Telecom Italia S.p.A. (TIT) Earnings Call Transcript & Summary

[Audio Gap] head up the telco team at Goldman. And more importantly, we'd love to welcome Luigi Gubitosi, CEO of Telecom Italia. Luigi, hi.

Hi.

Thank you for your time today. I just wanted to go through, for the audience sake, the plan for the next 35, 40 minutes or so. We're going to try and touch on all the hot topics, of which there are many at Telecom Italia, talking about the FiberCop and the chance for a single network. We're also going to look at Italian operations. Brazil, if we can, cost-cutting and digital efficiencies and try and finish off with, I guess, crucial to everything, the free cash flow and returns outlook at the company.

So without further ado, again, thanks for your time, Luigi. I was just going to kick off almost to get it out of the way, but ask your thoughts on how the corona crisis has affected your business and how it's affected your mid- to near midterm growth outlook?

Yes. Okay. Thank you, and hello to everybody. Very pleased to be with you this afternoon. Coronavirus has obviously been a negative in short term for various reasons. I had the opportunity to mention that at Q2 results and happy to reiterate the largest one, the easy to understand, for example, the roaming. We have plenty of tourists in Italy and plenty of Italians abroad. That number has obviously been reduced by a very important factor. The second aspect is that we had less devices sale as well as less foot traffic in the shops, obviously. Every time somebody goes to buy a SIM or phone, we obviously try to capture their attention, some other products, and that has been reduced again because of coronavirus. And the other important aspect of coronavirus is that we have a slowed down decision on investments in the business and award of tenders since from the states. The entire economic activity in these months of lockdown has been reduced. It has also impacted small business. That is probably behind some of the line losses that have occurred. We have not noticed, at least not yet, any, let's say, very significant growth in bad debt or so, which was one of the things we were feared. So that aspect has not materialized. Having said that, I think in retrospect [Audio Gap] sometime from now in the future, once coronavirus would have been hopefully, something that we remember from the past, like influenza 1918 or so and we've been discussing how crazy it was to lock down, and some people would even say that they like this isolation and so on, particular things that looking after, we will identify coronavirus as one of the things that accelerated dramatically due to the process of Italy. Digitalization will increase very significantly in Italy. So in the medium term, and medium term means basically from next year, the level of support that these sectors will get from the government and from the European Union will increase dramatically. I think coronavirus was very relevant to understand the importance of having a good telecommunication network. So people that never done a video conference use Zoom or Meet or Teams or whatever and others, both for the first time online. And many people, from [ 500,000 ] to 6 million approximately went into smart working, working from remote. So -- and the network worked well. Actually, the network is where -- the network at problem was where there was no network. And there are areas in our country, so-called white areas where there was -- there is not, I should say, there was not because not then we intervened afterwards. There was not enough coverage. There was a project that government did 3 years ago or 4 years ago to award subsidy to a company that should have then closed this gap, and that did not materialize the company was open fiber. And it's been well known that they are late by 3 to 4 years compared to the project that was supposed to be complete in 2020. And so everybody realized that the network is indeed important. And I think if we're talking about a single network, it's probably also thanks to COVID. So COVID has been a [ miraculous ] experience for the country. We hope to get rid of it as soon as possible. But from a regional point of view, I think it is as active as [Audio Gap] normality. Schools have reopened in Italy and most European countries, at least of the large countries. So the economy is restarting as I said, slowly, but [Audio Gap] progresses, if there is no worsening of the situation until we get finally a definite breakthrough with the vaccine or other cures that [Audio Gap] make it manageable.

Thank you, Luigi. That was [Audio Gap] some of the specifics of your positive guidance [Audio Gap] top line and EBITDA growth from next year. [Audio Gap] And then specifically, how concerned should we be about the [Audio Gap] current macro environment.

Well, [Audio Gap] country was a fully digital country, which basically means there is a lot to be done and in fact, we mentioned in the Q2 results that EUR 2.7 billion already been earmarked for the sector. Another batch of funds is coming. And this is going to be dedicated to the broadband, to the acceleration of 5G introduction, to data center and cloud, to Internet of Things, et cetera, et cetera. And in all these businesses, I named, TIM is the most qualified player in the country to become, let's say, the leading player and therefore, to intersect, let's say, most of these flows. So I do expect that area to pick up. Besides, as you know, the sector suffered significantly in Italy. And all of our competitors did. So competitive pressure, I expect to be less significant next year for some of them, it's going to become difficult to sustain. The trends are -- on pricing are positive. At least on the Fixed, it seems to be slowly but surely moving up. Most of the competitors now have agreed in their offers. And again, I see a rebound from a low base that we got this year.

Yes. Okay. That's helpful. And on the...

And I didn't answer your question about the business. Yes, indeed, we got, over spring and summer, the headwinds of being very much -- we've got the lockdown that at some point -- at the majority of small businesses closed and the postponement of some projects from the larger ones and the public sector, simply because people were not in their office to accept or where anybody wanted to understand what was going on when people will be back in the office and so on and so forth. But yes, indeed, we have suffered. But for the very same reason, we see that every time you have such a quick decline, you tend to have a rebound, which is going to be fueled by the massive level of state intervention, state and European intervention. So -- and as I said, on the credit side, we did not see a lot of issues yet this year. But by now, we would have seen it. I always say Q3, we start seeing it. And we haven't. So I'm reasonably confident also because [Audio Gap] we continue to do it. We're going to be very much [Audio Gap] cost. This is a sector that has been reached, and there is still significant room to make it leaner and more effective. We have [Audio Gap] in the last 2 years, we had every year that sliming will continue. We're not going to make big fuss about it because why would you want to discuss too much certain things. But you should expect that our cost exercise on energy, there will be significant savings. We are the second largest buyer of energy in Italy. But really on every aspects of the -- and in fact, our issue is more an issue of capitalizing revenues rather than cutting costs. I mean, cutting costs, we're good at. We continue to do that. And as all incumbents there is a lot of room to rationalize to remove all technologies to eliminate part of the baggage that you bring with you being a 70-plus-year old company. So I guess that that's the main reason why I'm comfortable with the development next year.

