorgio Peluso

Yes, thank you, Alex. On the effects of the downgrading, we have been including the press release this morning all the detail that you are requesting but just to recap, our documentation is clean and we do not have any acceleration risk on our current financing program. We have just one financing with the European Bank (inaudible) of EUR3.35 billion which provides in case of downgrading the obligation for the company to sit down with the bank in order to negotiate additional guarantees and/or revision of the price. If we do not manage to find with the bank an agreement, there is the risk of the repayment, but before the repayment – the obligation is related just to sit down in order to find a solution to the problem. We do not have any other acceleration risk in our documentation.

In terms of the cost of the facilities, for one (inaudible) we have EUR11 million per year through the – on the current documentation. Of course, we are not in a position to estimate the impact on the future financing and this is what we can say very clearly to you today.

Marco Patuano

I am Marco Patuano. On the cost side, I’ll try to give you more color on how we wanted to reach these extra savings. As I told you in last conference call, we signed an agreement with the unions that can be considered favorable. In the second half, it will deliver full effect. In the first half, it was just delivered more than one quarter, and in the second half it will give us an extra boost of around EUR15 million.

Customer care, we are doing fairly well. We are doing extremely well. We thought we could recover in just the first year something around EUR30 million to EUR40 million. We are duplicating the efficiency we are ready to perform, and I am absolutely convinced that this is affordable. Another area in which we are doing even better than our original expectation is real estate. We are renegotiating most of the contracts. Of course, the fact that real estate market in Italy is not particularly – there is not so much demand help us in renegotiating some contracts. And from real estate and facility, we can expect EUR30 million to EUR40 million.

Advertising in second half will give us back another EUR20 million to EUR30 million. And we are boosting very strong – the industrial cost, in particular with site sharing, a more intense program of site sharing, but we do not expect to have many benefits on 2013. We expect to have most of the benefits starting from 2014 onwards. What we expect is to reduce in the coming years our cost for rental of sites about 25%, and we can imagine we can reduce our CapEx expenditure for new sites for LTE in the region of 40% to 50%.

Franco Bernabè

Yes, on the third question, I thought I gave already an answer when I said that in respond to recent press speculation, we underlined that we will not need a capital increase now to sell Brazil to reach the deleveraging target of the year. And I think when Peluso described the actions that we are taking, they are sufficiently strong and there is also a buffer in order to meet the target. I think that is what needs to be said.

Mathieu Robilliard – Exane BNP Paribas

Thank you very much.

Operator

Next question comes from Mr. Giovanni Montalti from UBS. Mr. Montalti, please.

Giovanni Montalti – UBS

Hello, good morning. Just a quick question on the network spin-off project, you have decided to exclude the DSLAM from OPAC perimeter. I was just wondering if you see some room for AgCom to ask you to include them back in the perimeter of OPAC. Thank you.

Marco Patuano

No, there is no reason to include the DSLAMs because the spin-off concerns only the essential facilities, and DSLAM are owned by all the operators. We will be working in the new environment in the quality input environment, exactly in the same position of the other operators. So there is no need to include also the DSLAMs.

Giovanni Montalti – UBS

Thank you.

Operator

Next question comes from Mr. Simon Cooke from Insight Investment. Mr. Cooke, please.

Simon Cooke – Insight Investment

Thank you. Sorry to ask you again, on that inorganic actions you may take, but I just want complete clarity. Would you consider actions such as the capital increase selling Brazil or giving up majority control of the network if necessary in order to protect your investment grade ratings?

Franco Bernabè

I think I’ve already answered two times on this. We don’t need. We don’t think it is necessary to take such a radical move given all the leverage that we are putting now to get to reach the target that we have set ourselves. That’s what needs to be said.

Simon Cooke – Insight Investment

But I understand that. If it did become necessary, so if operational performance continued to decline, would you consider inorganic options, or would you rather just accept falling to high yield?

Franco Bernabè

Inorganic option is a different story than high yield and what I stated very clearly in my presentation is that we think that the Italian markets needs to be consolidated. Now, from that Marco said during his presentation, I think that we are no longer waiting and giving up market shares in order not to disturb our competitors in gaining on their side market share. So we decided to play it that. Marco said it very clearly. I think that we are seeing and we will see very soon the end of this war. So I think that we will go back to normal conditions. I think that envisaging any other catastrophic scenario is completely out of scope.

Simon Cooke – Insight Investment

Okay, thank you.

