Telecom Italia Board of Directors examines and approves the Group First Half Financial Report at 30 June 2013

08/02/2013 - 07:35 AM

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  • Network spin-off: the board of directors positively assesses recent Agcom decisions and confirms the company's willingness to pursue the implementation plan
  • Revenues: 13,760 million euros, -2.7% in organic terms compared with h1 2012
  • EBITDA: 5,236 million euros, -6.8% in organic terms compared with h1 2012
  • Goodwill write-down for a total of 2.2 billion euros
  • EBIT: 353 million euros (-13% in organic terms compared to h1 2012) as a consequence of the goodwill write-down; without this intervention the EBIT amounts to 2,540 million euros
  • Consolidated net result: -1,407 million euros; excluding the effects of the goodwill write-down for a total of 2.2 billion euros, the profit amounts to approximately 800 million euros (1.2 billion euros in h1 2012)
  • Adjusted net financial debt: 28,813 million euros, down by 1.5 billion compared to 30 June 2012; this data is up by approximately 500 million euros compared to 31 December 2012
  • Guidance 2013 confirmed for consolidated organic revenues (“stable”) and adjusted net debt (below 27 billion euros). guidance 2013 relative to group organic EBITDA revised downwards: from “low-single digit decline” to “mid-single digit decline”
  • 2013 Domestic Organic EBITDA guidance revised downwards from “mid-single digit decline” to “high-single digit decline”

Bernabè: "Telecom Italia is implementing significant actions aimed at increasing the level of operational efficiency and ensuring that the deleverage expected for the end of the year is achieved. at the same time, renewed impetus is given to the development of the new fibre network, which will offer an important contribution to the future stabilization of the domestic EBITDA and the LTE development plan, a necessary addition to a convergent ultrabroadband offer.
At the same time, following AGCOM's communication officially confirming the positive conclusion of the  preliminary investigation and verifying the reliability and appropriateness  of the access network spin-off plan, Telecom Italia confirms its intention to proceed with the operation as announced on 30 May.
In italy, in a market context characterized by strong pricing pressure especially on the mobile market, in the second quarter we responded firmly with highly competitive offers, investing a part of the margin in the defence and acquisition of customers even through the use of innovative fixed-mobile convergent offers.”

The results of the Second Half of 2013 will be illustrated to the financial community during a conference call scheduled for 12 pm today (Italian time). Journalists may listen to the conference call, without asking questions, by calling: +39 06 33168.
Those unable to connect live may follow the presentation until Friday 9 August 2013 by calling: +39 06 334843 (access code 550959#). It is possible to follow the audio webcasting live and on demand with slideshow on
www.telecomitalia.com/1H2013/eng

In addition to the conventional financial performance measures contemplated under IFRS, the Telecom Italia Group uses certain alternative performance measures in order to give a clearer picture of the trend of operations and the company's financial position. Specifically, the alternative performance measures refer to: EBITDA; EBIT; organic difference in revenues, EBITDA and EBIT; net financial debt carrying amount and adjusted net financial debt. For further details on these measures see the annex “Alternative performance measures".

The Telecom Italia Group First Half Financial Report at 30 June 2013 was drafted in accordance with art. 154–ter (Financial Reporting) of Leg. Decree 58/1998 (Consolidated Finance Law - CFL) and subsequent amendments and supplements and prepared in accordance with the international accounting principles issued by the International Accounting Standards Board and endorsed by the European Union ("IFRS"), as well as the provisions issued in implementation of art. 9 of Leg. Decree 38/2005.

The accounting policies and consolidation principles adopted in the preparation of the Half-year Condensed Consolidated Financial Statements at 30 June 2013 have been applied on a basis consistent with those adopted in the Annual Consolidated Financial Statements at 31 December  2012, to which reference can be made, except for the new standards and interpretations adopted by the Group, which, other than for the prospective adoption of IFRS 13 (Fair value measurement), didn’t impact on the Half-year Condensed Consolidated Financial Statements at 30 June 2013. Note that the section "Business Outlook for the 2013 fiscal year", contains forward-looking statements about the Group’s intentions, beliefs and current expectations with regard to its financial results and other aspects of the Group's operations and strategies.  Readers of the present press release should not place undue reliance on such forward-looking statements, as final results may differ significantly from those contained in the above-mentioned forecasts owing to a number of factors, the majority of which are beyond the Group’s control.

