Telecom Italia's CEO Discusses Q2 2011 Results - Earnings Call Transcript

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Telecom Italia S.p.A. (NYSE:TI) Q2 2011 Earnings Call August 5, 2011 4:00 AM ET

Executives

Alex Pierre Bolis – Head of IR

Franco Bernabè – Chairman and CEO

Marco Emilio Angelo Patuano – COO

Analysts

Georgios Ierodiaconou – Citi

Mathieu Robilliard – Exane BNP Paribas

JP Davids – Barclays Capital

Tim Boddy – Goldman Sachs

Micaela Ferruta – Intermonte

Ottavio Adorisio – Société Générale

Stefano de Angelis

Chris Alliot – RBS

Tolster Akman – JPMorgan

Singh Mandeep

Giovanni Montalti – Cheuvreux

James Ratzer – New Street Research

Alex Pierre Bolis

Good morning ladies and gentlemen, this is Alex Bolis speaking, Head of Investor Relations and I welcome you to the presentation of the Telecom Italia Gruppo First Half 2011 Results.

Today’s conference call is hosted by, Mr. Franco Bernabè, the Group Chairman and CEO and by 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. After the remarks are completed, we will be happy to take your questions. You may follow us today via simultaneous webcast that may be 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 Litigation and 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 in those forward-looking statements which speaks only as of the date of this presentation and are encouraged to consult the company’s periodic filings which are on file with United States Securities and Exchange Commission.

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

Franco Bernabè

Thank you. Good morning, ladies and gentlemen and thanks for attending Telecom Italia first half 2011 results conference call.

The challenging macroeconomic and financial market conflicts, did not hold us back from improving overall domestic performance in the second quarter of this year.

In particular, in our domestic mobile segment, KPI has improved and top line revenue erosion on a year-on-year basis. Last quarter’s double-digit negative figure improved to single-digit with no adverse impact on EBITDA.

In our Latin American operations, we continue to overperform with the double-digit growth year-on-year in both Brazil and Telecom Argentina’s main financial matrix.

In consideration of these accomplishments, also made through the successful implementation of the new domestic business organization headed by Marco Patuano, and to the excellent work done by Luca Luciani and Franco Bertone’s team in Brazil and Argentina, we can confirm our year-on-year targets for 2011 both at the domestic and at the group level.

Let’s now move to the overview of the results for the period. You can follow me on slide three. In the first six months of 2011, we improved our operating free cash flow generation by €360 million year-on-year, reaching €2.5 billion. Reported group revenues increased by 10% year-on-year, also incorporating the positive results of Telecom Argentina. Organically, the group top line grew by 1% year-on-year.

The reported group EBITDA was up 4.3% year-on-year. Organic performance was down 2% year-on-year and reached in the first half of 2011 approximately €6 billion consistent with our year-end targets. This performance benefited from TIM Brasil and Telecom Argentina’s contribution, as well as from continuous cash cost reduction in operation efficiency at the domestic level.

Having largely completed our disposal plan in line with our expectations and allowing for some product contribution coming from residual minor sales, our yearly leveraging plan can now continue organically. Continued strong attention on cost efficiencies will contribute – generate enough financial flexibility to allow for end market acquisitions such as AES in Brazil without diverting from a continued improvement meant in leverage metrics.

I would like to remind you that the impact of the spectrum auction scheduled for the summer in Italy is not included in our year-end 2011 debt target.

Operating free cash flow generation in the first half of 2011 increased by 16.7% versus the same period of last year. Net cash flow for dividend payment of €1.3 billion on April 21 this year was €1.674 billion, a 20.8% increase versus the same period of last year.

On an organic basis, in the first half of 2011, group revenues grew by 1% year-on-year while EBITDA declined by 2% versus the same period of last year. We recorded a sound improvement for both figures in the second quarter versus the first quarter of 2011 due to the contribution of both domestic and LatAm operations.

Contribution to our group results from Brazil and Argentina in the first half of 2011 represents more than 35% of our revenues and 24% of our EBITDA, respectively, up 5.5 and 3.4 percentage points from the same period of last year.

Our continued care for LatAm’s operations has been rewarded by these important results. To date, Brazil, an engine of growth for the group, has a better capital structure to the migration of its stock to Novo Mercado. Its strong business profile will benefit from an even larger footprint following recent demand in market acquisitions of AES. In Telecom Argentina, where from March 2011, Telecom Italia Group’s economic interest has increase to 21.1%. Our management has delivered continued strong operating results and financial performance.

The recent deterioration in financial markets and the weaker macroeconomic prospects which we always witness across Europe and which increased risk-free rates and depressed equity prices have played a major role in the reduction of analyst consensus levels for the next three years performance of our core domestic business unit. In such uncertain context, according to IAS 36, we registered an impairment loss on its goodwill for €3.182 billion. As a consequence, the group’s goodwill has been reduced to €40.7 billion from 43.9.

Net of such one-offs, non-cash item after adjusting for minorities, net income would have been €1.169 billion. It is important to note that this write-down will not in any way impact our dividend policy or alter our key targets. After this goodwill realignment, reported first half of 2011 net income decreases to minus €2.13 billion at the group level post minorities.

