Telecom Italia S.p.A. (TIT)

Q3 2010 Earnings Call Transcript

November 4, 2010 11:30 am ET

Executives

Franco Bernabe – CEO

Marco Patuano – Head of Domestic Market Operations

Andrea Mangoni – Head Administration, Finance & Control

Analysts

Mandeep Singh – Berenberg

Mathieu Robilliard – Exane

Robin Bienenstock – Bernstein

James Britton – Nomura

Micaela Ferruta – Intermonte

Frederic Boulan – Morgan Stanley

Justin Funnell – Credit Suisse

Tim Boddy – Goldman Sachs

Presentation

Operator

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Good evening, ladies and gentlemen. Welcome to the presentation of Telecom Italia Group nine months 2010 results. Today’s conference call is hosted by Mr. Franco Bernabe, the Group’s CEO; Mr. Marco Patuano, Head of Domestic Market Operations.

We would like to inform you that this event is being recorded. And all participants will be in listen-only mode during the company’s presentation. After Telecom Italia’s remarks are completed, there will be a question-and-answer session.

Today, we have a simultaneous webcast that might be accessed through the company website, www.telecomitalia.com. The slide presentation may be downloaded from that website as well. Please feel free to view the slide show during the presentation – the conference call.

Now I’ll turn it over to Mr. Franco Bernabe.

Franco Bernabe

As you know, we increased our stake in Sofora with no cash disbursement. And this allows us to fully consolidate the economic results of Sofora Telecom Argentina starting from the fourth quarter of 2010.

The European Commission – and there’s a second very important point – endorsed the new costing model on the basis of the long run in incremental cost model of the Italian regulator to calculate the local loop unbundling monthly rental fee and required an assessment of some input parameters. We are confident that a forthcoming final decision is going to substantially confirm the local loop unbundling target price that was notified to the European Commission.

And now to spend a few words on the memorandum of understanding for the development of the ultra-broadband fiber-based infrastructure that will be underwritten by Telecom Italia and by other operators in the next few days. The agreement aims at creating a private-public partnership to invest in the development of a passive infrastructure in geographical areas, where the NGAN [ph] payback period would exceed the one which is acceptable for private initiatives. And therefore, the MOU is an opportunity to broaden the full tenant of Telecom Italia’s NGAN with shared investments in the public funds.

Finally, on October 29, Telecom Italia announced a commercial launch of its retail ultra-broadband offer for consumers and business customers in the city of Milan and Rome by December 2010 and in the cities of Catania, which will start approximately the same period and Torino, Venice, Naples, Genoa, and Bari, throughout the year 2011.

Moving to the results of the period, we kept our focus on the structural transformation of our company. This resulted in a further streamlining of our cost structure in all business units and in consistently reducing the slowdown wireline revenues while posting very positive commercial KPIs.

These results were, of course, partially overshadowed by the higher-than-expected and yet inevitable effects of certain promotional initiatives of the customer-based cannibalization – sorry about this – and of competition of the wireless business. We will fully elaborate on this in awhile.

Let me summarize the key financial achievements of the period. Group revenues were largely stable in reported terms, thanks to the good performance of our Brazilian subsidiary. EBITDA is in line with this year’s target, supported by the ongoing double-digit growth in the profitability of TIM Brazil and by the cash cost reduction program that keeps delivering as expected.

In Brazil, service revenues grew 5.9% year on year, improving when compared to the first half of the year. The overall outcome was a solid growth in group net income, namely a 57% increase year on year, about 15% on a normalized basis, excluding the effects of the headcount reduction provision that we took on the second quarter and the 2009 handset goodwill write down and other minor nonrecurring items.

I’d like to remind you that the positive one-off effect of EUR280 million that are caused by the Sofora transaction will be posted in the fourth quarter of this year. So we’ll have an extra positive effect on net profit at the end of the year.

Focus on financial discipline remains strong. We increased our net cash flow by EUR1.5 billion year on year. And we decreased our adjusted net debt by EUR1 billion since the end of 2009 to EUR33 billion, which is in line with our target.

Given the recent evolution of our group, I would like to give you an update on Latin America. As you know, Brazil and Argentina are two very attractive countries within the emerging markets and offer great opportunities to all those foreign companies operating in the country.

In the mobile business in particular, Brazil is the fourth market worldwide in terms of revenues. And it is growing double digits. In Argentina, although it’s a much smaller market, shows a healthy 14% growth. With the consolidation of the Telecom Argentina Group, as of the fourth quarter of this year, Telecom Italia international presence will be strengthened.

On a pro forma basis, the percentage of international mobile customers would have reached 67% in September 2010 vis-a-vis 55% in September 2009. In terms of financial contribution on a pro forma basis, the weight of revenues from Argentina and Brazil in September 2010 would have accounted for 30% of the consolidated revenues, almost double when compared to September 2009, while EBITDA generated outside Italy would have increased from 10% to 21%.

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