Finally, please note that the limited review on the Telecom Italia Group Half-year Condensed Consolidated Financial Statements at 30 June 2013 has not yet been completed.

***

The Telecom Italia Board of Directors, chaired by Franco Bernabè, yesterday examined and approved the Group’s First Half Financial Report at 30 June 2013.

Franco Bernabè commented: “The first half of 2013 was affected by the fragility of the domestic economic framework and by the reduced growth of the economy in Latin American countries. In Italy continued pricing pressure was also recorded, in particular on the Consumer Mobile market, in addition to a significant negative impact deriving from regulatory aspects. In this context, it was decided to respond firmly to competitors' offers on the mobile market, investing a part of the margin to pave the way for the defence and net acquisition of customers, also through the use of innovative fixed – mobile convergent offers”.

“Telecom Italia”, underlined the Chairman, “having acknowledged the context, deemed it appropriate to downwardly revise the guidance for the year in relation to the consolidated EBITDA, shifting from a "low-single digit decline" to a "mid-single digit decline", just like the domestic Ebitda which shifts from “mid-single digit decline” to "high-single digit decline". Whereas the current operational and financial dynamics allowed the confirmation for 2013 of both the "Stable" guidance for the Group's turnover, and that concerning the reduction of the net debt to under 27 billion euros”.

“While the overall conditions also for the second part of the year continue to appear challenging – continued Bernabè – the Company expects a gradual easing of competitive pressure, a more stable regulatory framework and an initial improvement in the economic performance”.

“As regards the access network spin-off plan – noted the Chairman of the Company – having taken note of the AGCom decisions of 25 July concerning its validity and solidity, we confirm our willingness to proceed promptly with the access infrastructure spin-off as approved and announced on 30 May”.

“Telecom Italia – concluded Bernabè – is implementing significant actions aimed at increasing the level of operational efficiency and ensuring that the deleverage expected for the end of the year is achieved.  At the same time, renewed impetus is given to the development of the new Fibre network, which will offer an important contribution to the future stabilization of the domestic EBITDA and the LTE development plan, a necessary addition to a convergent Ultrabroadband offer. In this context, all the opportunities offered by the announced project of structural separation of the fixed access network shall be pursued, and we will continue to evaluate future opportunities for consolidation in the mobile sector”.

***

Main variations to the Telecom Italia Group consolidation area

The following change to the consolidation area occurred in the first half of 2013:

  • La7 S.r.l. - Media: On 30 April 2013, after having received the authorizations provided for by the applicable regulations, Telecom Italia Media completed the sale of La7 S.r.l. to Cairo Communication and consequently the company left the consolidation area.

The following change occurred in 2012:

  • Matrix - Other assets: the company was sold on 31 October 2012, and it consequently left the consolidation area.

Telecom Italia Group

Revenues in H1 2013 amounted to 13,760 million euros, down 7% on the first half of 2012 (14,793 million euros). In terms of organic variation, consolidated revenues fell by 2.7% (-375 million euros).

In detail, the organic variation in revenues is calculated by excluding:

  • the effect of foreign exchange rate fluctuations of -634 million euros, mainly regarding the Brazil Business Unit (-352 million euros) and the Argentina Business Unit (-280 million euros);
  • the effect of changes to the consolidation area (-33 million euros) following the sale of Matrix (Other Assets) on 31 October 2012 and La7 S.r.l. (Media) on 30 April 2013.

