Telecom Italia SpA (TI) Flavio Cattaneo on Q2 2016 Results - Earnings Call Transcript

| About: Telecom Italia (TI)

Telecom Italia SpA (NYSE:TI)

Q2 2016 Earnings Call

July 27, 2016 4:00 am ET

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 (0:42) presentation – sorry for the interference. And I hand it over now to Flavio Cattaneo.

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 (2:33) revenues. Fiber lines in the quarter were up by 118,000 supported by our engine rollout. Line losses decreased at 134,000, the lowest quarterly number since 2010. And the broadband ARPU grew at about €22. We are currently repricing some of our fixed broadband offers. While in September, we'll launch an important new four-play (3:11) campaign. We are, therefore, in the best condition to face the second part of the year.

Slide six, you can see the sharp positive turnaround made our second quarter year-on-year performance and it is the best in the last 25 months. Organic EBITDA has started to grow again on both our quarterly and half year basis. And the Domestic EBITDA is up by 6.9% in the second quarter. It was minus 5.2% in the first one and plus 0.9% in the first half. Reported Domestic EBITDA is even more impressive. Q2 year-on-year performance is nearly plus 40%, while the first half score is almost plus 12% as Piergiorgio will better detail later on.

Performance on cost reformation program and the expected development on the top line make us confident in a further improvement of the outlook. As a consequence, we are changing the full year guidance of Domestic EBITDA from at least stable to positive low-single-digit growth.

On slide seven, we give you an update on TIM ultra broadband plan in Italy. By the end of this year, we'll come near to 14 million households passed with Fiber-to-the-Cabinet, a technology that can offer download speeds of up to 200 mega.

In terms of FTTH rollout, we've signed a deal with Fastweb that has changed our footprint. We add to our 900,000 connectable households expected by year-end further 650,000, bringing connectable households to over 1.5 million. By the end of 2018, we'll reach 3.8 million premises with at least 1-giga fiber connection, up from the 3.1 million of our previous plan.

Moving to mobile ultra broadband, LTE will approach 95% coverage of the population by the end of this year. This will increase the cap from our customer base as we proceed with further LTE enhanced deployment.

Let's now spend a few more words then on the Fastweb deal. You can see in slide 8, this deal confirms our primary role in Italian NGN and accelerates by almost one year our FTTH target. It is a combination of a commercial and a co-investment agreement.

In the commercial agreement, Fastweb sells to TI 650,000 FTTH connection in the six prime cities for a gross cost of about €200 per unit or a net one of €150 each after other economic element of the overall agreement. And there is also €1.2 billion co-investment agreement for this development of FTTH infrastructure in 29 cities in the next five years through a dedicated joint venture.

The joint venture will be 80/20, 80% for TIM and 20% for Fastweb, investing a double-digit internal rate return. No incremental CapEx is expected for TIM in the 2016-2018 time horizon. The partnership will allow synergies in investments, thus reducing monetary cost. This really is a big improvement in the Italian fiber landscape materially accelerating the availability of retail and wholesale fiber offer in the 29 covered cities and indeed supporting our related revenues.

As you will see in the next slide, we have also an update mobile network plan. Infrastructural quality is a key to develop next-generation network and 4G deployments requiring more wireless infrastructures. Indeed, as announced yesterday in the quarterly call, INWIT will be providing the vast majority in the wireless infrastructures that were acquired by TIM, accelerating its investment plan with additional €150 million CapEx and generating upside in terms of EBITDA. CapEx are incremental for INWIT but not for the group. INWIT will focus on the construction of more than 500 new sites, at least 4,000 small cell, and the connection of a minimum 1,000 towers with a fiber link by 2018.

In the future, TI will be the company completely integrated with the Fiber-to-the-Home and the Fiber-to-the-Tower will create a unique company in Italy at the maximum speed and the maximum quality. This business affiliation will also strengthen INWIT's role as a wireless infrastructures provider, getting ready for 5G deployment, and enhance a lot the current LTE and the 4G. So, this business acceleration represents an interesting growth story, and a win-win opportunity for value creation for both company and their shareholders.

Slide 10, as shown, (9:36) now briefly with a slide on Brazil, which is strategic and not for sale. Although the environment is increasingly complex, after a change in management, there has been a sign of improvement, especially on EBITDA and on market share.