Operator

Next question comes from Mr. Sam Morton from Mizuho. Mr. Morton, please.

Sam Morton – Mizuho International

Good afternoon. I just – I was quite interested to hear that you reiterated the intention to issue EUR3 billion of hybrids over the next couple of years – because Moody’s this week changed its methodology which removed the equity credit for more lowly [ph] rated companies, and so I wondered whether – in this context, whether you thought it would make sense to issue more expensive hybrid debt versus issuing regular senior debt? That’s all. Thanks.

Alex Bolis

Thank you very much for your question. This will be answered again Mr. Piergiorgio Peluso.

Piergiorgio Peluso

As you know Moody’s has just introduced a potential change in the calculation of the equity component for the sub-investment grade, but this is something which is not applicable to us, so we are for the sake confirming the EUR3 million program and we will see the metric – how we will perform in the market in the next one year in order to perform or what we have announced.

Sam Morton – Mizuho International

Thanks.

Operator

Next question comes from Mr. – I beg your pardon for my pronunciation, Mandeep Singh from Redburn Partners. Mr. Mandeep, please.

Mandeep Singh – Redburn Partners

Thank you very much. I wanted to come back to the issue of Brazil. I appreciate you said that you’re not going to go in much deeper into this that you have no need to sell Brazil for a capital increase. However if somebody is willing to offer you a good price, would you be willing to sell that?

Franco Bernabè

Well you are asking me an excellent question. I mean there is always a price for everything. It depends on the price. I mean I am ready to consider any option at the right price, but I think that for the time being we reiterate that Brazil is a core asset for us.

Mandeep Singh – Redburn Partners

Thank you.

Operator

Next question comes from Ms. Micaela Ferruta from Intermonte. Mr. Ferruta, please.

Micaela Ferruta – Intermonte

Yes, Micaela Ferruta. I would like to know if you are also reiterating the 2015 Group EBITDA in that target at this stage, and more specifically on (inaudible) if you are able to confirm the dividend policy for the current year? And for Marco on mobile, I’m actually quite worried about this EUR10 per month price tariff. So my question is, whether you see the end of the price war ending. Do you see the prices converging to this price point when the war ends maybe next year or what do you think about it?

Alex Bolis

Thank you, Micaela for your question. The first part would be responded by Mr. Bernabè and the other part by Marco Patuano.

Franco Bernabè

So the first part is very simple. We are not dealing with that guidance, so we have no reason to change it. We are talking about the guidance for 2013. Marco?

Marco Patuano

Hi Micaela, I don’t think that EUR10 is sustainable till the end of the year. We decided to enter into this price war because otherwise somebody was continue to think that being more aggressive could deliver a benefit to one or another player. Now we clearly demonstrated that if you wanted to – see, if somebody wants to play tough, we are here to play tough, but it’s something we don’t wanted to continue. So I hope it will end well before next year.

Micaela Ferruta – Intermonte

Thank you. I also asked about dividend payments?

Piergiorgio Peluso

No, there is no – I mean it’s not time when we discuss about dividends now. We will talk about that much later and we are not envisaging for the time being in dividend relation.

Micaela Ferruta – Intermonte

Thank you.

Operator

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

Justin Funnell – Credit Suisse

Yes, thank you, a couple of questions please. Obviously the rates of line loss for TI Retail is relatively stable but as you showed the LLU adds – and bundled line add is slowing, as you’ve highlighted the rates of line loss at the markets is gradually worsening and you’ve talked about that being voice-only lines disconnecting on fixed line. Is there something you feel you needed to do something about, is it a trend that if it worsened might start affecting your financials more? Secondly, we’ve seen a relatively positive decision by the EC recently overturning low wholesale prices fixed line in Austria and they do appear to be willing to use the veto. Have you seen any sign yet from that you see they might veto the AgCom decision on ULL? And then finally, Moody’s on your credit rating, it does seem to be a bit more conservative than S&P and Fitch, would you be willing to consider having a split rating where one rating agency is double B plus and the others are still investment grade?

Alex Bolis

Thanks, Justin. The first one would be taken by Marco Patuano. The second one by Franco Bernabè, and the third one on Moody’s by Piergiorgio Peluso.

Marco Patuano

Well, hi Justin. The line loss is clearly showing that the market is cross influenced by very low prices in the mobile, because when you are a voice-only customer, you tend to consider attractive, the pure mobile offer. Well first of all, we are working on – so I don’t think that it is something that had to be considered irreversible but of course we needed to work on the two sides.

