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Telecom Italia S.p.A. (NYSE:TI)

Q2 2012 (H1 2012) Results Earnings Call

August 2, 2012 8:00 AM ET

Executives

Franco Bernabè – Group Chairman and CEO

Marco Patuano – Chief Operating Officer

Alex Bolis – Investor Relations

Stefano de Angelis – Group Controller

Analysts

Luigi Minerva – HSBC

Micaela Ferruta – Intermonte

Georgios Ierodiaconou – Citi

Mathieu Robilliard – BNP Paribas

Nick Lyall – UBS

James Britton – Nomura

Tim Boddy – Goldman Sachs

Torsten Achtmann – JPMorgan

James Ratzer – New Street Research

Stanley Martinez – Legal & General Investments

Paul Marsch – Berenberg

Alex Bolis

Today’s call we will review Telecom Italia Group’s First Half 2012 Results. We have with us this morning. Mr. Franco Bernabè, the Group Chairman and CEO; and Mr. Marco Patuano, 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.

You may follow us today via simultaneous webcast that maybe accessed through the company’s website, www.telecomitalia.com, from which you can download or view our slide presentation during the conference call.

We would like to remind you that this presentation contains forward-looking statements within the meaning of the Private Securities 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 filings, which are on file with the United States Securities and Exchange Commission.

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

Franco Bernabè

Good afternoon, ladies and gentlemen. And thanks for attending today’s Telecom Italia conference call in which we will summarize Telecom Italia Group results for the first half of 2012.

From April onwards the macro context in Italy has become more challenging with an overall deterioration of consumer spending and forecasting for 2012 a 2.2% fall of GDP year-on-year. Small to medium sized enterprises went through considerable difficulties mostly related to very tight credit conditions, while large corporations further reduced their spending.

Vice versa consumer spending on telecom services appears not to have suffered from relevant reductions. Overall, our expectations on the trend for the year remained unchanged.

The deterioration of the European macro environment and the weak cyclonical recovery in the United States are negatively affecting the emerging market economies including South America.

Brazil has been experiencing an adjustment in consumption in the C Class of its population after a number of quarters of robust income growth. We see this as a healthy adjustment which should actually move along with the sustainable trend in consumer credit in the future. The countries potential remained solid and continues to provide precious support to our Group’s performance.

Argentina has enjoyed a support of commodity prices and seems to be well-prepared to meet the forthcoming foreign currency sovereign debt deadlines. Our operations have successfully dealt with the introduction of mobile number portability while continuing to profit from the growth in mobile data and fixed broadband.

In order to better oversee management of business development in our Latin American operations, yesterday’s Board of Directors appointed Andrea Mangoni as the General Manager for South America. Andrea has recently been doing a good work in TIM Participações and we are sure he will guarantee the best possible evolution of our position there.

On the regulatory side, TI is following with great interest the positive developments on copper and fiber access within the European Commission regulatory framework. We believe that the new policy statement announced [audio gap] balance between income stabilization and investment promotion, which is needed by the European incumbents deploy the ultra broadband networks.

A new package to be adopted by the end of 2012 will facilitate the transition from legacy to next-generation networks and grant more price flexibility for fiber-based wholesale services deriving from the removal cost orientation while avoiding price cuts on copper assets.

Another positive development concerns to the European Commissions finding that the recent law imposing on Telecom Italia, the obligation to grant alternative operators the possibility to direct and manage local open bundling maintenance services is not compliant with the EU regulatory framework.

Moving to Brazil, as you know, we’re addressing the current issues with Anatel. I have personally had an active and open dialogue with the Brazilian regulators on this matter in order to clear up any potential previous misunderstanding and to confirm that the quality issues are extremely important for us. A detailed course of action is being agreed upon and we believe that the commercial ban will be lifted very-very shortly.

Let’s now move on to a brief review of our Group’s first half results. On the right hand side of slide number three, you can see that the Group level revenues grew organically year-on-year by 3.1%. Organic EBITDA was down 1% year-on-year and reached €5.893 billion in the first half of 2012, both are trending and full consistence with 2012 year end targets.

Moving to the left hand side of the slide, reported revenues increased by 1.7% year-on-year, while reported EBITDA performance was down 1.6% year-on-year. Group reported results were impacted by the weakening of the real that once converted into euro reduced the local currency positive performance.

TIM Brasil posted solid figures in light of the fact that Brazil has been experiencing a macro economic slowdown. On Telecom Argentina’s contribution, I shall briefly comment later on, but let me just point out that the mobile number portability was introduced in the country. We did not increase post-paid tariffs for the time being and we achieved the first position in terms of shares of revenues.

On slide number four, I only wish to draw your attention to the first half net income, which grew on a comparable basis by 9.2% year-on-year reaching more than €1.2 billion.

Let’s now take a closer look at the operating free cash flow generation in the first half, which as you can see in slide number five stood at €2.243 billion, down by €269 million from the first half of 2011 impacted essentially by the anticipation in network development CapEx plan for 2012.

The second quarter higher figure confirmed our commitment to constantly improve quality of service in TIM Brazil where we accelerated our investments in network deployment and in IT.

In the second half, we will however benefit from an improved operating free cash flow generation, we will be -- which will be inline with our 2012 full year indication of around €7 billion.

Moving to working capital, its absorption increased in the first quarter was more than fully offset in the second one. As you can see on the left hand side on slide number five, in the first half of 2012 it was actually embedded by €60 million than the comparable figure for 2011.

Our net cash flow on a comparable [audio gap] by €75 million, with a final value of €54 million. After, however, we self-funded more than €1 billion of net Group dividends paid out in the second quarter.

Moving now to analyzing debt, the net cash flow generation that you can see on slide number six has allowed for a reduction in the net, in the adjusted net financial position, which was down to €330,360 billion at the end of June 2012 versus €330,414 billion at the end of last year. Year-on-year reduction is €759 million.