Revenues, broken down by business unit, are as follows:

(millions of euros)

H1 2013

H1 2012

Change

 

 

% of total

 

% of total

absolute

%

% organic

Domestic

8,104

58.9

9,048

61.2

(944)

(10.4)

(10.5)

Core Domestic

7,687

55.9

8,570

57.9

(883)

(10.3)

(10.4)

International Wholesale

596

4.3

709

4.8

(113)

(15.9)

(15.7)

Brazil

3,620

26.3

3,733

25.2

(113)

(3.0)

7.1

Argentina

1,890

13.7

1,823

12.3

67

3.7

22.5

Media, Olivetti and Other Assets

212

1.5

290

2.0

(78)

 

 

Adjustments and eliminations

(66)

(0.4)

(101)

(0.7)

35

 

 

Consolidated Total

13,760

100.0

14,793

100.0

(1,033)

(7.0)

(2.7)

EBITDA came to 5,236 million euros, down 623 million euros (-10.6%) on H1 2012, with an EBITDA margin of 38.1% (39.6% in H1 2012). In organic terms, EBITDA fell by 391 million euros (-6.8%) on the same period of the previous year and was 1.8 percentage points lower in proportion to revenues, falling from 40.7% in H1 2012 to 38.9% in H1 2013, owing to the greater weight of South American revenues, where margins are lower than for the Domestic Business.

The following table shows a breakdown of EBITDA and EBITDA margin by business unit:

(millions of euros)

H1 2013

H1 2012

Change

 

 

% of total

 

% of total

absolute

%

% organic

Domestic

3,824

73.0

4,406

75.2

(582)

(13.2)

(10.9)

% of Revenues

47.2

 

48.7

 

 

(1.5) pp

(0.1) pp

Brazil

919

17.6

987

16.8

(68)

(6.9)

2.8

% of Revenues

25.4

 

26.5

 

 

(1.1) pp

(1.1) pp

Argentina

537

10.3

550

9.4

(13)

(2.4)

15.5

% of Revenues

28.4

 

30.2

 

 

(1.8) pp

(1.8) pp

Media, Olivetti and Other Assets

(40)

(0.8)

(81)

(1.3)

41

 

 

Adjustments and eliminations

(4)

(0.1)

(3)

(0.1)

(1)

 

 

Consolidated Total

5,236

100.0

5,859

100.0

(623)

(10.6)

(6.8)

% of Revenues

38.1

 

39.6

 

 

(1.5) pp

(1.8) pp

Write-downs of non-current assets amounted to 2,213 million euros and relate primarily to the 2,187 million euros write-down of the goodwill allocated to the Core Domestic Cash Generating Unit of the Domestic Business Unit.

In accordance with the specific procedure adopted by the Group, the valuation took into account the deterioration in the macroeconomic environment, both in general terms, considering the prospects for the Italian economy, and in specific terms, considering the management's expectations of the impact, throughout 2013 and for the years to come, of the recent decisions taken by AGCom regarding the prices for wholesale access to the copper network and the commercial performance recorded by the Domestic Business Unit in H1; also taken into account were the expectations of analysts regarding the expected performance of the Business Unit in question and the trend in financial indicators and interest rates.

EBIT amounted to 353 million euros (3,199 million euros in H1 2012) and is affected by the impact of the aforementioned write-down of 2,187 million euros in the goodwill allocated to the Domestic Business Unit.
Organic EBIT amounted to 2,763 million euros, down by 412 million euros

(-13%) on H1 2012, with an EBIT margin of 20.1% (22.5% in H1 2012).

Profit for the period attributable to the Parent Company's shareholders is negative in the amount of 1,407 million euros, down by 2.649 million euros compared to H1 2012 (1,242 million euros). Excluding the negative impact of the goodwill write-down, the profit for the period would be positive by  approximately 800 million euros.

Capex amounted to 2,193 million euros, down slightly on H1 2012 (2,269 million euros) and is broken down as follows:

(millions of euros)

H1 2013

H1 2012

Change

 

 

% of total

 

% of total

 

Domestic

1,345

61.3

1,333

58.7

12

Brazil

597

27.2

662

29.2

(65)

Argentina

231

10.5

236

10.4

(5)

Media, Olivetti and Other Assets

20

1.0

38

1.7

(18)

Adjustments and eliminations

Consolidated Total

2,193

100.0

2,269

100.0

(76)

% of Revenues

15.9

 

15.3

 

0.6 pp

Capex for the Domestic Business Unit remained largely in line with the same period of the previous year: the increase for the advancement of plans to build out next generation networks (LTE and fibre network) was offset by the reduced requirement for delivery of new conventional plants, due to the commercial slowdown in fixed-line access.