In line with what we indicated in May, yesterday Brazil has announced a recovery plan with an improvement of reais foreign policy, R$1.6 million in 2018, run rate reduction of hedge cost, for a total additional cumulated saving equal to R$4.5 billion over the next three years. Our focus today is securing EBITDA, and the cost recovery program goes exactly in this direction.

In Brazil, we have a great opportunity as a mobile challenger by strongly focusing on data services, supporting multimedia and digital development, and properly diversifying offers across different customer segment and different areas of the country. When and improving the top line, supported by strong investment and had a solid commercial plan as a statement of de Angelis, as explained in TIM Part quarterly call yesterday.

Slide 11, we talk about leverage projection and are obviously changing. This includes the impact of the cost efficiency and we take out the sale of INWIT. The three-year projection of this positive operational dynamic, and other things being equal, would lead an improved net debt/EBITDA guidance.

In 2018, the ratio goes from below 3 times to below 2.7 times, even without INWIT sale. Aside from the positive effect of the €1.3 billion mandatory bond conversion due in November, current scenario indicates an organic three-year cumulated free cash flow generation of about €2.1 billion.

Well, now I leave the floor to Piergiorgio for the detail of the quarterly results.

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 (15:26) business that created a €10 million drag. At the same time, line losses were around 134,000 given our ongoing strong focus on fixed broadband delivery and the growing attention we have on overall customer service, the line losses points to a gradual but continuous improvement both in the consumer and business segments.

Domestic broadband service revenues improved by 6.2% year-on-year as we continue to leverage on our quality. As a consequence, fixed and broadband ARPU increased by 4.4% year-on-year reaching €21.9 per month. Broadband net adds remained in line while competitive pressure was slightly up. We confirm an approach based on premium pricing that would be supported by our further expansion.

Slide 17. Let's now move on to Domestic CapEx. Its total figure for the first half 2016 of €1.6 billion was €69 million higher year-on-year showing an important increase in the innovative components' weight, up 10 percentage points year-on-year, and now accounting for 49% of total. Infrastructure remains our strong focus in both traditional and innovative components.

Slide 18 gives us an update on the Domestic OpEx evolution with the first half year. Let's look first at the evolution of OpEx net of nonrecurring items, which decreased by €156 million against first half 2015. As you can see, labor cost played a very significant role in this reduction, including the release of the company performance bonus provision for €66 million. Additional support also came for the full solidarity impact in this half. This is a contribution that last year stopped at the end of March.

On real estate and energy, we improved the first half year-on-year comparison by €61 million, reducing office spaces and related costs and unitary cost on power. There is at the top slide (18:08) showing the cost strength in the main cluster for the first quarter. All first half year-on-year savings occurred in the second quarter 2016, showing that the cost efficiency program we communicated in May is fully on track.

Slide 19. In the first half of 2016, our adjusted group net financial position stood at €27.5 million, showing an increase of €236 million versus year-end 2015 compared to a €341 million rise in first half of 2015 versus year-end 2014. Solid operating free cash flow and M&A more than covered cash financial expenses, taxes and dividends. The variation of the net debt is mainly driven by exchange rate impact due to the Brazilian real revaluation and the new cash impact related to IAS 17 on leasebacks.

We do expect operating free cash flow performance of our group in the second half to improve significantly versus first half due to better revenue outlook, efficiency program fully on track both in Italy and Brazil, and cashing in our EuroSud public fund. Debt evolution for the second half would also benefit from the €1.3 billion mandatory bond conversion and will be negatively affected by IAS 17 on leasebacks.

Thank you. Thank you for your attention. I now return the floor to Flavio for the final remarks.

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.

Question-and-Answer Session

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 (24:21).

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: the market-driven cost for €30 million, the process-driven cost for €67 million, and the personnel for €110 million.

In terms of personnel, we have, I would say, three components. The first one is the payment for (26:58) of €66 million; then the solidarity impact for €24 million; and then various components, mainly related to the change in quantities and other issues, for additional €20 million. So this explains the €110 million reduction at labor cost level.

In terms of process-driven, I would say that the main area in this quarter is related to the G&A, which accounts more or less for 100% of the process-driven cost reduction. And in market-driven, it is very much related to the reduction in advertising and other – with a small component also on the reduction on commercial cost.

If you want to, let's say, consider the second part of the year, I would say that, in principle, the pace of the reduction is expected to be more or less in line with the second quarter, but with different mix, because of course, the personnel reduction cost in the second half will be very limited, and will just be related only to the organic reduction. But of course, we will not have in the second quarter, let's say, non-recurring reduction like the (28:25).