It is worthwhile noting that our TI Media disposal process is well underway and we expect to close it by the end of the year. More importantly, on our debt reduction guidance for the year, I wish to point out, how in the second half we will not have the 2011 negative one-offs, first, of the Italian LT license for €1.223 billion and second of the net amount of the AES acquisition for €446 million.

Therefore, we will fully benefit of the net cash flow generation for the remaining part of the year, which for your reference in the second half of 2011 stood on a normalized basis at around €2.4 billion.

At home, we’re facing a challenging environment with macro economic indicators deteriorating in the last quarter. Overall first half of 2011 and ‘12 revenues performance of minus 3% year-on-year was supported among other by our multi-step pricing simplification on fixed has slightly decreasing fixed line losses impacting essentially only a lower spending segment.

Our ability to keep a marginal increase prices for fixed and mobile data, and are growing mobile customer base, which posted about 1 million net additions in the last 12 months with a stable calling base of around 80%.

As to our fixed line business, retail broadband ARPU improved both quarterly and on a year-on-year basis with a stable quality consumer base market share that supports our value strategy.

For mobile consumers, our customer base with a smartphone is approaching 20%, while 70% of small screen users have a data package. As usual, Marco will give a full picture of our domestic operations.

Now, I’ll spend a few words on the recent positive regulatory developments which occurred in Europe. Without elaborating on the details contained in the slide number nine, which is a little bit complicated, let me return to briefly comment the positive impacts coming from the new European regulatory approach regarding stable copper access prices and more flexibility for the next-generation wholesale pricing environment.

The counterpart for this regulatory rebalancing expected by the commission is the requirement for incumbents to take a step ahead in non-discrimination rules, where Telecom Italia is in the position to leverage on its positive experience regarding taxes equivalence undertakings.

Telecom Italia will leverage on this framework for its future investment and fixed user broaden by fully exploiting the considerable cost and time advantages offered by fiber to the cabinet, vectoring and the other future copper accelerating technologies, including Phanthom, G Fast and others. In this respect, our full IP copper access network will continue serving Italy for many years to come.

In a meanwhile, LTE technologies would offer a strong complementary approach, accompanying a growing overall broadened penetration, increasing the overall customer satisfaction and mobility, and resolving the digital device issues in due course.

The new regulatory guidelines shall be first translated into EC recommendations and then incorporated into the national regulatory frameworks. In practice, without having to wait for the end of this formal process, indications which have been publicly given strongly support economic value that we have been attributing to our access network, also vis-à-vis future opportunities of corporation with potential partners.

Let’s now move on to TIM Brasil’s performance that despite the more complex economic environment and tougher market competition posted sound results.

Let me remind you that in June, we successfully acquired licenses for 4G technology for a total cost of around €150 million, confirming a discipline in the allocation of resources while preparing ourselves for the strong mobile data growth in this area.

In the first half of the year, TIM Brasil continued to outperform the market confirming its second position among Brazilian mobile operators and its leadership in prepaid segment.

Revenues grew by 12.6% year-on-year and these results were driven by a sound growth in outgoing voice revenues and boost in -- revenues driven by continuous increase of smart and web phones penetration which are now above 30% -- 35% in aggregate on the total customer base. While facing the negative impact of mobile termination rates introduced in February and in March 2012.

EBITDA in the first half of 2012 reached €987 million, which is plus 10% increase year-on-year and in line with the full year indications that TIM Brazil has always gave earlier in 2012.

Moving on to Argentina, despite the complex environment, our operations posted good performance in the first half. Revenues grew by 21% year-on-year and reached €1.823 billion, mainly underpinned by the performance of the mobile business, which was up 24% year-on-year.

Topline growth translated into an EBITDA increase for the first half of 2012 by around 9% year-on-year, impacted by the increase of commercial efforts, due to the introduction of mobile number portability.

Telecom Personal launched a successful new branding and a winning strategy on services and pricing that have ensured a good start in the new environment. On the other hand, in the second quarter, we experienced a negative impact on margins mainly due to the mobile number portability that required stronger commercial effort to stay focused on quality acquisitions and increased energy cost, which suffered from the cancellation of energy subsidies.

And moreover, on negative comparison half on half on labor cost. Nevertheless, we kept EBITDA margin above 30%, while EBITDA like CapEx improved by 4.5% year-on-year.

Let me now wrap up on our financial position and our targets. Renewed fears on the ability of the euro system to cope with specific solvency issues have caused a new deterioration in the financial markets.

Despite this situation, let me point out how Telecom Italia’s robust liquidity position which has been further supported by the recent extension of bank lines and bond issued puts us in the condition of being fully funded well into 2014 and therefore, with no need to access capital markets in ‘13.

This quarter confirms how our operating free cash flow generation is inline without the leverage requirements of approximately €2.5 billion for the year 2012 and 2013. And therefore, I wish to stress how also given the current complex financial situation, our dividend policy is fully sustainable. It was actually redefined earlier this year precisely to ensure its consistency both with our plans and with the excellent conditions.

Therefore, you have seen from my presentation and as you will now see Marco’s presentation, our Group shows again in this quarter that it has the operating in the financial profile which allow us to confirm our targets for the year.

So, thank you very much for your attention. Now I leave the floor again to Alex Bolis. Alex?

Alex Bolis

Thank you, Franco. After Franco Bernabè’s presentation its time now for Macro Patuano’s update on the overall domestic performance.

Marco Patuano

Thank you, Alex. Good afternoon to all of you. The second quarter TI domestic business showed important resilience consistently with our domestic guidance for the year, which we confirm to be negative mid single-digit both for topline and for EBITDA.

Italy has experienced an impressively severe recession, which has shown its teeth particularly in sectors like autos, white goods and construction business. Telco’s were less affected than TI has been trading rather consistently on consumer and largely worsen corporate as you will see shortly.

The combination of these two affects drive our second quarter reported figures around 1 percentage point down versus the previous quarter both in the domestic topline and EBITDA.

Domestic service revenue normalized for calendar discontinuities both in the first and second quarters and for bad weather in February have improved and now stand at minus 2.9% year-over-year.