Capex for the Brazil Business Unit decreased by 65 million euros on the same period of 2012 (including a negative forex effect of 62 million euros); the reduction was mainly attributable to the pace of new investments in the network and to the drafting of new agreements with the main providers.

Capex for the Argentina Business Unit fell by 5 million euros, including a negative forex effect of 36 million euros, without which it would have grown. Besides the costs of client acquisition, expenditure was aimed at enlarging and upgrading fixed-line broadband services and backhauling to support mobile access development. Moreover, Telecom Personal invested primarily in increased capacity and enlargement of the 3G network to support Mobile Internet growth.

Cash flow from operations  stood at 1,277 million euros (2,243 million euros in H1 2012). This result, which is normally lower than in the  second half of the year anyway, was affected to a greater extent than ordinary by the seasonal dynamics of disbursements made for purchases during the latter part of the previous year.

Adjusted net financial debt as of 30 June 2013 amounted to 28,813 million euros, down by 1.5 billion euros on 30 June 2012.

In Q2 2013, adjusted net financial debt remained broadly stable compared to 31 March 2013. The cash flow from operations for the quarter (approximately 1.13 billion euros) was entirely absorbed by the requirement for the payment of dividends, financial expenses and taxes, the effects of the sale of La7, which took place at the end of April, and the payment of fees for the rights to use mobile telephone frequencies in Brazil.

(millions of euros)

30.6.2013

31.3.2013

Change

Accounting net financial debt

29,786

29,516

270

Reversal of fair value measurement of derivatives and associated financial liabilities/assets

(973)

 (749)

(224)

Adjusted net financial debt

28,813

28,767

46

Detailed as follows:

 

 

 

Total adjusted gross financial debt

36,007

37,222

(1,215)

Total adjusted financial assets

(7,194)

(8,455)

1,261

Accounting net financial debt amounted to 29,786 million euros (29,053 million euros as of 31 December 2012).

At 30 June 2013 Group headcount stood at 82,163 employees (83,184 at 31 December 2012), of which 53,622 in Italy (54,419 at 31 December 2012).

***

Business Unit Results

Figures for Telecom Italia Media as of 30 June 2013 can be found in the press release issued on 30 July, following the Board of Directors' meeting.

Domestic

Domestic revenues fell by 10.4% in reported terms and 10.5% in organic terms to 8,104 million euros (9,048 million euros in H1 2012).

With a worsening economic outlook and a market characterised by stiff competition and accelerated downward pressure on prices (especially on mobile and traditional services), the fall in revenues was also significantly influenced by discontinuity factors of a regulatory nature.

In particular, revenues were affected by the entry into force on 1 January 2013 of the new mobile termination rates (MTR), which provide for rates to be reduced by a further 40% on H2 2012 and 72% on H1 2012, as well as by the recent decisions taken by AGCom regarding the prices for wholesale access to the copper network (local loop unbundling, naked bitstream, shared bitstream services). Excluding the impact of the reduction brought about by the new mobile termination rates (MTR), amounting to 247 million euros, and the aforesaid change in the prices for wholesale access to the copper network, amounting to 58 million euros, performance in H1 2013 would be -7.1% compared to the same period of the previous year, with a trend that is virtually in line with the first part of 2013. This reduction is attributable in particular to the fall in revenues from traditional services, which was only marginally offset by the development of innovative services, particularly on Fixed-line Broadband, ICT and Mobile Internet in the Consumer segment.

Highlights:

Core Domestic Revenues

Core Domestic revenues amount to 7,687 million euros and fell by 10.3% (8,570 million euros in the first six months of 2012), with an organic reduction of 10.4%.