One is, as I told many times, these price points for the mobile is unsustainable. We can play harder the long that is necessary, but I think that it is simply a decision of the market. So I am ready to become rationale as soon as I can, but this is for the mobile.

For the fixed, there are many things that we can do. Number one is the convergent initiatives are paying not only on the mobile, but of course they tended to pay also on the fixed. Second, we needed to up-sell on the customer base which is voice-only. In order to do it, we are working on local on very geo-localized efforts in order to avoid nationwide promotions, but to be more targeted and more effective and work very hard with the multi-channel approach.

We are working very hard in order to introduce a full flat that introduces also a flat rate towards the mobiles. So once you buy a flat offer, you buy a flat offer that includes voice not only fixed-fixed but also fixed-mobile which is something we have been quite innovative in pricing the fixed line. And I think that this is something that would start to be appreciated by the customers.

And very last, we are working very hard. We are really, really working very hard in order to enlarge our content area in order to launch double play, triple play, quadruple play offer that will be extremely important, because once we enlarge the footprint of our fiber network, then we need to give to the customer also a much wider range of services, and of course in the consumer area entertainment is extremely important as it has been demonstrated all across Europe.

The fact we have no cable operators once again is extremely important in understanding how important it is to find an agreement with some content providers. Franco, I think the second is for you.

Franco Bernabè

Yes, thanks. And thanks to Justin for the question on corporate prices, because I think that it was too quick one. I talked about this during the presentation. Now let me explain it. AgCom had adopted two draft decisions, one on ULL, and the second on bitstream. And both decisions were submitted to the European Commission for evaluation.

Now the European Commission has three – can do three things: can write a non-comment letter saying that, everything is okay; can write a comment letter indicating the need for making some decision; or it can open a phase two where the decision can be really completely rethought. Now the final decision will be taken by AgCom only after the European Commission evaluation. And I think that we will have the first answer from the European Union in more or less 10 days.

My opinion and I said very clearly to them, I am working very hard with both AgCom and with the European Commission. My opinion is that the Commission will be – the decision will be scrutinized very carefully by the European Commission, because it is critical for maintaining the framework that the Commission has set in terms of favoring an investment positive climate. And I think my personal opinion is also that the draft decision that AgCom has taken, after the observations of the European Union will be improved.

However, our first semester accounts have potentially included the most negative scenario with the effects of the draft decisions as they are now.

Third, I think I’ll pass it on to Piergiorgio.

Piergiorgio Peluso

Yes, thanks Franco. On the rating agencies, of course I am not able to answer to your question because we cannot comment the potential decision of the agencies. What I can tell you is and we’re saying it during the presentation that we have discussed at length with the agencies our results and our additional measures in order to reach the objective of EUR27 billion by year-end. And we have also confirmed the commitment to keep the investment rating. So this is something the only answer that I can give you to your question.

Alex Bolis

Thanks, Justin.

Operator

Next question comes from Mr. Sharon Chen from MetLife. Mr. Chen, please.

Sharon Chen – MetLife

Hi, thanks for taking my questions. My first question is again on your rating unfortunately. In terms of the measures that you’ve announced today to get to your deleveraging target by year-end, correct me if I am wrong, but they all seem to be rather short-term measures. If no stabilization is seen next year or in 2015, what do you think might be the options available to you to maintain your ratings? My second question is on your hybrid. Can you just tell me how it’s been accounted for in your financial statements? And my last question is on the Italian mobile markets. Absent consolidation in the market, what do you think are the drivers for the market to become more rational in 2014 and 2015? Thank you.

Franco Bernabè

Let me answer the first. I think that these are short-term measures, because we think we have a short-term program. So that’s I think the answer. Piergiorgio?

Piergiorgio Peluso

On the hybrid, as I was saying, we confirm our plan in the next 18 months, which is consistent with what we have announced to the folks, and we have already issued EUR750 million. So as usual, the next steps will be depending on the market conditions, and we will announce as soon we will think there is the right timing to issue. In terms of the treatment, the hybrid is account – in our balance sheet is accounted 100% as debt. And only for the equity – for the agency proposals is accounted 50% as equity, but from an accounting standpoint is debt.