Nevertheless, our financial discipline ensured a better trend for our working capital and a sound increase of the operating free cash flow. CapEx were up in the quarter year-over-year as ultra broadband network investments delays were recovered and we now proceed according with our original plans, margins were stable.

In first half 2012, operating free cash flow improved by 4.9% -- Europe €118 million higher than first half ‘11 at over €2.5 billion. Operating free cash flow or revenues reached 28.1%, the highest level I can recall.

Let’s now move to slide four to better focus on consumer versus corporate. General economic conditions in the second quarter of 2012 have been worsening. Italian GDP decreased further.

Austerity measures increasingly affected overall spending attitude. No taxation on real estate which started to become due unpayable in the month of June impacted mostly consumer and its all segments.

In light of this overall context, we continue to adopt a cautious approach. In the consumers small and medium business segments we did not reacted to the new wave of price aggressiveness on mobile nor to the challenging offers in fixed broadband. We have proceeded instead to further simplify the traffic structures.

In our top corporate clusters, we kept expanding significantly the offer of cloud services. As a result of this strategy, our consumer segment continued to show the best response as we continued to -- the sequential improvement in service topline seen in the previous quarters.

While GDP estimates worsen to minus 2.6% on yearly basis and corporate confidence is further declining. On the corporate side, the economic slowdown has driven service topline to minus 6.5%.

In this SOHO/SME segment, the crisis caused a lower net inflow of companies in the last quarter, which impacted on revenues. Large corporates and public administration are still in a saving mode and this receipt reduced and postponed their spending.

This quarter, the balance of these two different trends in consumer and corporate delivered to our Group resilient performance. We expect to keep -- to continue to keep a lower correlation to the economy of the telco spending by Italian households and to encourage a moderate improvement in the corporate segment driven by ICT.

Let me now give you with slide number six, some specific updates on our fixed operations whose service revenues are definitely keeping the favorable pace, which was supported since from July 1, 2011 by our monthly fee increase and pricing simplification moves.

Since July 1, 2012, we have been working again on our consumer price structure and we have combined local and domestic long distance tariffs into a single one. We do expect a positive outcome on topline and EBITDA in the second half of the year, partially mitigating the unfavorable year-on-year comparison effect and helping to defend our profitability.

On the bottom left-hand side of the slide, you’ll find elements that confirm the resilient wholesale domestic trend and the contribution of our international wholesale unit Sparkle that still benefited from the important portfolio repositioning, which was conducted during the first half of 2011.

Moving now to the overall market line losses evolution. On the right hand side of this slide seven, you will find evidence of further deterioration in OLOs net acquisition trend. This was close to zero in the quarter, while they were engaged in a churn exercise among themselves.

Therefore, while LTI kept its erosion stable at about 180,000, it is clear that OLOs are not the dreamland of our customers, which are not looking for cheaper offers, but for an overall expense optimization moving low end, low value lines to mobile-only. At the same time, high value customers are more and more interested in qualitative service, which is still driving our retention and win back exercise.

Our retail fixed in access market share remains very strong at about 66%, while quarterly line erosion does not affect high value lines. On low end, consumer voice ARPU is up nearly 1% in this quarter versus second quarter of 2011.

Taking a closer look to our broadband market, I can confirm to you that we continue to stick 100% to our value strategy. As you know, the approach we are following is, on one side, avoiding to follow the deep discount promos that our competitors are still posting.

And on the other side, implementing successfully a pay-for-faster and better approach, as shown by results of our superintendent bolt-on offer where customers have grown close to €0.5 million.

This last evidence paves the way for stepping up in the first 30 Italian cities, our Fixed Broadband services via FTT Curb investments, which will allow us to deliver to the majority of the households in these locations download speeds of at least 30 mega within the first half of 2013.

As a result, TI’s broadband service revenues are growing 1.4% despite a minor decrease in lines that does not hold us back from having a retail market share of around 52%. At the same time, our fixed broadband ARPU is up again this quarter both on a year-on-year basis and versus the previous quarter.

Let’s now move to mobile. I would like to attract your attention to the key performance indicators, which you can see at the bottom of the total mobile revenue breakdown. On the eve of a huge MTR cut, I’m sure that we all agree that business generated is the most meaningful measure of real operating performance.

Moving now to look at least on a quarterly perspective, on the right-hand side of this slide, you can see how consumer did show a supporting and even improving trend while corporate has suffered from the economic context.

An evidence for the consumer resilience, it is important to note a further growth of around 50% in handset sales that we recorded in the second quarter. This clearly speaks for a substantial stable telco spending allocation by Italian households.

Moving to the next slide, we see how our mobile operation continued to benefit for -- from a healthy acquisition trends called since the second quarter of 2011, confirming the calling percentage of around 80% of the customer base.

In the second quarter, we completed a migration program following the termination of the MVNO agreement with MTV Mobile. It has determined and earned a disconnection of about of 150,000 residual silent customers. Net of this effect, our net adds would have been positive by about 50k quarter-on-quarter.

Looking at the bottom left hand quarter -- quadrant, it clearly stands out that there has been a missed opportunity for the Italian mobile market to shift gears on MNP. As I did comment in our last call in May, all main pleasure -- players were just about to reach IT. Unfortunately, since then not all the operators followed the same value-oriented approach.

The result can be seen from the diverging lines reported for the month of June. I just would like to add that, for the time being, TIM kept its MNP tariffs stable since the month of February. I personally hope that all players will converge again to a rationale behavior.

On slide 12, we move to look in a little more detail on the positive results we obtained from a constant progression in bundle adoption. Customers on bundle now amounted to over 30% in consumer, while data packages in SME and SOHO segment are in excess of 40%. This type of events proof to be ARPU accretive, churn reducing and short-term volatility dampening. We worked very carefully on bundled content, with the aim to increase users without capitalizing messaging.

