Telecom Italia Spa (TI)

Q4 2010 Earnings Call

February 25, 2011 04:00 AM ET

Executives

Franco Bernabe – CEO

Marco Patuano – Head, Domestic Market Operations

Luca Luciani – CEO, TIM Participacoes

Franco Bertone – CEO, Telecom Argentina

Andrea Mangoni – General Manager, Telecom Italia Sparkle and Director, International Business

Oscar Cicchetti – Head, Domestic Market Operations

Analysts

Luigi Minerva – HSBC

Ottavio Adorisio – Société Générale

Giovanni Montalti – CA Cheuvreux

Mandeep Singh – Berenberg

Stanley Martinez – Legal & General

Justin Funnell – Credit Suisse

Frederic Boulan – Morgan Stanley

Tim Boddy – Goldman Sachs

Presentation

Operator

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This conference call is hosted by Mr. Franco Bernabe, the Group’s CEO; Mr. Marco Patuano, Head of Domestic Market Operations; Mr. Luca Luciani, CEO of TIM Participacoes; Mr. Franco Bertone, CEO of Telecom Argentina.

We would like to inform you that this event is being recorded. All participants will be in listen-only mode during the conference presentation. After Telecom Italia’s remarks are completed, there will be a question-and-answer session. Today, we have a simultaneous webcast that may be accessed over 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 conference call.

Now, I turn over the conference to Mr. Franco Bernabe. Thank you.

Franco Bernabe

Thank you, and good morning, ladies and gentlemen. Thanks for attending Telecom Italia 2010 results conference call. Today, I would like to review our 2010 results, provide an outlook for 2011, and give you a quick update on our plan, following the consolidation of Telecom Argentina.

I must tell you that I would really like to meet you all in South America later this year in order to give you a sense of the great opportunities we have there and to detail the strategic business plan. Today, I’m joined by Marco Patuano, Luca Luciani, and Franco Bertone. The four of us will take you through the main achievements and the future objectives in our three core markets.

Now, let’s move to the summary of TI Group’s results for fiscal year 2010. For your information, the complete set of slides was published on our website yesterday. In 2010, we improved our free cash flow generation by EUR300 million, reaching EUR6.6 billion, aside from the extra EUR400 million that we paid for the settlement of the Sparkle case.

The organic EBITDA at the Group level was stable in line with the guidance for the domestic market, and yet over delivering in Brazil. Net income at Group level grew by 18.4% year-on-year on a normalized basis. If you look at on a reported term, it grew by 97%, mainly due to the positive effect of TIM Brasil tax assets in 2010 and the negative impact of HNS write-down in 2009.

We achieved at the end of 2010, a net financial position of EUR31.5 billion, well below our target of approximately EUR32 billion, and the average cost of debt declined to 5.2%. Considered that this figure does not include the cash inflow of the sale of Etecsa Cuba that was completed at the beginning of 2011, and amounted to approximately EUR400 million.

Based on these results and on a positive outlook for 2011, the Board of Directors decided to submit to the Annual General Meeting, the distribution of a dividend per share of EUR0.058 to our ordinary shareholders and of EUR0.069 to our saving shareholders for a total amount of EUR1.2 billion, with an increase of 15% year-on-year.

Let’s now have a more detailed look at the year 2010 results. Reported revenues and EBITDA clearly benefited from the consolidation of Telecom Argentina in the fourth quarter. If we do not take this acquisition into account, both metrics remain stable, due to the positive contribution of Brazil. On an organic basis, EBITDA remain stable at EUR11.8 billion. Again, if we exclude Argentina to compare apples-with-apples, this parameter proved to be in line with the guidance for the year that remain stable at EUR11.6 billion.

In 2010, we improved our free cash flow generation by EUR300 million year-on-year, excluding the Sparkle case impact, reaching EUR6.6 billion. Even excluding the contribution of Argentina, cash generation improved by EUR100 million in the year. We also increased our net cash flow by EUR1.9 billion year-on-year.

As anticipated, even without considering non-recurring items, we posted a very good net income result. As already mentioned, our adjusted net financial position reached EUR31.5 billion at year-end 2010. The Group enjoyed a comfortable cash position of approximately EUR6.8 billion, which covers our debt maturities well into 2012. In addition, we count on a further EUR7.8 billion of committed and drawn revolving credit facilities.