Marco Patuano

Marco Patuano answering the question on long-term mobile market. Well I see a mid-term future which is quite different from the one we see today. First of all, the price war we are experiencing today is preventing some players to invest in next generation networks in the mobile. I don’t think this is a good mid-term strategy for anybody, because it’s clear that the future needs and wants ultra-broadband also in the mobile. So, one good reason for not considering this price war sustainable mid-term is because of the lack of profitability and cash generation in order to sustain a new investment wave for the mobile.

Second, smartphone penetration is still fairly low. If you consider our case, and we are not the largest in the market, let me say we are fairly well-positioned. In the consumer area, we have just 28% penetration of the smartphones, and in the corporate segment it’s definitely higher, but we are still in the 50% region.

So once again there is – this is an area where we will see a huge evolution even if it’s clear that communication services let me call it – let me include it in these category, voice and SMS, will tend to become flat and the problem – the real question is what will be the price point for pure voice services today. It stands close to EUR10. Once again, it seems to be too cheap, and it has to grow, but the real long-term change is the market consolidation.

We are four players. And you see how difficult it is for some of the players to get a decent profitability. Everybody talks about our indebtedness. We are not the only one to have debt in the Italian market. So I think that market consolidation honestly, as you know we tried more than once to perform the market consolidation. The exercise for the time being did not end well, but I personally shared the vision of the chairman when he says long-term these three – market for three infrastructure players.

The number of MVNO can be as big as you want, but the number of infrastructure players for Italy can’t exceed the number of three.

Franco Bernabè

Now let me add a comment on this, because I think that it’s precisely the price point that we are seeing now that will accelerate the process and consideration. I think that this situation is not sustainable. I think that we have done the right things in reacting so strongly. This has – I think has created the conditions for accelerating the process of consolidation. When Marco says long-term, I am thinking more, short to medium-term.

Sharon Chen – MetLife

Thank you.

Operator

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

Luis Prota – Morgan Stanley

Yes, thank you. My question is on Telco, your main shareholder. There have been talks recently about potential changes in the structure and shareholders of Telco, now in September potentially some changes happening and some of shareholders making comments. So I would like to get your thoughts on what could be the potential outcome, if you have any views on that, and whether taking into account that seems best time you cut the dividend, Telco is not getting source of funds and not the service its best, and could need some kind of balance sheet repair actions. To what extent your dividend policies linked to the needs of Telco, or you are completely independent on that? Thank you.

Franco Bernabè

Our dividend policy is no – by no means linked to Telco’s needs. And of course we cannot comment on Telco’s decisions or on individual shareholders decision. What I can only say is that given the fact that they are very big and reputable institutions, they will – whatever the decision will be, it will be a rationale and orderly decision. I don’t think – I don’t see any surprises coming from that.

Luis Prota – Morgan Stanley

Okay, thank you.

Operator

Next question is from Mr. Hannes Wittig from JP Morgan. Mr. Wittig, please.

Hannes Wittig – JP Morgan

Yes, good morning. I have two questions. The first one relates to your desirability of potentially having more funds for investment, it has been suggested for instance by AT&T’s Chairman that European companies aren’t investing, you have – of course as has been previously mentioned a number of opportunities, these fiber need to be accelerated, LTE be it maybe more investment content, et cetera. Would you say that there is a – it would be desirable to have more funds available for investment and that would be adding value to the companies. Do you think that broadly your investments are not constrained by financial considerations at this point especially in the domestic market? And second question is again going back to the European level, where we have seen initial single market proposals presented by the DG Connect. Have you got any comments at this stage as to how you would overall evaluate these proposals from maybe industry perspective especially with regard to your company? Thank you.

Franco Bernabè

What we have always said is that our investment strategy was market-driven, and aimed at innovating the – introducing the ultra-broadband, both in mobile and fixed, giving a boost to the market and this is what we are doing. I don’t think that we need to – at this stage, we need to accelerate any of the investments. We are doing neither in the fixed, nor in the mobile – by the way in the mobile we are seeing that together with one other operator, we are the only one that are investing in the fixed, I see that again we are investing what is needed to create a competitive advantage. So I think we are exactly in line with what we need to do.

On the European single market proposal, I think that there are – it’s again a mixed bag. There are some benefits and especially those that attain the recommendation on next generation pricing mechanisms and there are some negatives, but I think that they are under discussion now. We hope that they will be improved. And I am really confident that this would happen, because I’ve spoken several times with maybe Neelie Kroes [ph]. I think that she is sincerely committed in creating a very positive and pro-investment attitude in the European market, exactly because we need in Europe to bridge the distance that we have with the United States.