Specifically on TIM Young, our client portfolio recently reached the 300k, showing an outstanding level of renewal rate and being one of the ARPU sustaining components, focusing on the messaging working pattern of TIM Young, it’s clear that each SMS send calls for another SMS back. Therefore, this balance is messaging traffic among operators and plays an active role for TIM.

As you can see, we have been rewarded both on volume and economics. We enjoy the mid single-digit usage growth on voice, an increase about 25% messaging usage in the first half of 2012 and flat SMS revenues in second quarter.

Slide 13, highlights the consumer Italian mobile broadband market. On the left hand side of the slide, you can take away that the overall mobile broadband user in our country amounted to about €16.4 million. This figure is a result of two blocks of €11.9 million in unit each, representing large and small screen users.

Today, the first one grows only because of tablet. The second is still booming. There is an overlap of 7.4 million clients who use both the small and large screen devices that explains why the number of users is lower than the some of the two blocks. These overlap is growing as the two markets are complementary.

As you can see in the data connection box of the slide, the increasing sale of small screen is going hand-in-hand with the growing number of data sessions per device. Thus, network excellence will play more and more a key competitive role and LTEs takeoff is around the corner.

At the same time, large screen users benefits from higher tablet penetration, capitalizing on their user front-end features, customer entertain more frequent connection to the net will then spending more and improving the ARPU mix as seen in the lower left-hand box. Our double-digit total mobile data growth is impacting, what has become today is rather material underlying number, approximately worth of €260 million per -- of revenue per quarter.

I will close my presentation providing you with some details on EBITDA performance in second quarter 2012. We have already spoken of our domestic revenue trend that was down €173 million year-on-year, partially offset by, again, as in the previous quarter the positive impact of retail MTR reduction, partially offset by an increase in international interconnection costs related to the increase of traffic volumes and revenues.

Continued attention to limit SAC and Subsidy and continued efficiency of marketing and commercial costs and the reversal versus the previous quarter of fixed OpEx such as personnel costs, more than offsetting the increase in energy spend and in other industrial costs.

Overall domestic EBITDA trend for the second quarter was minus 3.7% year-over-year. For the six months of 2012, EBITDA was down by 3.3%, fully in line with our indication for the year.

Thank you very much for you attention and now back to Alex.

Alex Bolis

Thanks, Marco. Ladies and gentlemen, we are now pleased to take any of your questions. (Operator Instructions) Please begin now.

Question-and-Answer Session

Operator

The first question comes from Mr. Luigi Minerva from HSBC. Mr. Minerva, please?

Luigi Minerva – HSBC

Yeah. Good afternoon and thanks for taking my questions. I wanted to go back on your remarks about the European Commission statement on NGN regulation. And I wanted to ask you, how it will affect your future strategy, particularly on two levels, but firstly, whether we should expect an acceleration of your fiber deployment compare to your previous guidance?

And secondly, how this will change your position in any discussion with MetroWeb forecasted their positive strategy, because I understand from your pervious statements that one of the reasons for you to consider a potential partnership with them on the network side was to get a better regulatory environment.

But now that regulation seems to be improving anyway, I struggle to understand why a company like Telecom Italia would want to share its natural leadership role in that network deployment? Thank you.

Franco Bernabè

Well, thank you for your question because it allows me to make a few more comments on the decision that was taken by Neelie Kroes and the changes quite substantially, that the European Commission has said on this matter in the last several years.

Now, the idea that we have now stable long lasting regulatory framework that we have no consolidation for the next generation networks and we have no policy oriented reduction in copper prices, is a major change in the regulatory approach, both at the European level and then we will see it also at the national level, which allows us much more flexibility. And I think that we will seize the opportunity to use this flexibility in order to explore all kinds of alternatives that we have.

But for -- I think we must stretch very strongly that, although we are exploring possibilities, we are not in any case thinking about losing the control of the network, I think you are right.

The network is one of our -- the access network is one of our very important asset. Of course, it’s not the only one. It’s what we consider very, very important asset and this asset will remain with us for the very long time. So there is no doubt about this.

I think that what changes, but not only for us, but for the entire telecommunications world is that, of course, we can now look much more positively at the future. We will not of course accelerate the deployment of fiber network because, of course, it’s now at an early stage, because it’s simply an indication, a policy orientation on the side of Neelie Kroes, we will see the final decisions that will be taken by the European Commission at the end of the year and then we will see how this will be received by the national authorities.

But as we always said, our network deployment, the fiber network deployment, next generation network deployment is customer driven and its profitability driven. So we will not in any case do anything that will compromise our overall targets that are -- for the medium term are still very strongly committed to the deleveraging of the company. Thank you very much.

Luigi Minerva – HSBC

Thank you.

Operator

The next question comes from Ms. Micaela Ferruta from Intermonte. Ms. Ferruta, please?

Micaela Ferruta – Intermonte

Good afternoon. I have a first question on mobile service revenues. Would it be possible to have a normalized performance of service revenues altogether, so now broken down for end business for Q2? And possibly an indication on June or July whether there has been any further deterioration or not in the trend?

And then on the corporate segment, generally, I think in your guidance you said that you expect an improvement, a moderate improvement in the corporate segment driven by ICT. But I see that ICT revenues are actually down. So just, maybe you can give us color on why you said this -- are you seeing any price pressure decreasing, as contracts being re-negotiated for example?

And then I have financing question on OpEx, in the second half of this year, what is the trend like to be excluding interconnection which is clearly going to go down for domestic?

Franco Bernabè

Sorry, Micaela. Could you repeat the very last question?

Micaela Ferruta – Intermonte

The very last question is…

Franco Bernabè

Very last one, sorry.

Micaela Ferruta – Intermonte

Yeah.

Franco Bernabè

… the last one?

Micaela Ferruta – Intermonte

Domestic OpEx trends in the second half of the year, but excluding interconnection which I expect to be down clearly because of the MTR cuts.

Marco Patuano

Okay. First of all, if I give a look to the revenue trend without splitting by segment -- did you ask me splitting or not splitting? Not splitting. It would have been service revenues mobile is 5.7% in Q1 and minus 6.2 in Q2, given the fact that the impact is mostly on consumer and much less on the corporate.