Yes. Okay. That's helpful. I was going to -- I was going to be moving on to FiberCop. Just given you mentioned some of your operational trends. So you mentioned in your discussion just now you expect competitive pressure to ease into next year and that there are some positive signs on retail competition today. Can you give us a bit more color on what's making you feel more confident on the competitive trends right now? That would be helpful, both on Fixed and Mobile.

Well, I mean, take the Fixed, for example. Basically, none of our competitors are doing well in terms of the cash flows. And if we go below -- beyond the EBITDA, you see that most of our competitors are basically treading water. In some cases, even a new camera sky, it's basically cutting between the free linear TV, the pay non-linear TV like Netflix, Amazon and Disney. After that, the pressure on the sports rights, and you see that there's not much -- I mean, I don't see that anyone of them start the price war. So -- because they could -- I mean, it's difficult for them to afford it. So pressure -- competitive pressure should be lower. Again, what we see on the market is that the trend is a more-for-more type of environment where people try to bundle few things and so on and so forth. But there is no pressure on prices. In the case of the Mobile, the trend on -- it's more flattish because Iliad is still there. Iliad tends to attract typically Wind customers much less ours or Vodafone. So in Q3, I think the trend has been stable on the ARPU barring extraordinary elements like roaming and so on and so forth. So as I said, we are entering into next year with a complete solution, which has fairly much stabilized and possibly improve on the Fixed. Did I answer your question? Okay.

Yes, you did. No. You really did. The follow-up question, just while we're on the subject is, obviously, Iliad has been clear now that they expect to launch a fixed business by early summer next year. How do you think about the potential disruption that could cause your fixed line trends?

I don't know Iliad is burning EUR 700 billion a year in Italy. So that's quite a bit. I don't know how much they will want to lose more. If they don't, probably they will make reasonable behavior. But there is some start-up losses that they will get. So it's too early to say. We're talking almost a year from now, summer of next year. But I'm confident on Fixed. In fact, we see that in Fixed, we are on target in terms of KPIs to reach our objective of halving the losses this year. And then I think if we say we will stop it by 2022, I think you probably will not be able to stop it by next year. So I would say that we will recover even earlier than that. So we're working on the company making sure that our services level improve. That people are happy with what we do. In fact, we're #1 now in customer service for Mobile, customer satisfaction index. And clearly, our aim is going to be also that for Fixed. We see -- by the way, we see some other area of the business like cloud and data center continue to grow. It's obviously a base which is smaller than our traditional business. But we do see that's growing double digit. And I was saying before, I expect that to be part of the areas that the government wanted to push and sustain in the economic recovery plan. So there is quite a bit of things that we can do to improve our activity. The content is proving to be successful. I think, as you know, we were -- we are -- there is an exclusive distributor and has been very successful in Italy. And I guess not only in Italy. The same is true for TIMvision in general. We have more content and we expect now that the football season starts again that there's going to be more people also to become subscriber of our sports services. So this is going to become, in my opinion, something that distinguish certain providers from others. So there's going to be the pure resellers. And these are people that are going to be more, how would I say, more apt to become a victim of new entrants like Iliad or so, and others that can offer some distinguishing services like contents, like cybersecurity, gaming and so on and so forth, which is, to a certain extent, our strategy. I mean -- as well as playing a convergent strategy with Unica, which is our service where we combine our service into a quadruple play. Clearly, we try to do something that is not easily matchable by any other competitor, especially the one that tends to be MVNO and have no -- not their own infrastructure.

Okay. Yes, maybe I'd just -- the comment on infrastructure takes us into the discussion of FiberCop. And you've recently announced finalized plans for FiberCop. Your JV with private equity partners on your -- part of your fixed line assets. And then we saw the letter of intent with the CDP for the creation of a national FiberCop. Maybe if we just start from the beginning, so the creation of FiberCop. Can you first kind of just walk us through your thought process for creating that entity and why you wanted to do that?

Well, yes, and we started discussion with the private equities to basically join forces to merge with Open Fiber. And then in discussing it, we reached the conclusion that we could easily carve out the secondary network, i.e., the last mile because in the infrastructure players' calculations, a fiber network is worth more than a fiber and copper, mixed one. And therefore, they were happy to finance the -- to join us investing into the creation of full fiber network and then the migration of the customers there. This outstarted. It's something that boosts our ability to deleverage while continuing to invest. It gave us some more traction in terms of some of the parts. I mean, obviously, you are the analysts, but if I look at some of the parts of TIM and I look at INWIT, I look at Brazil, I look at the data centers, you almost get the rest for free. And so being able also to unlock some value by using a multiple of 8x plus was definitely a positive. We -- the risk while continuing to reduce leverage and continue to invest. Then -- and this has been finalized as we said in August. Then from there, we followed an invitation by the government to look into whether we could do a single network. And we think that makes sense, obviously. I reiterated this point for a while. Obviously, it will make sense at certain valuation and with certain engagement rules, this is where we are now. I think we have established an MoU, let's say, the valuation procedure and the government -- the governance rules. So at this stage, we need to implement that, and this is what you should expect to happen between, say, now and year-end.