I just want to remind you that Telecom Italia’s capital reserves are biddable for distribution which as of June 30, 2011 were worth €10.2 billion, insure a massive backup protection for dividend remuneration going forward.

Moving now to analyzing debt, net debt decreased in the first half of 2011 compared to year-end 2010 by €349 million. On a yearly basis, the decline is €2.46 billion. On June 30, 2010, group net financial position stands at €31.1 billion. It is worthwhile mentioning that the ongoing financial crisis has no current impact on our debt structure as our liquidity margin at June 30, 2011 stands at about €13 billion. This amount allows us to meet debt maturities until beyond the end of 2013 and prevents any need to refinance ourselves at today’s conditions.

Our fixed portion of 65% protects us from possible rate increases, while the current average cost of Telecom Italia’s debt remains stable versus previous quarter at 5.4%. Deleveraging and protection of cash generation will continue to remain key priorities at the group level.

Moving to domestic business, overall second quarter results registered an improvement to the better mobile performance in service revenues and handset sales, while our wireline business was still affected by general market slowdown and the tail of an aggressive promo season from our competitors.

On domestic mobile, revenues were down in the second quarter 2011 by 7.6% against the 12% year-on-year posted in the first quarter of 2011. On domestic wireline, the second quarter of 2011 topline results marginally weakened year-on-year from 4.5% to 5.1%. Domestic second quarter EBITDA trend improved from first quarter’s minus 7.6% year-on-year, to 4.8% year-on-year. The first half of 2011 total amount stood at €4,591 million, with a growing margin for 48.1% in the first half of 2010 to a current 49.1%.

Both on domestic mobile revenues and on domestic EBITDA, we have normalized the non-cash, no-recurring impact of TIM’s customer loyalty program in second quarter 2010 to €35 million, in order to offer a better representation of underlying business trends.

In terms of key performance indicators, the mobile domestic customer base increased, reaching nearly 31.3 million SIM cards, also due to a double-digit reduction in number portability net losses. Overall, wireline access market in Italy posted in the same period an unprecedented increase of net losses totaling about 130,000, which compares with the relatively stable low double-digit negative trend in previous quarters.

This happened to our Telecom Italia actually improved line losses on its own account, down from 106,000 in the first quarter to 183,000. And there is a visible sign of a sharp slowdown in all those net apps. Adverse market context and tapping daily workable win-back lines from OLOs caused a slight decrease in Telecom Italia’s fixed broadband lines.

Going forward, we expect the strength to benefit from recent AGCOM decisions. In the business data segment, ICT services continued growing high single digit offsetting good performance on traditional delta.

Let me close my quarterly domestic performance summary with a couple of comments. Once again, I wish to underline how Telecom Italia’s network remains the key domestic asset of the group, which we look forward to further develop on a demand-driven basis, as co-owners and operators alike. NGN project currently discussed in official meetings do not impact Telecom Italia’s strategies. From a broader perspective, it is clear that in the current context, the Italian domestic market could benefit from a consolidation among players. However, it is too early to say if and how this will materialize.

Let’s now take a quick glance to the Latin American operations. During the second quarter of 2011, Brazil increased further its very positive performance and key metrics show in the first quarter of 2011. Revenue-wise, the year-on-year performance versus second quarter 2010 was up 19.5% driven by both services and handset sales. EBITDA increased by 12.5% in the same period, totaling approximately €500 million in the quarter, posting a margin of around 27%.

In the month of June, our Brazilian operations reached 55.5 million SIM cards, closing the gap with Claro. As you already know, on July 8, Tim Participações announced the acquisition of AES fiber infrastructure for about €700 million equivalent. It’s 5,500 kilometers of fiber infrastructure, positioned in the Rio and Sao Paulo areas, which accounts for 27% of Brazilian GDP will considerably extend the current capacity and business customer operations. This decision was taken after the very positive experience we derived from Intelig’s acquisition in 2009 and shows the importance that the group keeps to its growing and very profitable presence in this country.

Telecom Argentina confirmed in the second quarter 2011 its double-digit growth on top line and EBITDA. Revenues grew by 28.4% year-on-year, reaching €758 million and the SIM card and postpaid performance of the mobile business where customer base grew to 17.4 million. Personal is now the second largest operator in revenue share and in lines. EBITDA reached €249 million in the last quarter, confirming a marginality of about 33%.

We think that these positive group results together with domestic performance improvement and sound EBITDA generation show our commitment to defend the value of your investment in Telecom Italia, while we reconfirm all main targets and commitments for 2011, both at a domestic and the group level.

We are in fact confident that in the second half of 2011, we will further improve performance on a year-on-year basis in meeting our full-year objectives and ensure that shareholder remuneration going forward is in line with the indications which we gave earlier this year.

Thank you very much for your attention and now I’ll give the call to Marco Patuano, who will now focus on the domestic business.

Marco Emilio Angelo Patuano

Thank you Franco. Good morning ladies and gentlemen. As you heard from keynote address of Mr. Bernabè, year-on-year result in our domestic business have indeed improved in second quarter 2011, as we succeed in limiting mobile revenues decline. EBITDA performance is on track and a growing margin is ensured through a relentless attention to cash quotes.