Of course in the United States, the investment spree has been driven by very positive regulatory changes in the period between 2003, 2004, 2005. We have not seen yet any of these changes in Europe, but I think that the change of mind that has taken place at the Commission level and that we are seeing now is exactly aimed at creating the same positive investment climate that you see in the United States.

And what – the reason why I am engaging also on the network separation project is exactly because I think that we need to do – we need to contribute in a positive term to this change of mind, I mean we did it and the same was done by TeliaSonera with a decision to introduce the equality of input in their separated company that owns the access network.

So I think that the whole sentiment is evolving very positively at the European level and at the Italian level. And at the Italian level, I have constant signs that our decision was the right decision to take and that there is a growing consensus to make this decision very, very positive for all the players involved, of course starting from Telecom Italia.

Hannes Wittig – JP Morgan

Thank you.

Operator

Next question comes from Mr. Wilton Fry from Merrill Lynch. Mr. Fry, please.

Wilton Fry – Merrill Lynch

Yes, hi there. Should we assume any money you received from the sale of a stake in the network is using fiber investment, and if that’s the case, are the rating agencies aware of that? So are they expecting that to go towards deleverage? Thank you.

Alex Bolis

Yes, Mr. Bernabè would comment again briefly on the framework of the network separation thoughts of our plan.

Franco Bernabè

Now can you repeat the question because I didn’t – I mean I didn’t get it?

Wilton Fry – Merrill Lynch

Will you be using the money from the sale to CDP of a stake in the minority in the network for fiber investments, and if you are going to use that money for fiber investment, are the ratings agencies aware of that intention? Thanks

Franco Bernabè

Look, of course we are not yet discussing with CDP on this, although CDP has constantly declared that they are interested in joining our investment effort in separated network. CDP has the same constrains that we have in creating something that makes sense from an economic and from a financial point of view. They have the same constrains that we have. They cannot do sort of public works, not remunerated investments.

And therefore, I think that the – whenever there will be – but this is not yet the case, a possible investment from Cassa Depositi e Prestiti. This will reinforce of course the balance sheet of the combined entity, and since that we will be consolidating the combined entity, it will impact on the reduction of our debt. Of course it will aim – it will be aimed at accelerating medium to long-term investments.

Wilton Fry – Merrill Lynch

So you will be using it for investment in fiber, but is the rating agency aware of that intention?

Franco Bernabè

No – excuse me – well first of all, it is premature to talk about this because we have not yet discussed about this. Second, the impact will be on debt because from a purely accounting point of view, there will be a debt reduction. Third, there is the same objective of the Cassa Depositi e Prestiti to make profitable investments and therefore it will be a market-driven investment effort. That’s what we can say at this stage.

There is nothing to say to the rating agencies at this point. I mean I think you are going too far. It’s technically and from an accounting point of view, the impact will be a debt reduction.

Wilton Fry – Merrill Lynch

I understand. Thanks very much.

Operator

Next question is from Mr. Jean-Francois Paren from Credit Agricole. Mr. Paren, please.

Jean-Francois Paren – Credit Agricole

Yes, thank you. Two questions if I may. First one is could you give us an idea on the current price premium you’ve got on domestic mobile, and in your view how much do you need potentially to reduce that premium to stabilize your market share, and make sure you don’t lose mobile customers? And the second question is a follow-up question is, I’m not sure I understand why you think that the current crisis or high-level of competition in Italy is a short-term problem, what makes you think that this is not something that’s going to be – to last like it does last in the other European countries? Thank you.

Alex Bolis

Thank you. The first question would be answered by Marco Patuano and the second by Franco Bernabè.

Marco Patuano

Well today what the market says is that more or less we have to keep almost the same price with Vodafone because the market considers for different reasons that our brand value is almost the same, so the price have to be – even if with a different combination, almost in line. With reference to the other two players, up to a difference of around EUR20 billion – of course it’s an empiric consideration, but let me say that up to more or less 20% difference, 15%. 20% difference it’s not a major problem, it’s not a major issue. There is – sometime you gain a bit and sometimes you lose a bit, but it does not determine big swings in the customer base. I hope I answered.

Jean-Francois Paren – Credit Agricole

Yes, thank you.