The performance of the individual market segments as compared with the same period of 2012 is as follows:

  • Consumer: revenues for the Consumer segment amounted to 4,012 million euros, down by 420 million euros compared to H1 2012 (-9.5%). Performance confirmed the downward trend compared to previous periods (-8.9% in Q1 2013), attributable in particular to steep erosion in the Mobile business(-16.4% compared to -14.7% in Q1 2013), due to fierce competition and the consequent loss of Customer Base (approximately -5% compared to 30 June 2012 and -3% compared to 31 December 2012) and the negative impact of the reduction in termination rates (-216 million euros in H1 on Mobile). This fall is entirely due to revenues from services (-383 million euros, -17.5%), particularly on traditional Mobile Voice services (-350 million euros, partly resulting from the aforesaid introduction of the new mobile termination rates, which has an impact of 186 million euros on the Consumer segment), Fixed-line voice (-91 million euros) and Messaging (-44 million euros), only partially offset by the growth in Mobile Internet revenues (+22 million euros) and Fixed-line Broadband (+18 million euros).
  • Business: Revenues for the Business segment in H1 2013 amounted to 2,627 million euros, down by 386 million euros (-12.8%) on the same period of 2012. The fall was primarily seen in revenues from services (-367 million euros), including -202 million euros on Mobile (-22.5%) and -182 million euros on Fixed-line (-9.1%). Specifically, on Mobile the contraction is mainly attributable to the decline in income from voice traffic, following the aforesaid reduction in the new mobile network termination rates (amounting to -61 million euros in the Business segment), but also to a reduction in unitary revenues (ARPU) and more marginally to a loss of human customer base (-2% compared to 30 June 2012), particularly in the Soho and SME segment. On Fixed-line, cooling demand due to the negative economic situation and a fall in the prices of more traditional voice and data services continues to have a dampening effect.
  • National Wholesale: the Wholesale segment reported revenues totally 964 million euros in H1 2013, down 71 million euros (-6.9%) on the same period of 2012. This is entirely attributable to the aforesaid regulatory changes which have cut the LLU access, Bitstream, Wholesale Line Rental and termination rates.

International Wholesale Revenues

International Wholesale revenues in H1 2013 amounted to 596 million euros, down by 113 million euros (-15.9%) on the same period of 2012. The contraction was seen particularly in Voice services (-90 million euros, -18%) following the annual review of bilateral contracts and the transit component, with a consequent focus on renewing higher margin agreements. Revenues were down for IP/Data services (-10 million euros, -7%) primarily in the captive market component. Despite the overall increase in the total bandwidth sold, the market suffered from the increasingly competitive scenario and the resulting fall in prices. Also down, particularly in the Domestic component, was the business MNC's segment (-11 million euros, -27%). In view of these reductions, the greater focus on higher margin international traffic and the constant attention and actions aimed at cutting costs allows an EBITDA of 96 million euros to be achieved in the first half of the year, with an increase in profitability compared to the same period of 2012 of approximately 2 percentage points, although this was down slightly in absolute terms.

EBITDA for the Domestic Business Unit amounted to 3,824 million euros, down 582 million euros on H1 2012 (-13.2%). EBITDA margin was 47.2%, slightly down compared to the first six months of 2012 (-1.5% percentage points). This result was affected by the decrease in revenues from services (-921 million euros compared to the corresponding period of 2012) and the impact of the Antitrust penalty relating to the A428 proceedings (84 million euros), which were only partly offset by the reduction in quotas payable to OLOs, resulting primarily from the reduction in termination rates and the efficiency achieved through selective monitoring and containment of operating costs.
Organic EBITDA came to 3,943 million euros (-480 million euros, -10.9% compared to H1 2012), with an EBITDA margin at 48.7% of revenues, essentially in line with the same period of the previous year (-0.1 percentage points).

EBIT for the Domestic Business Unit was -147 million euros, down by 2,752 million euros compared to H1 2012 (2,605 million euros). Performance was affected in particular by the 2,187 million euros write-down of the Core Domestic Cash Generating Unit goodwill.

Organic EBIT, excluding the aforesaid write-down, amounted to 2,159 million euros, down by 443 million euros (-17%) compared to H1 2012 (2,602 million euros). EBIT margin fell from 28.7% in H1 2012 to 26.6% in H1 2013.