Let us now zoom into some details. Let me spend a minute on the cover slide for the quarter. Mobile, the Mobile business, our recovery strategy is making progress. A significant customer base growth with more than 700,000 incremental SIM card since June 2010. Our growing price stabilization in 2011 and overall good performance in Mobile broadband both in terms of volumes and revenues.

Mobile broadband best performance was our consumer Small Screen segment, where revenues improved by 25.6% year-on-year in the second quarter. The business on top segment, the macroeconomic pressure is still negatively impacting the overall marketplace where customers are taking a conscious approach on spending.

Wireline. In the second quarter 2011, TI was able to curb line losses even if backlog will started to be reduced only from August onwards as the recent AGCOM decision. In Broadband, despite our competitors have significantly reduced prices in the previous quarters, the market did not expand.

For the overall broadband market, the second quarter grew only by 65K versus around 200K in the previous quarter. In this context, TI is protected of the value of its customer base. On ICT, notwithstanding the current complex scenario, TI increased its service revenues offsetting the traditional data decline.

Excluding Sparkle group, where rationalization in international wholesale revenues has been almost completed. The core domestic wireline service revenues posted a minus 3.5% year-on-year reductions stable versus price previous quarters.

Financial discipline. The cash cost control program is fully on track delivering minus 227 million year-on-year in the second quarter, allowing us to meet our expectation in terms of EBITDA. In the first half 2011, we also delivered a strong operating free cash flow exceeding €2.4 billion.

Slide number four. In second quarter ‘11, the overall organic performance of the domestic top line showed a minus 6% year-on-year decreased against the minus 7.4% of the previous quarter. In terms of profitability, in second quarter 2011 the EBITDA trend improved closing at minus 4.9% year-on-year against a minus 7.6% in the first quarter. EBITDA margin improved by 0.6% from 48.1 to 48.7 in second quarter 2011 as OpEx delinked by 7.1% in the same period. Cash cost on revenues were below 66% confirming TI as one of the most efficient operators in Europe.

Slide number six. Entering into the domestic mobile, we are now showing a positive retail revenues evolution that slowed erosion at minus 6.6%. This result is backed by both a sound plus 26.2% year-on-year increase in handset revenues almost completely driven by smartphones in line with our acceleration strategy on the small screen mobile broadband segment and a positive evolution of retail service revenues from minus 10.9% year-on-year in the first quarter to minus 7.7% in the second quarter. Total mobile revenues were negatively impacted by the wholesale business that reflects the decline in national roaming demand.

After looking at the financial, let’s now move to the confirmed positive trend of the commercial KPIs. We already mentioned the sound customer base growth. The good news is that in second quarter 2011 we reached the leadership on gross acquisition at the same time we improved the percentage of calling customers on their total base.

We are significantly improving our MNP performance. MNP can be considered a proxy of high-quality acquisition and of the competitiveness of our offer. On the recipient side, we improved by 43% year-on-year in the second quarter while on the still negative MNP balance, we are now 36% better in the same period. This shows that our commercial strategy was correctly perceived by the market. Slide eight please.

Focusing on the consumer market, KPI showed a continued improvement in all metrics. In the upper left quadrant, you can see that the growth of our year-on-year SIM customer base in second quarter ‘11 was 77% larger than in Q1.

Moving in on the chart, outgoing volumes were up 22% year-on-year in the last quarter and most importantly, the outgoing price has confirmed its stability from year-end 2010. In July, such trend was confirmed. Small Screen browsing reported a growth of over 20% both in users and in revenues. It is worth mentioning that this sound improvement is not affecting the traditional SMS business. In fact, the decline in messaging revenue is totally price-driven, since SMS users remain stable and the usage is growing double-digit year-on-year. Given that our market share in the young segment is lower than the one of our competitors, our SMS promos which do not generalize price cutting are to be seen as an investment to strengthen our positioning.

Moving to slide nine. Let’s take a closer look to the consumer mobile broader performance both on Large and Small Screens. In the Large Screen segment, we confirm our leadership in dongle sales, where our users increased by a solid 20% year-on-year, stabilizing ARPU on a quarterly basis through an important contribution on sales coming from our high-end Internet pack offer that accounts for 60% of the June dongle sales.

In the Small Screen segment, we have now regained leadership on smartphone sales, where in second quarter 2011, we reached a strong 38% market share among operators, most atypically, 40% on iPhones. In this context, by increasing our Small Screen users and ARPU, revenues grew by 26% year-on-year in the second quarter 2011. At the same time, we have also protected our consumer segment against any possible impact due to billing shock to those customers with no data bundles through our daily default tariff offer.

In slide number 10, we summarized second quarter ‘11 mobile revenues performance with the focus on retail service revenues.

Let’s move to the Fixed business. Let me highlight that the core domestic service revenues declined by 3.5%, flat versus first quarter 2011. Total Fixed Service revenues are stable versus the previous quarter. It is worth to mention that ICT service revenues posted a good performance offsetting traditional business data decrease with cloud services meeting the growing preference by SME and enterprise markets.