Second, your question on ICT. ICT in Q2 was up. It was not down and slightly up, but up. The reason is that in Q1, most of the traditional -- the relatively more traditional services included in ICT were submitted to a re-negotiation process by the customer, which tended to impact fully on the quarter and on the full year and during the rest of the year, we continue to aggregate a new contract.

Another reason is that we have to be careful look into what part of the ICT were sales and what part of the ICT was represented by services. In the sales, we are much more prudent because margins are much lower and so we don’t wanted to finance for the full -- for this whole negotiation of equipment.

Then, last part is on OpEx. There is a chart in the presentation at the very end. You will see the progression on handset’s marketing and commercial, industrial. So there is the full split, not only taking away the interconnection but splitting all the rest. So, I think it’s quite self explanatory to you give a look to the annexes. Thank you.

Micaela Ferruta – Intermonte

Thank you. I was just asking on mobile service revenues in June and July, just to understand whether there was deterioration?

Marco Patuano

Of course, July is not something we disclose, I don’t, I would say that July is almost in line with June. The most interesting element, of course, keep in mind that in July we had a massive cut in MTR. But, and I think that this summer the most important part is that, especially one operator is much more aggressive than in the recent past.

And we think that this is something that have to be considered in the rest of the year if we recover some to some more rational behavior or if we are entering in a new phase. I think given the macro situation being rational is in the interest of the whole industry.

Franco Bernabè

Thank you.

Alex Bolis

Next question, please.

Operator

Next question comes from Mr. Georgios Ierodiaconou from Citi, London. Mr. Georgios, please.

Georgios Ierodiaconou – Citi

Yeah. Good afternoon. Couple of questions. The first one, the follow-up on the comments about the European commission. They have provided assurances there is no downside risk to the unbundling fees. But in the past (inaudible) was offsetting the fact that access banks were declining with ongoing increases unbundling fee in Italy. How can we look at your future returns on the operating access network in an environment where access line continue to come down yet unbundling fee remains stable. Are there any other ways you could offset that?

And my second question is on network sharing in mobile. In the past couple of months we have seen couple of active and network sharing agreements, most notably in the U.K. and I wanted to get your views on active sharing and whether there are any barriers that will prevent you from replicating this model in Italy? Thank you.

Marco Patuano

Well, on the first..

Franco Bernabè

Okay. Marco will answer the second and then I will. Okay.

Marco Patuano

Let me touch on the first one. You are right when you say that there are lines going down, but what we see today in the market is that the lines that have been canceled are the low -- the low value lines. What I mean with low value lines are lines without broadband.

So, why it is so important that that broadband -- that the regulation for broadband is new one. Because today we saw in the Italian market, several retail offers that have been so aggressive that we think that an overall regulatory environment that sustain or says clearly that there is no way for a further discount on wholesale prices will drive the retail price to a more rational behavior.

So, this is the reason why on the traditional idea sell I think that the whole market will benefit and with the correct pricing of idea sell, you can correct price also the NGN. So if you don’t price correctly the 10 mega or 20 mega, it’s very harder to price correctly 30 mega or the 50 mega or the 100 mega. So it’s extremely important to be rationale on this. Thank you.

And second I leave to Franco.

Franco Bernabè

Network sharing on mobile, well, Marco again. Today, we are not looking for network sharing gear in Italy. I think that what prevents mostly this kind of exercise is the factor that we have a very strict regulation in terms of electromagnetic regulation. We are of course sharing sites.

We want to share more sites. Sharing sites drives down the cost -- the overall industrial cost of the network. But today, we think that is very hard to reach an agreement on a more robust network sharing in the mobile. So we for the time being are not looking at it.

Georgios Ierodiaconou – Citi

Thank you.

Alex Bolis

Next question, please.

Operator

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

Mathieu Robilliard – BNP Paribas

I’m sorry. Yeah. Hi. Good afternoon. Thank you very much. First question on the wholesale prices, I think you said in the past that you’re expecting wholesale prices are just a framework for becoming also prices indicated by the regulator around Q3 of this year. Is it still on the time table that you’re expecting or has it changed with recent comments, could it be delayed?

And second with regards to Brazil, you’ve announced Mr. Mangoni is now managing the Latin American division. Should we understand that he will be directly managing it in Brazil or you’re still on the process of looking for a CEO for Team Brazil? Thank you.

Marco Patuano

On the wholesale price, let me add -- also comment on the previous questions -- on the previous question. I think that what Italian regulator -- the approach of the Italian regulator in the past was very rationale.

And I think that as you know we have been the only or one among the few operators that have had the unbundling prices increased in the last few years. And the rationale for this policy has been now shared also by the European Commission.

I think that behind the thinking of the European Commission, there is also a lot of work that has been done by the Italian regulator. So I think that this will continue to be -- to set base of the decisions of the Italian regulator. Now, of course, they’ve been -- they’ve just been sworn into office and they will decide their agenda but I think that it will follow very closely the thinking of the regulator so far. So we will see no major changes.

On the second question on Mangoni, Mangoni will oversee and supervise the Latin American operations. And I think that will – as concerns, TIM Brasil, he will stay as long as he is needed in order to fix the problems that we have encountered recently, and then he will manage the overall operations. Thank you very much. Next question please.

Operator

The next question comes from Mr. Nick Lyall from UBS. Mr. Lyall, please.

Nick Lyall – UBS

Hello. Two questions please. On the -- on TIM first, could I ask how our operators approaching the termination rate cuts with retail prices? Have you seen operators moving to cut retail or do you think they’re going to keep retail prices higher despite the termination rate cuts in mobile.

And then secondly, could you talk a little bit about why data ARPU slowed significantly in the second quarter? And the final one was I think Marco, you’ve mentioned so far in July you hadn’t seen a big change to TIM transfer. Is the same true effect as the property tax so far made no change to fix trends in July as well? Thank you.