The headcount, of 52,997 employees, fell by 227 units compared to 31 December 2012

***

Brazil

(average real/euro exchange rate 2.66695)

The revenues of Tim Brasil Group come to 9,655 million reais, 639 million reais higher than in H1 2012 (+7.1%). Revenues from services reached 8,152 million reais, up from 8,000 million reais in H1 2012 (+1.9%). Revenues from product sales increased from 1,016 million reais in H1 2012 to 1,503 million reais (+47.9%), thanks to the greater penetration of high-end handsets (smartphones, webphones and tablets), which is an important lever for developing Data Service revenues.

Mobile ARPU stood at 18.3 reais compared to 18.7 reais in H1 2012 (-2.1%). ARPU and service revenue performance were affected both by competitive pressures, which led to a fall in business voice unit prices, and by the reduction in the network interconnection rate for mobile operators.

The total number of lines as of 30 June 2013 was 72.2 million, up by 2.6% compared to 31 December 2012, corresponding to a market share of 27,2%.

EBITDA, of 2,452 million reais, was 67 million reais higher than in H1 2012 (+2.8%). EBITDA growth was sustained by the increase in revenues, mainly in VAS, partially counterbalanced by the higher termination costs due to increased traffic volumes and by industrial and labour costs. EBITDA margin was 25.4%, down 1.1 percentage points on the same period of 2012.

EBIT amounted to 1,121 million reais an improvement of 11 million reais on H1 2012. This is explained by the higher contribution of EBITDA, partially offset by increased depreciation and amortisation of 59 million reais (1,330 million reais in H1 2013 compared with 1,271 million reais in the same period of 2012).

Headcount stood at 11,494 employees (11,622 as of 31 December 2012).

Argentina

(average peso/euro exchange rate 6.72696)

Revenues came to 12,712 million pesos, up 2,333 million pesos (+22.5%) compared to H1 2012 (10,379 million pesos). The principal source of revenues for the Business Unit was mobile telephony which contributed around 74% of consolidated revenues and grew by 25% compared with H1 2012, thanks to growth in the mobile customer base and to the increase in the ARPU.

The number of fixed lines as of 30 June 2013 was 4,114 thousand, down slightly on the end of 2012 (4,128 thousand lines). Despite the fact that fixed telephone services in Argentina continue to be affected by the freeze on tariffs imposed by the Economic Emergency Law of January 2002, the ARBU  (Average Revenue Billed per User) grew by 8.5% compared to H1 2012, thanks to the increase in additional services and the more widespread adoption of new price plans.

The total broadband client base of Telecom Argentina as of 30 June 2013 was essentially in line with the end of 2012 and stood at 1,634,000 accesses.

The Personal client base in Argentina grew by 332,000 from the end of 2012 to reach a total of  19,307 thousand lines,  33% of them with post-paid contracts. Meanwhile, thanks to the increase in the number of high value customers and the leadership in the Smartphones segment, the ARPU grew by 16.8% to reach 63.8 pesos (54.6 pesos in H1 2012). Much of this growth is attributable to value added services (including SMS and  Internet), which together represent 56% of mobile telephony revenues in H1 2013.

In Paraguay, the Núcleo client base grew by 3.5% compared to 31 December 2012

to reach 2,381 thousand lines, 20% of them on postpaid contracts.

EBITDA reached 3,615 million pesos up by 484 million pesos (+15.5% compared to H1 2012). The EBITDA margin was 28.4%, down by 1.8 percentage points on H1 2012, mainly due to the higher incidence of labour and other operating costs, particularly as a result of the higher indirect tax charges resulting from the increased tax on gross revenues.

EBIT was 1,524 million pesos, up by 72 million pesos (+5.0%) compared to H1 2012, essentially as a result of the improved EBITDA, partly offset by higher amortisations and write-downs of non-current assets. EBIT margin was 12.0% of revenues (-2 percentage points compared to H1 2012).

Headcount stood at 16,713 employees (16,803 as of 31 December 2012).

Olivetti

On 13 June 2012, the shareholders' meeting of the subsidiary Olivetti I-Jet S.p.A. resolved to wind up the company. Furthermore, on 2 July 2013, a resolution was passed to start winding up the Swiss subsidiary Olivetti Engineering S.A.

Revenues in H1 2013 amounted to 124 million euros, down by 6 million euros on the same period of 2012.