Sparkle group has almost completed the rationalization process aimed at eliminating low margin contracts. Looking forward, let me confirm that tariff for shipping and retail monthly fee increase entered into effect as of July 1.

Slide 13, as Mr. Bernabè already highlighted, in the second quarter, the access market declined as much as in the whole 2010. We assume such decline is also due to OLO revisiting the quantity of their customer base while the commercial aggressiveness is becoming more rational. For the time being, we didn’t witness a structural worsening of the market to the extent that we recorded a better line losses performance.

As a result, our market share remained above 67%. As of August 7, a new AGCOM decision will ensure a more symmetric environment in competition with daily cap of workable orders for acquired line from August increased up to 60%. Our backlog of 45,000 lines waiting to be passed to us will start to be processed.

Talking about broadband, I believe we should analyze our second quarter ‘11 results, keeping in mind the effect of all those commercial strategies started in the second half 2010. In this quarter the overall broader market growth suffered a considerable slowdown as new demand was only 65,000 versus more than 200,000 in the previous quarter.

This can clearly be correlated with the decline in the number of services I just mentioned. The second quarter of 2011 has been still affected by OLO aggressiveness although they pushed the break in June. TI kept the point not to follow the commercial behavior of its competitors.

With hindsight, even if it did cost us a quarter with a negative 25,000 net adds, ours was the correct move. Despite the growth in terms of users, revenue wise OLO market shrank in value, while Telecom Italia remained stable. Our broadband ARPU resilient trend speaks clearly in favor of the course of action we have taken.

We are now working to recover good performance also in terms of new users, but we keep the focus on the value of our broadband customer base. July 15 recaps the value, the wireline revenues by type and services, namely Sparkle group and domestic core services, voice, Internet, data and national wholesale.

Let’s now focus on EBITDA, and the main driver of its performance. As far as interconnection costs are concerned, we had a positive impact worth approximately €246 million. A different mix between on-net and off-net in the outgoing traffic is making voice more profitable. On handset costs, the selective push on ARPU generating smartphones allowed us to regain handset market leadership and to boost mobile broadband with almost no impact on EBITDA.

The overall reduction in commercial cost has been achieved, compensating the increase in volume-driven items by efficiencies reached in other commercial costs like advertising, content, and customer care. That is stable. Customer care quality is the highest ever recorded. On fixed set costs, we do confirm that our efficiency program is outperforming having reached approximately two-thirds of the original full-year target. Special attention has been put on labor costs and industrial costs.

To wrap up, these are the messages I wish you to take away. In the second quarter 2011, we confirmed an improvement on our commercial positioning while enhancing profitability. Mobile KPIs have progressed on many fronts, the most important one is the confirmed outgoing price stabilization from year end 2010, mobile broadband accelerating the year-on-year performance.

Core domestic wireline services revenues showed a low single-digit decrease year-on-year. Actual improvement in overall domestic top line and EBITDA will continue the positive trend. Thanks to closing the year-on-year gap in mobile outgoing price, keeping the focus on outgoing mobile broadband growth, maintaining the positive difference in mobile customer base that we concurred in the last year. Handset sales, wireline repricing, international wholesale stabilization, value-driven strategy on fixed and broadband, ICT service performance, which are all already in the pipeline.

We will keep on protecting our profitability through stringent cost control in order to secure EBITDA guidance, we know that you know, we are used to deliver. We are committed to ensuring an ongoing delivery of cash generation in tune with our plan targets since our domestic operating free cash flow exceeded €2.4 billion in the first half of 2011, €61 million better than the first half over the last year with a weight on revenues improving from 23% in the first half 2010 to around 26% in first half 2011.

Thank you for your attention, ladies and gentlemen. Let’s now move to our Q&A session

Question-and-Answer Session

Operator

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

Georgios Ierodiaconou – Citi

Yes, hello. I would like to ask two questions, please. And the first one is just to confirm that I understood correctly, you said earlier that you reiterated target, but the spectrum auction was not included. Does that mean then Atimus is now included? And if you do reiterate it including this transaction, does that mean that you have better cash flow than expected or was there something that was budgeted at the start of the year? And my second question is around cost cutting, the fourth quarter of last year benefited from the labor agreement early in the year and you had a big decline in OpEx. Can you repeat that this year or will comparisons get tougher for the Domestic market? Thank you.

Franco Bernabè

So thank you very much. Yes, Atimus was included in the yearend 2011 debt target. Spectrum, as we said, is not included and therefore, that means that we are able to – because as you remember, we never envisaged to make such an important acquisition in Brazil at the beginning of the period. That means that the cash that we are generating plus some minor divestitures that we are making are compensating for our financial – for the financial needs to finance this acquisition. Of course, Spectrum is not included and it’s – we – by the way, we don’t know how much it will be again so it could not be included at the beginning. On Personal, I will turn it to Marco for now.

Marco Emilio Angelo Patuano

Yes, the agreement we reached that didn’t give us a one-off effect. The effect is we get the effect quarter after quarter so there is nothing in the previous – in the fourth quarter of the last year that was changing the progression in an non-organic way. So we have delivered a good cash cost control also in Q4 last year, and I think that we are doing a good job also this year. So we will post also in the second half a stringent cost control policy.