Franco Bernabè

Yes. On short-term and long-term, the answer I think is the following. I think that we have been struggling with crisis now for over six years, and we have responded with structural actions that have improved our cost base and we keep working on structural actions. And we will keep working in the long period, because we think that the structural changes that are taking place in the market need to be addressed with structural interventions in our company, but I think that what we have seen in the last quarter has been a shorter acceleration of problems that we need to address with short-term levers.

What I see now is for the first time after several quarters, first signs of recovery from a macroeconomic point of view. The signs are still weak, but for the first time we see consistent progress in the same direction. I think that talking about price war, I think that this price war is unsustainable for all the prayers, I mean we – by the way, if you work – if you look at the structural positioning of Telecom Italia, we are by far the strongest player. And therefore I think that the others are suffering as much and more than we are suffering.

So it is not something that can be sustainable. So I think that going forward, what I see is in the next six months, an easing of the regulatory pressure for the reasons I’ve said before, because there is a growing consensus on what we are doing, and easing of the macroeconomic situation because the signs are all consistent and going in the same direction, and an easing of the competitive pressure because this situation is unsustainable for everybody in the market.

So of course does this solve all the problems? No, I don’t think that this will solve all the problems. Will there be structural problems to be addressed? Yes, and we are working constantly to address the structural problems.

Jean-Francois Paren – Credit Agricole

Thank you.

Alex Bolis

Thank you very much. This will be the last question for today’s session.

Operator

Next and last question is from Mr. Alex Grant from Macquarie. Mr. Grant, please.

Alex Grant – Macquarie Research

Hi there, thanks for the question. Just following on from your comments on Italian mobile consolidation. Do you think mobile consolidation is needed or is indeed possible in other markets such as Brazil? Thanks.

Franco Bernabè

Well I think that in Brazil – of course in Europe, mobile consolidation is needed because there are too many players, the market is too fragmented. We are confronting ourselves with the players in the United States and in Asia that have been concentrating very substantially over the last years. So I think that from a purely geopolitically point of view, Europe cannot sustain any longer situation where our mobile players are so fragmented and are getting weaker and weaker.

So I think that something needs to be done. Politicians have understood this, and I think that they will be creating a favorable environment. What has happened in Germany goes in the right direction. In Italy, I think something similar will happen in a not too distant future. So this is on the consolidation front. What was the other question?

Alex Grant – Macquarie Research

Do you think that possible consolidation to take place in Brazil?

Franco Bernabè

In Brazil. In Brazil, I think that there is – so far there is no need for consolidation, the market is growing. Brazil is not a country, it’s a continent. And there are of course investment needs long-term. And before we reach saturation of the market, I think it will take a long time. So I think that from our point of view, we have seen that our position is improving even in the not-so favorable conditions that we have seen in the last couple of quarters, three or four quarters. So we are very confident that for the time being, Brazil can go on if there is a recovery of course – it’s much better, but can go on with four players. And the problem of consolidation will be a problem that will come in the future at some point, but not the very soon.

Alex Grant – Macquarie Research

And do you have a sense of the regulatory view on consolidation in Brazil. It seems a bit more favorable in Europe. So I’m just keen to get a sense of your view of the situation in Brazil?

Franco Bernabè

In my opinion, the Brazilian regulator is – in a way, I would say that it is more similar in the kind of philosophy, in the kind of frame of reference that they are adopting to analyze what’s happening in the industry. It’s more similar to the U.S. regulator than the European regulator.

The European regulator is constantly aiming at giving dividends to the consumers, improving the benefits for the consumers in terms of prices, in terms of competition and so on and so forth. The Brazilian regulator is more preoccupied with the overall sustainability of the industry in terms of the investments that the industry is able to sustain. And in order to do so, I mean the sense is that while a European regulator in a sense looks favorably at a price war, although they are not encouraging of course any price war, but they are sympathetic with the fact that prices are declining and therefore the consumers are benefiting.

The Brazilian regulator is worried if a – or price war takes place, because they see that this will hamper the possibility of the operators to generate the necessary cash for going forward with their investments. So, I think that the attitude of the Brazilian regulators are clearly positive with the investment needs of the industry.

Alex Grant – Macquarie Research

Very clear. Thanks for the answer.

Alex Bolis

We are wrapping up our conference call. So ladies and gentlemen, thank you very much for being with us today, and have a great afternoon and a great weekend. And for those of you who are going on vacation, a great vacation. Thank you.

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