The fall in revenues is mainly due to lower copying and printing sales in the Italian market, where SME customers and professionals are the most exposed to the current market crisis. These sales fell by around 9 million euros (including 4 million euros on sales of photocopiers and associated products and 5 million euros due to a decline in the machine rental business). This fall was offset by sale performance in specialised systems and applications, where revenues grew in the first half of the year by 4 million euros (including 3 million euros in Italy and 1 million euros in Europe) and, in the Italian market, by increased revenues from cloud services and solutions (+1 million euros).

EBITDA was a negative 23 million euros,  up by 15 million euros compared to the same period of 2012 (+39.5%). In particular, during H1 2012, the EBITDA was affected by the provision for restructuring costs of 16.5 million euros made in June 2012 following the launch of Olivetti I-Jet S.p.A. winding-up process. Excluding this provision, the organic variation is -4.5%. The result for H2 2013 is however affected by charges totalling 9 millioneuros, following the fire on 19 March 2013 which completely destroyed the spare parts warehouse. The goods were covered by appropriate insurance policies and compensation is expected to be paid by the end of the current financial year. Excluding this component, the variation in EBITDA would have been a positive 8 million euros (+36.4%), thanks to steady margins on sales and the reduction in fixed costs (which benefit from the closure in 2012 of the ink-jet sector). These two phenomena more than matched the lower profits from declining sales.

EBIT was a negative 25 million euros, up by 16 million euros compared to the same period of 2012. The organic variation in EBIT, excluding the provision for restructuring costs in H1 2012, was zero. Excluding the losses due to the destruction of the spare parts warehouse in H1 2013, EBIT grew by 9 million euros (+36%).

The headcount of 729 employees fell by 49 units compared to 31 December 2012.

***

Outlook for the 2013 financial year

The difficult economic and market situation, marked by fierce competition, combined with the negative impact of the regulatory aspects, in the Domestic market, have led to a reassessment of the Domestic Business Unit's objectives, particularly with regard to the expected reduction in Ebitda for the whole of 2013, which is expected to change from a "mid-single digit decline" to a "high-single digit decline". Given this scenario, Telecom Italia is implementing significant actions aimed at increasing the level of operational and financial efficiency and ensuring that the deleverage expected for the end of the year is achieved.

Consequently, the objectives linked to the main economic and financial indicators of the Telecom Italia Group, for the whole of 2013, as previously reported, have been redefined as follows:

  • Revenues essentially stable compared to 2012 (confirmed from previous communications);
  • Percentage reduction of the EBITDA from “low single digit decline” to “mid-single digit decline”;
  • Adjusted net financial position below 27 billion euros (confirmed from previous communications).

***

Access network spin-off plan

The Board of Directors notes that AGCom has completed the preliminary investigation, confirming the reliability and appropriateness of the spin-off plan, as already announced on 30 May.

***

The Manager in charge of preparing the accounting and corporate documents, Piergiorgio Peluso, hereby declares, pursuant to subsection 2, Art.154-bis of Italy’s Unified Finance Law, that the accounting information contained herein corresponds to the company’s documentation, accounting books and records.

With a provision pursuant to Article 114, subsection 5, Legislative Decree no. 58/1998 CONSOB asked the Company to provide some specific information to supplement the First Half Financial Report at 30 June 2013 and the press release relating to its approval. It is set out below, repeating – for quick reference – information in any case already included in the aforementioned report and press release.

The access network separation plan

On 30 May 2013 the Telecom Italia Board of Directors resolved to proceed with the spin-off of the business unit relating to passive services for access to the fixed network and electronics introduced in the street cabinets for the creation of new generation broadband services.

The spin-off operation is aimed at achieving the Equivalence of Input (EoI) which, in line with the provisions of the European Recommendation on costing and non discrimination being issued, should allow the mitigation of regulatory constraints for the three-year period 2014-2016.

The company promptly informed the National Regulatory Authority for Communications (AGCom) of the voluntary separation project pursuant to Article 50ter, paragraph 1, of the Electronic Communications Code, in order to allow it to assess the effect of the operation through the start of a coordinated analysis of the access markets.