Georgios Ierodiaconou – Citi

If I may be more specific, if I remember, last year, apart from the head count reduction, you agreed some reduction in working hours and overtimes and so on, which contributed to more savings. Can you repeat a similar reduction in wages for employee this year or will the comparison as we annualize get a bit tougher from the fourth quarter? That was what I meant earlier.

Franco Bernabè

Yes. Once again, the agreement, we are translating into that agreement this year. We have reduced the total number of employees of at least, to be more precise around 7%. And we’re – almost half of the plan is done. And we have – but we are completely in line with our expectations. So if your question is there are more reduction in terms of employees, yes, there is still a part that is ongoing.

Georgios Ierodiaconou – Citi

Thank you.

Operator

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

Mathieu Robilliard – Exane BNP Paribas

Good morning. First a question in terms of the competitive environment in mobile as you showed these results, pricing has stabilized in Q2. Have there been any new initiatives from your end or from competitors’ end that could strengthen that stability in price per minute.

And second, going back actually to the cost question that was asked earlier, I think it’s fair to say that the rate of decline of EBITDA, so far the domestic business is a bit higher than what you’re targeting for the full year. So, the question is what are the specific elements you think that can enable you in the second part of the year to catch up is the rate you’re forecasting, I mean I think you’re forecasting something like minus four and you’re doing minus six. If you could maybe elaborate a bit in terms of what are the elements in H2 could help you get that target that would be very helpful. Thank you.

Franco Bernabè

Okay. Well, you’re right when you say that you did not see any specific extra-commercial activity or any specific extra-commercial aggressiveness. This is exactly the reason why figures are stabilizing and prices are stabilizing. In reality what we at least are doing, we are moving our – we are not changing the portfolio, but we are moving the customers from community offers to bundle offers. This is extremely interesting, because the profitability of those bundle offers are very good and second the bundle offer prevent us in case of change of the mobile termination rate from a change in the commercial strategy of the competitors, where the community concept lose part of its strength.

Now, July, the acquisitions were still very good. Prices are benefiting from seasonality, so all our metrics are confirming the trends and the comparison with the figures of one year ago in Q3, will explain parts of the recovery of – we expect in mobile especially consumer in the last year.

With reference to the cost control program, of course, part of the actions, we have in pipeline in terms of stabilization of the revenues turns into EBITDA. In any case, we have identified for the efficiencies that can be done in industrial cost. We are putting them in place.

There are some other things in the OpEx that we are looking with more care just to mention some of them. Real estate costs are quite important. And last, keep in mind that our cash cost attention allow us to us to protect in any case ultimately the free cash flow generation. So, we are keen to confirm the guidance also on EBITDA.

Mathieu Robilliard – Exane BNP Paribas

Thank you very much.

Operator

Next question come from Mr. JP Davids from Barclays Capital. Mr. Davids, please.

JP Davids – Barclays Capital

Good morning, gentlemen. I had a question on international wholesale. You made mentioned that this was one of the areas that you would see improving in the second half of the year. The breakup disclosure in the Appendix suggests that it’s in quite a lot of trouble at the moment, down 20% in terms of revenues and EBITDA. What are the prospects for this business? And is this a business you’re looking to hang on to? Thank you.

Marco Emilio Angelo Patuano

Marco speaking. First of all, the improvement in reality have to be read as a minor decrease. So what we did? To be very clear, the international wholesale business is made out of three parts. One is voice international long distance, the second is data and IP traffic on international wholesale, the third are transits.

Transit is a quite common business in international wholesale when an operator has no direct link with another operator and gives the traffic to a third party in order to have it delivered at the final destination. This very last component had very little margin and there is potential counterparty risks that have to be taken into consideration.

During the last year, we have been very cautious in keeping this under strict control. We have renounced to some counterparty whose credit risk we consider too high and we benefited on two sides. The margin did not decrease – the total margin did not decrease because we lost some margin on the transit, but we improved on the bad debt. Now, we started this rationalization almost one year ago. It was September, it was a decision we took during summer 2010, so starting from September and now, we are almost – we have almost completed this clean-up. So what remains are good voice, good data, which is growing very well and good transits from reliable counterparts.

JP Davids – Barclays Capital

Thank you. Very clear.

Operator

Next question comes from Mr. Tim Boddy from Goldman Sachs. Mr. Boddy, please?

Tim Boddy – Goldman Sachs

Yes, I’d like to ask a couple of questions if I may. First of all, just to reconfirm, you’re expecting stabilization in mobile trends because of the stable pricing against these comparisons by the end of the year, by the fourth quarter? Secondly, wanting to just to understand whether MTR effects or potential austerity measures could have an impact on consumer confidence and usage through the second half and any early indications of that? And then thirdly, in terms of your comments on consolidation, just whether you’d be prepared to use your equity of these prices to follow a consolidation part. Thank you.

Alex Pierre Bolis

Okay. First, price stabilization and the rest of the year, yes. We do expect it to keep prices stable also for the rest of the year, which means that the seasonality of the summer – at the end of the summer comes back to the value we had at the beginning of it. So you have to expect prices in May, in September, the same level of May. And from May onwards, you have to expect prices stable. MTR, we explained that the MTR have no impact on the PTA, on our profitability because we are able to offset the minor revenues with minor costs we pay both on the mobile and the fixed, especially on the fixed, let me say, on the fixed side.