Marco Patuano

Okay. Let me start with MTR first. I think that the major change will be a substantial move from a pay-per-minute offer or a community offer to a bundle offer. I think that the on-net off-net pricing strategy will become less and less available and more attractive as sort of any direction tariff plan that will allow the customer to call on-net or off-net without any difference.

We are already moving our offer into this direction. I think that at the same time it is also quite important that the change in SMS termination rates, also these will work in the same manner. So more bundles, and the bundle will help also to keep this kind of revenues without cannibalization from data, mainly on messaging, but also on increasingly on voice. So I think that the MTR cut and the sharp cut will work in this way.

The second question was on ARPU data. In the consumer segment, I would say that it is almost flat. Of course, when you increase so massively, the penetration of the small screen, it’s clear that you will start catching people with a lower propensity to a massive user. So this is something that have to be kept in mind.

In the corporate segment, we adopted -- consciously we took a decision. Now, since the penetration is very high, but we saw too many customers with high spending that was mainly driven by sort of mispositioning on data tariff plans. So we decided to proactively reposition them on more adequate tariff plans.

So we decided to limit these very, very high increase in data revenues because we think that sooner or later we had to pay the bill. So better to be proactive and work on the realization of the customer.

Franco Bernabè

Revenues fix, July, I see them almost in line with June. Remember that one year ago, we had also the effect of the monthly fee. We increased this year. Given this economic situation, it was not very popular to increase once again the monthly fee. So we decided to act only on the price simplification which is working, I would say, fairly well. So I don’t see July revenues very much different from June. Thank you.

Nick Lyall – UBS

That’s great. Thank you.

Alex Bolis

Next question please.

Operator

The next question comes from Mr. James Britton from Nomura. Mr. Britton, please.

James Britton – Nomura

Thanks very much. I just got one question focused really on the cost side, can you just clarify what the changes being to the labor law and how that might impact your ability to introduce headcount, headcount plans. And what plans do you have to initiate another round of personal reduction in the mid and price medium term? Thanks very much.

Marco Patuano

The changes in the labor law have made more flexible, the restructuring of the labor force of course with some constraints, but they represent a big improvement compared to the past situation. I don’t think that they will have any major impact in positive or negative returns on our policies.

In fact, they will help our policies in improving efficiency on -- of course, one of the major impact was the pension reform, that was taken six months ago and that has brought the retirement age from on average 60 years to now 67 years. So that will make a big difference.

But I think we have shown in the past to be capable of innovating very much and finding innovative ways to improve our efficiency. And we will keep in the future around the same line. I think that we have no major restructuring problems to introduce.

Of course, there will be efficiency gains that will be obtained over the next year, two, is a precise plan and perhaps given the role of Italy with respect to this. Michael will elaborate on this but I’m very positive and positive on the reforms. I think that the reforms have introduced a great improvement in the Italian environment. And we’ll help us also in our restructuring processes.

Franco Bernabè

Yeah. Just two comments, one is, even if the welfare law has been changed. Our plan, our project that was intended to have an early retirement for precisely identify the group of people that were closed to the age of retirement has been confirmed.

So we will benefit for earlier retirement procedure for another 2000 people with that the old parameters or below and not with the new one, which is question important. And this has been possible because we -- last year we have been first to agree the government on these restructuring process.

Second, more structural, I think that when you look globally through a traditional telco operator, we tend to consider the employees altogether. And inside employees, there are many different personalities. And different personalities ask for different treatment in terms of rationalization. You can’t apply the same medicine to customer care or field technicians.

So we have fairly little problem in some sectors in which the internal cost of labor is very much the same if you compare with the outsourcing. And there are other areas in which what we need is to reduce the overall cost of labor, which is not only the wage. It is the overall cost of labor.

And there are a third group of activities in which we simply have to be thinner. So we have to reduce our total number. So I think that this is quite important.

Let me just underline the very, very last comment. You know that this year was expiring the national labor contract, which has not been renewed for the time being, which has given us for the first half a benefit in terms of total cost of labor.

I’m fully confident that the unions will agree with us a good new plan for -- good new contract for the next horizon. I really very much appreciate it, the fact that unions approached their discussion table with a very constructive approach and this is extremely important not only for Telecom Italia but for the whole country. Thank you.

Alex Bolis

Next question, please.

Operator

The next question comes from Mr. Tim Boddy from Goldman Sachs. Mr. Boddy, please.

Tim Boddy – Goldman Sachs

Yeah. Thanks. I had a couple of housekeeping questions. Other line in the fixed-line domestic business grew nearly 30% year-on-year. I wonder if you just clarify what’s in that. And then if you could update us on your progress and potentially look into this first TI Media, which on these results, I guess, has negative EBITDA on significant debt. Is it really possible that you could dispose such a business?

Lastly, I just wondered if you could help me understand just once again the dynamics in mobile. It sounds like from what you’ve said June was materially weaker than the 7.5% decline overall you reported in service revenue. And you’re about to have an MTR cut of 50% on roughly 10% of revenue.

So I just -- I mean, it sounds to me like that business could be down as much as 15% in the third quarter. I just wondered if you make sure I haven’t misunderstood anything in that trend. Thanks very much.

Franco Bernabè

Sorry, Tim, could you repeat the first one? We didn’t get exactly the first question.

Tim Boddy – Goldman Sachs

In your domestic fixed business that was strong growth in the other line, and I just wondered what was in that because it grew quite sharply? We could perhaps take it up offline.

Franco Bernabè

Yes. I think we can take it up offline.

Marco Patuano

We can take this, just one with more detail.

Franco Bernabè

Okay. Do you want to mention? Next question please.

Tim Boddy – Goldman Sachs

I’m sorry just on the clarification around mobile, would be really helpful. Have I understood properly that June was materially worst than the rest of the quarter, and then you have to write the MTR cuts on top to get trend for the third quarter?