Let me turn now to the business outlook in the near future. We firmly believe that the path outlined in December 2008 was the one to be pursued. Given the gloomy macroeconomic environment and Telecom Italia’s highly leveraged balance sheet, our key priorities were necessarily the improvement of cash flow generation and the strengthening of the balance sheet. We achieved this by focusing on the core markets, on capital discipline, on cost reductions, will enforce the fundamentals of Telecom Italia turning it into a company that is now much better equipped for the future.

More specifically, cash cost were reduced by approximately EUR4 billion, working on efficiencies all across the board. This together with a headcount rightsizing plan resulted in a leaner organization. The sound free cash flow generation led to a debt reduction of approximately EUR5 billion from year-end 2007, including the effect of Etecsa Cuba disposal.

The implementation of the new customer-centric organization and the strong investments to recover competitiveness through past repositioning led to a significant reduction in revenues, especially in the mobile business, as well as a constant improvement in customer satisfaction and corporate image. This investment, I’m sure will pay handsomely off in the future.

Last but not least, we rationalized our portfolio, selling assets in countries where we did not have the size to compete successfully, while strengthening our presence in Latin America, by acquiring Intelig and gaining control of Telecom Argentina, thus balancing our exposure to the domestic market. These achievements made us stronger and more confident. We can stand up to the challenges that lie ahead of us.

In the near future, Telecom Italia’s strategic priorities remain the same as in the last three years. We will keep the focus on our core markets with important addition of Argentina, strengthening and reinforcing our presence in each one of them. In Italy, we have to complete our repositioning path and improve the top line trend, while continuing to ensure profitability and free cash flow generation. We also need to continue reinforcing competitiveness and leadership in innovation, both in the fixed and in the mobile businesses.

In Brazil, we aim at becoming the second player in the mobile market in terms of both volume and value. In Argentina, we will intend to strengthen our position, we shall consolidate our market share in the fixed business and grow in the mobile pushing VAS revenues. We confirm our commitment to grow free cash flow generation in order to complete the leveraging program delivering what we promised and generate sustainable growth in shareholders’ remuneration.

Let’s now quickly review the main drivers of our strategy. In Italy, we have to be very determined in protecting the value of access, both in the fixed and mobile businesses. To this end, we need to continue talking to the regulator and move towards an NGAN development. This requires a clever marketing strategy and a convincing dialog with the regulator. We should keep the reduction of line losses under control as our business plan unfolds by increasing the penetration of bundle offers and enhancing the value of access, relying on a superior quantity of service and knowledge of customers.

In the mobile business, we are recovering market share in the consumer segment, while reinforcing our leadership in the public sector and large corporations, as Marco Patuano will fully detail later on. In innovative services, our task is to speedup broadband growth, accelerating the penetration of smartphones, and finding new ways to explore the value of the network. Our home gateway business model is just the starting point.

This is crucial for the future of our industry. This is also the reason why discussions at the GSMA last week have clearly indicated that the industry shares a common vision on the joint efforts needed to foster innovation and defend the Telco industry against the threats coming from new competitors and over the top players. The main competitive advantage of over-the-tops is the customer-centric approach and refocusing on customer-centric approach is exactly what the industry is doing. An example of this; the Rich Communication Suite and the SIM-based NFC services that would be launched in key European markets this year by many companies including ourselves.

In the meantime, we keep making strides on cash efficiencies. The 2011-2013 plan comprises efficiencies for a total amount of EUR1 billion. The plan will allow us to reach our target of around 64% cash cost on revenues in 2013, and much of this will be achieved in 2011. Like our previous plan, also this one is frontend loaded. Our 2011 goal is to generate more than EUR600 million worth cash cost efficiencies, accounting for 64% of the total three-year plan.

Moving to CapEx, the overall strategy is the one we presented thoroughly in April last year. The main development is what we called Dream Project in wireless access through which we plan to deploy approximately 1,300 new B nodes and update approximately 12,000 nodes with a multi-standard approach to prepare our network for future mobile broadband evolution.

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