The fact that MTR can affect volumes, the historical – if I look backwards, there is no major evidence of a significant impact also because it’s not 100% true that the reduction is transferred to the final users. So, and it is especially true when the final user have a bundle offer. So in any case, MTR like that is on the way and we do not expect any impact on EBITDA. On the third question, I leave the floor to Mr. Bernabè.

Franco Bernabè

Yes, on consolidation, we think, of course, that consolidation in the Italian market would help very much in stabilizing the mobile business, and also, I would say, the fixed business in the long term. The Italian market has always been a very healthy market and I think at some point we will be again a very healthy a very healthy market as – I mean, if you see from the current profitability – in terms of current profitability, it is.

But we are not currently engaging in any consolidation negotiation and, therefore, we cannot say, of course, because there is nothing concrete at this point where it would be ready to use cash or stock for any consolidation process.

JP Davids – Barclays Capital

Just on the austerity risk. Are you seeing any kind of incremental impacts on consumers or business behavior following the recent austerity measures?

Franco Bernabè

While there is some austerity measures. I don’t think it has any great impacts for the time being because, as you know, the austerity measure, the greatest part of the austerity measures have an effect starting from 2013. On the contrary, the government has announced a recovery plan the other day, but we will see what happens next because now, everybody is facing this very big turmoil that we have in the domestic and the international markets and it’s not clear what the governments will do.

Of course, there is a great deal of uncertainty on the side of the consumers, but the policies that we have been pursuing have proven very much welcome by the consumers, and therefore – for the time being I don’t see any impact.

JP Davids – Barclays Capital

Great, thank you.

Operator

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

Micaela Ferruta – Intermonte

Yes, good morning and congratulation on the results. I have three questions if I may. One, on consolidation, you just said that there is no negotiation on the way. But maybe you could share with us whether you would be willing to be a consolidator and what would be the priorities whether mobile or fixed? And where do you see the highest possible synergy? So, how we should think about the potential benefits for the overall market?

The second question for Mr. Patuano, you actually spoke of original cost-cutting targets. So, I’m just checking whether you are actually increasing the cost-cutting for the full year. And third question, I’m sure we read everything on the semester report, but is it possible to have more comments on the current goodwill accounting and what kind of assumptions in terms of domestic goodwill? I’m basically, as you can imagine more worried about what assumptions and risks given the recent crisis. Thank you.

Franco Bernabè

Yes. On the first question. I don’t think there is much more to add to what I said before. I think that we like consolidation. We think consolidation is good for the market. We think also that there is a potential for consolidation in the Italian market, a concrete potential for consolidation in the Italian market. We are not currently in the process of negotiating anything. We think that we could be a consolidator, but I think that for the time being there is nothing concrete. It’s too early to say anything about this. And I’ll turn it to Marco for the next question.

Marco Emilio Angelo Patuano

Hi Micaela. Yes, when you are – when you do better than your plan, you always try to do even better. So we are looking for some more improvements that we can do or acceleration we can do. I’m very glad to say that our management team is confirming this very conscious – cost-conscious approach. So we are doing better than the original plan and this means that we are looking around to find new opportunities.

Micaela Ferruta – Intermonte

But you are not disclosing in your targets is what you’re saying?

Marco Emilio Angelo Patuano

No.

Micaela Ferruta – Intermonte

Thank you.

Marco Emilio Angelo Patuano

On the goodwill – we are making available and you know because we publish very extensively our goodwill calculations in our yearly report and we make available all the basic assumptions for the goodwill impairment that we have taken. We have taken this goodwill impairment on very conservative assumptions and therefore, I think that for the time being that’s what we can say and what is stated in our accounts.

Micaela Ferruta – Intermonte

Thank you.

Operator

Next question come from Mr. Ottavio Adorisio from Société Générale. Mr. Adorisio, please.

Ottavio Adorisio – Société Générale

Hi, good morning. I have a couple of questions from my side. The first one is on free cash flow and specifically on working capital. You touched on a number of points on cost cutting to boost the cash flow. Now, last year, you record a 600 million negative working capital. That actually depresses the free cash flow by 25%. Now, looking at your two quarters, you’re showing both quarters’ year-on-year improvements in that line. So, I was basically wondering if you’re confident that dilution for the year end would reduce and if this is affirmative, could you give us some sort of estimates by how much?

And my second question is in the Brazilian margins. Now, Brazil had been – sorry, negatively impacted by the change in the capitalization policy for the handset subsidies. Now, if this is the case, could you please give us some color on how much the change has impacted the margins? And what would have been the underlying growth you delivering in Brazil, the EBITDA net this change? Thanks.

Franco Bernabè

Thank you. De Angelis will answer the first question.

Stefano de Angelis

On the working capital, if you refer to the domestic business, the improvement is mostly related to the reduction in the CapEx that we achieved there in the end of 2010 when compared to the end of 2011 in terms of cash as we always stated. We paid the CapEx with the 90 to 120 days delay. So in the first part of 2011 we are benefiting from the reduced CapEx when comparing fourth quarter 2010 with fourth quarter in 2011.