Franco Bernabè

The MTR cut -- that MTR cut is not one. Of course it’s affecting the top line but as I explained several time, will not affect our profitability, because what is important to say is that we offset that impact on profitability, because of the interconnection cost. So we have almost one-third of the market in the mobile, but we had two-third of the market in the fixed lines.

So these of course, when you look through the balance sheet, these ends up with a slightly positive effect on marginality. So it’s true and it is exactly the reason why this time I underline that the user generated service revenues. Because in our case, of course, we are slightly different from the rest of the market but in our case, any cut in the topline for MTR offset the EBITDA level.

So then yes, June was slightly worst than May. Mostly on business and top customers, but I don’t think it will be something that will structurally prevent us to reach our targets. On consumer, of course, keep in mind what I told at the beginning, some extra competitiveness in the market that in July is still there. But we see early signal of -- a slightly better trend. I think you asked on TI Media if I was not wrong.

Tim Boddy – Goldman Sachs

Yes. Thank you. Yeah.

Marco Patuano

Mr. Bernabè.

Franco Bernabè

On TIM, the process is proceeding, we have a number of declaration of interest. There is a very formal process going on and we will announce -- as soon as we have something to announce we will be announcing. But our forecast is that, we will be closing by the end of the year. Thank you. Next question please.

Tim Boddy – Goldman Sachs

Thank you.

Operator

The next question comes from Mr. Torsten Achtmann from JPMorgan. Mr. Achtmann, please.

Torsten Achtmann – JPMorgan

Good afternoon. Two questions please, the first on working capital. You have shown significant improvement in the second quarter, looking for the rest of the year, do you think you can get working capital consumption depositor i.e. that working capital can start to produce cash for you or is that -- would that be too optimistic?

And the second question is on Brazil, where round about topline was 7% in the second quarter. Where do you expect the acceleration in the second half -- from the second quarter will come from, is that mobile data or is that elasticity on the MTR cuts? Thank you.

Franco Bernabè

Thank you. I’ll ask our Group Controller to respond, de Angelis.

Stefano de Angelis

In the first half, we had a positive contribution in terms of comparison year-on-year from the working capital of 60 million. As you remind, we had completely different result in first quarter and we were quite confident to recover soon.

For the second part of the year, our expectation is to maintain or have another slight improve in this comparison in terms of year-on-year. Just keep in mind, that last year we had a negative contribution for the working capital for the full year of approximately 400 million. And this year, we expect to have a better figure as we stated of approximately 100 million, 200 million.

Torsten Achtmann – JPMorgan

Okay. And third, just to clarify, that would be less outflow, not inflow of 100 million, 200 million?

Stefano de Angelis

Less absorption, slow outflow.

Torsten Achtmann – JPMorgan

Okay. Perfect. Thank you.

Stefano de Angelis

You asked about the second half in Brazil. The situation in Brazil, if we look at the fundamentals of our industrial plan and our budgets, we are confirming the situation that we still considered to add very huge opportunities coming from voice, the data and broadband wireline markets. In the second quarter, we suffered impact for the MTR and an aggressive reaction from our competitors.

We have -- in our focused the adoption of new tariff plans that will confirm our innovative approach. The data evaluation services are still confirming a very important role of 40% in the second quarter.

Long distance is suffering just because our competitors copied our offer. But consider our dual mobile approach in the voice, we are confident that we may find new revenue streams that will give us the opportunity to confirm a double-digit growth for the second part of the year in the topline of Brazil.

Alex Bolis

Next question, please.

Torsten Achtmann – JPMorgan

Thank you.

Operator

The next question comes from Mr. James Ratzer from New Street Research. Mr. Ratzer, please.

James Ratzer – New Street Research

Yes. Thank you very much. I have two questions, please. The first one was just regarding your fixed line consumer tariff simplification that you put in from July of this year. Just wondering if you could run through there exactly what you’ve changed in a bit more detail and what impact do you think that can have on revenues both this quarter and beyond?

And then the second question, please, was looking beyond 2012 and into 2013 and ‘14, I think your the industrial plan you set out in February of this year was to look for domestic EBITDA stabilization. I’m wondering if you could just confirm to ask you are still happy with that outlook. And if so what do you think will be changing from here to drive that improvement in EBITDA. Is that driven by the economy, is that something structural in the business or is that more cost cutting you see to bring the EBITDA trend back to stable? Thank you.

Marco Patuano

Okay. First question is the new price simplification. In Italy, the pricing structure for the fixed was quite traditional. And let me say technologically speaking quite old fashion. Because until one year ago, we had different prices for peak hours and off-peak time, we had difference prices for working days, non-working days, long distance and local calls.

So, it makes the whole portfolio very complicated to communicate. Nobody at the end knew exactly what was the price apart from very general conventions like -- cheap or long distance call are expensive. So -- and then if you ask the people what’s the price, nobody knew it. Even worst, because they considered the mobile started to clean up all those differences.

So no difference between peak-off peak, no difference between local calls and long distance calls, and people enjoyed it because it was much easier to communicate, much easier to understand. So one year ago, we canceled and they lost -- the industrial price of a long distance call and a local call is very much the same.

So what we decided one year ago was step one, we canceled the difference between peak and off-peak and working days and non-working days. This year, we have canceled the difference and we have just one plan, simple tariff that is fixed-to-fixed calls, national calls. No matter if it is local, no matter if it is long distance. It is night or day, Sunday or Monday, so just one simple tariff.

Of course, when once it is clear, people use slightly more and then when you fix an average price, of course with such big volumes also small roundings can make the difference. I leave to Franco for the second part of the question.

Franco Bernabè

You’re asking us what will happen in 2013 or 2014, but it seems that the markets has not even the visibility for the next two or three hours. So, I must say that it’s a bit difficult to answer to your question like this. But in any case, what I can say is that we have been managing the company under the worst conditions, since the great depression of the 30s.

And what we promised, especially in terms of -- in terms of debt reduction and therefore of cash flow generation we achieved. We promised to be below 30 billion at the end of 2000 -- around 30 billion at the end of 2011 and we achieved that. We promised a further decrease in our debt level in the next two years, which will be driven mostly by the stability of the EBITDA generation and we will achieve this.