We expected to have in the second half, in real estate and (28:35) programs, to begin to have a result, particularly with respect to having the delayering of the platform plus, on real estate, the full impact of the plan coming on profit. And also, market-driven, we expect to have a pace in line with the first.

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

(29:05) cost-cutting program we have just started. And the important element coming from this action will be in the next quarter. And depending what happened the issue, but what concern (29:44) the rebate for the supplier, we have already realized the contract and the agreement, but the effect we could see in the next month.

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 (31:59) next quarter, the impact of the comparison with Expo, which has (32:02) a value of €10 million in the second quarter. And, of course, we expect also to have some pick-up from the quad-play offer that we will have in September.

In terms of on the wholesale that you have in the wireline, on the wholesale component in the wireline, the second quarter is affected by a comparison with the second quarter last year because of the change in regulated prices that in the first half has an impact of €35 million.

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 (33:28). So, it's a mix of customer base that explains this evolution.

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, (33:51) questions were asked. I mean two small ones, if that's okay. Could you just give us a thought (33:58) for the base of supplier cost that you're trying to find savings on? What's the actual value of that base of OpEx in €100 million (34:07) equipment decline we have seen through here?

And certainly on the deal with Fastweb, firstly, would you be open to other (34:23) joining this venture such as Vodafone and Wind if they change their mind? And secondly, do you think there will be antitrust issues regarding approving this JV with Fastweb? Thank you.

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 (35:04) and according to the Italian regulation, we are available for the sale – in wholesale (35:12) in all of our infrastructures and according to the Italian law, there is not a particularly problem about it. But today, I don't know if there is another one available for the investment infrastructures because today, we are not against another partners. But so far, this Fastweb is the partner with the same industrial characteristic, and in my opinion, it is a very important strategic move.

Regarding the antitrust, Piergiorgio detailed because he is already informed by the authority.

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 (38:37) this incentive have require the use of this possibility, and this is well on track.

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 (38:57)?

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 (39:16) results on labor cost. So, we expected this provision to fully cover this redundancy plan. And maybe there will be a small adjustment in the next quarters or year but this is not will be significant. So, more or less, I will say that the costs are, in general, already provisioned. And in terms of benefit of this 170 redundancy plan for officer, we expect to have a small impact in 2016 in the region of €5 million with a run rate impact of €30 million in the 2018 level (40:01).

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 (42:06) – today, for example, or Sunday, when the people stay at home, that increase a lot to the connection, and that reduce significantly the line losses.

And the new offer will be launched in full, will sustain our top line also in the fixed. There is not – our repricing is a mix of the revenue management. There is not – sometime you can see in the market some promotion at a lower price. But there is a combined situation that bring us at this level, in terms of the revenues. Is important, the line losses. Our expectation would be in line with this guidance. Reduction the line losses is one of our mantra, and the fixed. And the new campaign have (43:17) that means increase the connection (43:22). And this is our expectation.

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 (45:19). We accelerated the results, particularly in the most important cities where, thanks to the commercial agreement, we obtained the same objective with at least one-year advantage.

In terms of cash cost, of course, the 20% equity of the vehicle will reduce our total disbursement for this FTTH program. So we have also an additional benefit from this perspective.

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 (46:29) to your fiber in cities like Milan, where you are developing alternative infrastructure with fiber? Is this a possibility? And what are the condition to expand this agreement you reported in the bottom part of the press release? What are the areas where this agreement can be extended? Thank you.

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

(49:01) to Piergiorgio on this detail.

Piergiorgio Peluso - Chief Financial Officer

Yeah. So the second question was on Infotel and the first question was on the FTTH new level (49:13). Of course, it's related to new areas. But, of course, there will be a synergic approach with our cabinet. And it is not the case that both Telecom and Fastweb have decided to analyze this opportunity, given the same industrial approach on this plan. But then, of course, there'll be a synergy with our cabinet deployment plan.

In terms of other areas, I said that we will in the future evaluate all the opportunities. For the moment, the agreement provides only the FTTH program. But, in principle, we do not exclude any additional business, but this is not under the table today.

Luigi Minerva - HSBC Bank Plc (Broker)

So, to clarify, the 29 cities, are they currently covering (50:08) Fiber to the Street Cabinet and the agreement will just help you to take the fiber from the cabinet down to the premises? Is that correct?

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 (50:27), so from cabinet to the buildings. And, of course, there will be a synergy between our cabinets and the (50:34). So, the answer is yes.

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.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!