On the other side, we have the benefit in terms of working capital of the reduction in the top line. And these are the basic impacts when you compare year-on-year. If you compare the generation of cash in the six months, clearly the negative impact in terms of working capital is driven by the strong portion of CapEx that we always book in the fourth quarter of the year. So the negative cash absorption that we have in terms of working capital is related mostly to this impact in terms of CapEx booked in the fourth quarter of the year. For the second part of the year, what will – we will see, we have a budget in terms of CapEx that is basically in line for the second part of the year with 2010. So the impact in the working capital of the CapEx would be the same as of 2010.

On the other side, we expect to take the benefits from the recovery in the top line in terms of operating free cash flow net. We can confirm that for the full year, as of for the group, we expect at the domestic level in operating free cash flow that is mostly in line with 2010 if you excluded the impact of the TI Sparkle issues that’s, just to remember, impacted for approximately 400 million in the operating free cash flow of 2010. So as reported, we expect the benefit of approximately 400 million.

The impact of the handset subsidy in Brazil, if you compare apples with apples, we had 28.4% EBITDA margin last year which is going down 26.8%. Using the same criteria, we would have had last year 26% EBITDA margin and it would be up by 0.8%. And therefore, I mean, if you compare apple with apple, it has improved by 0.8%, the margin. Thank you.

Ottavio Adorisio – Société Générale

Thank you.

Operator

Next question comes from Mr. Chris Alliot from RBS. Mr. Alliot, please.

Chris Alliot – RBS

Yes, good morning. Thanks. Just a quick question on the domestic broadband market. I mean, I wonder if you could comment, Mr. Patuano, on the current market environment that you’re seeing. I mean it looks to me as though perhaps, that your aggressive promotions that we saw in the first quarter effectively have sort of sold this broadband net adds forward. And I wonder whether we might see quite a weak overall market for the remainder of this year?

And then just along with that, I wonder whether you think you might be able to see net adds in the second half of this year at TI on a retail basis? Thank you.

Marco Emilio Angelo Patuano

Yes. Just to give you some color on the difference between the price pressure that the OLO put in the market versus Telecom Italia. We kept our price around €20 with a promotional phase of three months. And our competitors were at €3 with the promotion period of two years. So it’s quite easy to understand that on the net – on the acquisition side, we were playing in a market situation that was quite tough.

What we saw was really a huge OLO-to-OLO migration. This is something that we experienced for the very first time. And also I suppose that also the OLOs were a little bit unprepared to see this new market environment. The customers – some of the customer decided to stay with us just for quality reasons. And even if it was clear that our solution was more expensive than our competitors.

Now, at the end of May, starting from June, we started seeing a sort of change in the attitude of our competitors, which as I said before they push to some extent the break on this kind of extra promotions. They are still of course more aggressive than what we are doing. But let me say the difference not 3 to 20, now the difference is much more balanced.

So, what would we expect? First of all, I expect Q3 it’s summer time, is always a quarter in which net adds are lower than the other quarters. But we probably will benefit from some recovery of the backlog that we have in the pipeline and that the OLOs are now transferring to us.

I assumed that starting from September when people comes back from the vacations, the results that can come back to the ones we had – that we had in the first half of 2010.

Chris Alliot – RBS

Okay, thank you.

Operator

Next question comes from Mr. Tolster Akman from JPMorgan. Mr. Akman, please.

Tolster Akman – JPMorgan

Hey, good morning. First of all, some of the trends we see in wholesale got worse this quarter and I was wondering what was the main driver given that you had an increase in the ULL fees. I was expecting that this got at least stable or could improve throughout the year, so maybe if you could clarify what is in there.

And secondly, there seem to be MTR cuts in Brazil being talked about. Is that something you expect will happen next year or generally what are your expectations there? Thank you.

Marco Emilio Angelo Patuano

Marco Patuano, on the wholesale. Of course, some of the reduction we saw in the market were disconnections in the OLOs. So when you see the net commercial activity of the OLOs, you can find in chart number 13 of my presentation, of course you’ll have to keep in mind that this is the net effect of new connection and disconnections. So when they cancel the customers, they do not only cancel the customers but they also cancel the contract at ULL or the NAT or the WLR contract that they had with us. This is the – let me say that the fact that there was a revision in prices did not affect the commercial activity of the orders for the time being. If I look to the request of new connections or new equipments, we are plus 1% year-on-year.

Franco Bernabè

On MTRs reduction in Brazil, although the amount of the MTRs reduction is not known yet, we are expecting approximately 20% reduction in MTRs this year, but we don’t know maybe if it will be this year or next year. But the very important point is that TIM is consistently reducing its dependence on the MTRs. Just to give you a few figures, incoming revenues or the total revenues had come down from 30% in the second quarter of 2009 to 24% in the second quarter of 2011. And the EBITDA exposure to MTR has come down again from 33% in the second quarter 2009 to 23% in the second quarter of 2011. I think that, I mean, as you know it’s now under debate at Anatel, for how much we will impact. There are different positions from different operators.