So, the only thing I can say is that despite the fact that macro economic environment is so bad, we have done all necessary -- whatever was necessary in the particular circumstances in which we have managed the company to do whatever it was necessary to achieve our targets and this we will continue to do.

James Ratzer – New Street Research

Do you think there is…

Franco Bernabè

Yeah please continue. Do you have further remarks to make? Probably we’ve lost the line with somebody? Next question please. Hello?

Operator

The next question comes from Mr. Stanley Martinez from Legal & General Investments. Mr. Martinez please.

Stanley Martinez – Legal & General Investments

Good afternoon, gentlemen. And thank you for taking my single question, which is back to the year end net debt target. I recognize there’s always been a second half skew to Telecom Italia’s net debt reduction due to the timing of the dividend payments.

But even so anything bearing in mind the €770 million of debt tenders announced last month. I think that the €2.4 billion required this second half seems to many of my counter parts to bridge too far.

So my question is whether having already captured better than seasonal working capital contribution in Q2, it is right to use the Telecom Italia media proceeds and the normalized €2.4 billion of free cash flow generation from 2011 at actual bridge to your year end target. And may whether there are some additional levers that you might deploy around that to achieve your target, maybe on cash taxes or on CapEx or in commercial costs in the domestic business that we are not immediately thinking about?

Franco Bernabè

Well, I mean the math is very simple. Last year, we had an outflow in second half of 2011 that was in the amount of €1,223 million for the Italian LT license. Then we had €446 million for the acquisition of AES. That means that given the amount of cash that we have generated in the second half of last year, which was €2.4 billion, I think we are more than comfortable in getting to the targets we have set.

Our plan of course allows for contingencies, for example, a speed of NGN investments is demand driven, if the economic recession continues and consumer demand becomes impacted materially. We will slowdown CapEx. It’s the normal business in managing a large companies, has many leverage to pull.

And -- but I think that the key figures, which were the once they quoted before, make largest impact on the -- on last year’s absorption versus generation of cash flow. I think that I can reaffirm that we are confident that we will be there by the end of the year.

Stanley Martinez – Legal & General Investments

Okay. Well, thanks for that reassurance, Mr. Bernabè. I just wanted to make sure there was nothing in the free cash flow generation for the second half this year that would be materially different from the second half last year and it seems you seem pretty certain with that?

Franco Bernabè

There are no M&A, that we envisage. So the -- I mean, there will be no usage of free cash flow generation for this kind of thing. So I mean, you are right.

Stanley Martinez – Legal & General Investments

Okay. Thank you.

Franco Bernabè

Thank you very much. Next question please.

Alex Bolis

We are moving now to our last question.

Operator

The last question comes from Mr. Paul Marsch from Berenberg. Mr. Marsch, please.

Paul Marsch – Berenberg

Yeah. Thank you. I just have one question relating to the wireline network and some of the excitements that surrounded the wireline network a few weeks back. When I think your shares were up like maybe 10% in two days, but the idea that it might be split into this joint venture with the government or with the FSI.

I know the time there was some discussion in the press about whether the form of regulation could change for the wireline network, away from [lyric] style regulation towards a more utility style regulated asset base. And I’m just wondering is that a realistic prospect at all for the wireline network to be regulated going forward?

Franco Bernabè

Well, you see, I think that and as we discussed a blend before, the changes in attitude by Neelie Kroes and the European Union are a general framework, but it moves from the recognition that without incentivizing or creating a concrete incentive for investments, there will be not the achievement of the digital agenda for 2020 in the European Union.

And we will all miss -- I mean the European Union will miss all the targets for digital improvement. So they need to create space. They need to create incentive. They need to create the boost for investments. So, I think that the -- what Neelie Kroes said goes in the right direction. Now, it has to be transformed into a detail directive then it has to be to be taken up by the national regulatory bodies and transformed into a detailed new regulatory environment.

But as I stated clearly couple of times during this session, the Italian regulator has always been very, very concerned about the fact that unless you create an incentive there will be no investments in next generation networks. So I’m very confident that given the fact that the most rationale approach is a regulatory asset base approach.

And therefore, all the mechanisms for determining the risk premium and of course then as in any regulated asset base approach you have to create a risk premium, and then you to get back to the customers, the improvement inefficiency that you gain, which is in fact what they have been doing and what will be done.

So, what was missing was a concrete incentive mechanism. And now we have a decent principle. So I think that, I think it’s really something that changes deeply, very deeply the future of the telecommunications industry in Europe. I think there is a major step forward for changing the future of our industry in Europe.

Paul Marsch – Berenberg

But I don’t see in anything that the -- that the EC has proposed so far, anything which suggests move from away from lyrics for copper networks and the move towards regulated asset base approach, are you hearing something different? Out of the…

Franco Bernabè

Yeah. But if you heard not the lyrics but the bad songs of the past.

Paul Marsch – Berenberg

Sure.

Franco Bernabè

And they kept saying that copper prices needed to be reduced in order to create incentive or the disincentive to keep on the copper prices and move to the fiber optics networks. Now the music has completely changed. I mean, Neelie Kroes herself declared several times and there was a big title on FTE. I remember nine months ago, when Neelie Kroes said, prices of copper must go down and now the approach has completely changed.

Of course, now there is no concrete. And there is one very important point that is also a very fundamental change. It is that while Neelie Kroes and the regulators in Europe declared that there needed to be cost orientation on next generation networks. Now Neelie Kroes has clearly stated that there is no cost orientation on next generation network.

Paul Marsch – Berenberg

Sure.

Franco Bernabè

I mean, it change a substantially picture. And I think that we are moving forward in the right direction.

Paul Marsch – Berenberg

Thank you very much.

Franco Bernabè

You’re welcome.

Alex Bolis

Ladies and gentlemen, the conference is over now. Thank you for calling in and for your attention as well on TI.

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