Oi is pushing more aggressively. I think that it is in the interest of the Anatel to defend the position of those operators that have shown to be very much in favor of creating a more competitive environment in the Brazilian market. And therefore we expect that Anatel will also consider the different position of different operators. So on the one hand, we are reducing our exposure. On the other hand, we think that Brazil and the Brazilian authorities will clearly favor a situation where competition is preserved as happened in almost every market. I mean you see, for instance, the Italian market. Again, we expect a symmetry to take place longer term. But for the time being, for longer period of time, the Italian authority has maintained an asymmetric position in the market. Thank you.

Operator

Next question comes from the line of Mr. Singh Mandeep from (inaudible) Capital. Mr. Mandeep, please?

Singh Mandeep

Hi, thank you. Can we – just a question on the Domestic Mobile business, if we rewind back a year, you had some confidence that you could exit 2010 with a positive domestic mobile performance in service revenues. Given now, we’ve got stable prices and you’re growing your customer base, do you feel confident enough that you can exit 2011 with positive service revenues? Thank you.

Franco Bernabè

What happened one year ago was that some of the commercial activities we put in place during the summer overheated the price minute. And looking backwards, I would say that it has been too aggressive. What we have on – in the pipeline today on the marketing side is nothing comparable to those initiatives and to be honest, I don’t see also looking at the competitors, I don’t see let me say any specific attitude of re-warming the competitive scenario. So, I think that the price cut that the market had in the last12, 18 months was more than enough.

Now, we are all – all the players are willing to keep prices stable and to play with different weapons. So, I’m confident that the – what caused the decrease one year ago will not be repeated this year. So, sorry for not putting a month, because I did it in the past and it was not a nice experience to come to you with a different date. But let me be general, the end of the year will be very close to the breakeven.

Singh Mandeep

Thank you very much.

Operator

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

Giovanni Montalti – Cheuvreux

Good morning. Would you expect to any pressure from the credit rating agencies to reduce your dividend policy? Thank you.

Franco Bernabè

Well, I think that we had indicated very clearly to the rating agencies that our objective is to deleverage. And in order to achieve the deleveraging, we are generating a very strong cash flow. We are – we have completed as I said before, the divestiture program. But at the same time, we’re looking very deeply in our portfolio in order to find other minor things that we can divest. So we are fairly confident that we can maintain the deleveraging objective that we have indicated to the rating agencies, at the same time preserving our dividend policies. Thank you.

Giovanni Montalti – Cheuvreux

Thank you.

Operator

The last question comes from Mr. James Ratzer from New Street Research. Mr. Ratzer, pleas.

James Ratzer – New Street Research

Yes, thank you very much. I had two questions, please. The first one was just regarding your domestic broadband business. In relation to what we saw in your mobile business about two years ago and you started to lose mobile customers. You embarked on a more aggressive price cutting strategy. Why don’t you consider doing the same thing in your fixed line business now? We started to see you lose customers in this quarter. You talked about aggressive promotions from competitors. Do you think you ultimately need to follow suit and cut prices there?

And the second question was just regarding overall number of fixed lines in Italy. It seems after a relatively stable performance during 2010, the number of total lines in Italy is beginning to gradually come down a bit. Is that something you see is a structural trend or do you think that is the most cyclical concern at the moment? Thank you.

Marco Emilio Angelo Patuano

Marco Patuano speaking. I think that the lesson we learned on the mobile have to be taken into consideration and fixed. And by the way, if you look at the average price we have in the broadband in Italy is cheap. And nevertheless, even if the price is cheap, the mobile penetration on the total number of lines is low compared with the rest of Europe and I’m not referring to the Scandinavian countries. I’m also referring to our more comparable neighbor in Europe. So I don’t – personally, I don’t think it’s a matter of price and the demonstration have been done by the fact that our competitors tried to shock the market with very aggressive prices. I have never seen something as aggressive as we experienced last year. And the market, at the end, if I look one year later, the market does not seem to have boomed. So I think that what we have to do is to work on new products to innovate the way, the reason why you need to use it. You need the broadband in your house, the quality of the broadband and the quality of the access that Telecom Italia can deliver.

This is, I think by far more important than the price cuts and the generalized price cut.

The second question was the shrink of the market or the dimension of the overall market. I think that Q2 2011 have shown that some of the figures of 2010 and beginning 2011 were to some extent a little bit to be revised. Because I do not believe in this quarter the market had a jumped down like the one you see in the figures. So, it means that probably the number of line of market reduction of 2010 was underestimated and the number you see in Q2 is overestimated. So, I think that the trend is quite linear. I don’t see any structural reason to have an acceleration in the fixed mobile substitution. Thank you.

Alex Pierre Bolis

That was the last question. I want to thank everybody – did you want to follow-up on this?

James Ratzer – New Street Research

No. Thank you, that was great. Thank you.

Alex Pierre Bolis

Okay. Thank you very much. Thank you. I think that was the last question. I want to thank all of you for your attention. And for those of you that have not taken yet vacations, I want to wish everybody, have a good, very excellent holidays in the next few days. Thank you very much.

Operator

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

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