In the months of June and July some preliminary in-depth studies were carried out between the company's offices and those of AGCom, with particular reference to the perimeter of the network involved in the separation, the governance of the EoI system, and the procedures and timing for the implementation of the EoI model.

On 26 July, the Authority informed Telecom Italia that it had assessed the proposed spin-off of the access network with the implementation of the EoI model, and found the requirements of reliability and appropriateness provided for in the BEREC guidelines on functional separation. The Authority also announced that a coordinated analysis of the access markets will be initiated in the month of September (in line with the procedure provided for by Article 50ter, paragraph 2, of the Electronic Communications Code) and asked for confirmation of the company's willingness to proceed with the project and to provide all elements that may be useful for evaluation.

The Board of Directors notes that AGCom has positively completed the preliminary investigation, verifying the requirements of reliability and appropriateness of the spin-off plan, it has confirmed its willingness to proceed with the spin-off plan, as already announced on 30 May.

Economic-financial performance

The directors, within the assessment of the recoverability of the goodwill for the purposes of preparing the half year financial report at 30 June 2013, assessed the validity and reasonableness of the assumptions underlying the 2013-2015 plan.

Continuing to apply the impairment test procedure previously adopted in the 2012 Financial Statements, a verification of the variations between the expected results and the final data relating to the first half of the year in progress was carried out. The differences mainly affected the Core Domestic business unit and were caused by the deterioration of the macroeconomic framework, an increase in the competitive dynamic (in particular on the price leverage of mobile services), and the review that took place in the regulatory variables. These dynamics will determine a reduction of the results expected in the short-medium period, without however making the strategy and the prospects underlying the plan obsolete.

Consequently, the estimate of the use value for the Core Domestic business unit was based on the analytical forecasts of the planned financial cash flows adjusted to consider the following elements:

a) recurring differences that are only “worsening” among the 2013 new forecasts, updated on the basis of the results of the first half, and the 2013 budget (prior to the effect of AGCom decisions of July 2013).

b) expected effects following AGCom's decisions of July 2013 on the lowering of the wholesale prices of the copper network.

Pursuant to the specific procedure, in addition, the reasonableness of the adjusted planned forecasts was verified through comparison with the recent forecasts formulated by the financial analysts (equity reports, industry reports and sector analyses).

The impairment test, carried out in this way, highlighted a reduction in the value of the Core Domestic business unit equal to -2,187 million euros.

As concerns the other business units to which a goodwill is allocated, an analysis was made of the planned cash flows in relation to Brazil and International Wholesale, for which the impairment value is based on the use value; no impairment loss was therefore recorded at 30 June 2013. In addition, a sensitivity analysis to changes in the cumulative growth rate of the EBITDA and the investment rate (capex/revenues) was carried out, and for both business units the most significant variable is the investment rate (capex/revenues).

The difficult economic and market situation, marked by fierce competition, combined with the negative impact of the regulatory aspects, in the internal market, have led to a reassessment of the Domestic Business Unit's objectives reported to the market on 8 February 2013, particularly with regard to the expected reduction in organic EBITDA for the whole of 2013, which is expected to change from a "mid-single digit decline" to a "high-single digit decline". Consequently for the consolidated organic EBITDA a reduction has been anticipated which shifts from “low-single digit decline” to “mid-single digit decline”. Whereas the Group guidances for 2013 are confirmed with regard to:

§ revenues (expected to be essentially stable with respect to 2012) and

§ the adjusted net financial position (expected to be below 27 billion euros).

Confirmation of the objective on the adjusted net financial position, despite the presence of a reduction in the guidance of the organic EBITDA, depends not on the mere inertial development of the operations but the activation of specific actions which will be carried out also through the activation of a project team, which will be responsible for implementing the activities necessary to achieve the objectives. These actions will be aimed at increasing the level of operational and financial efficiency and ensuring the deleverage objectives expected for the end of the year are achieved. Specifically, it involves initiatives to optimize the management of the working capital. Competitive repositioning actions have also been put in place with the aim of containing and stabilizing the customer base and increasing the penetration of new services.

This area of intervention is accompanied by the optimization of the investments profile and the timing of the entry into operation of the investments in accordance with the new levels of commercial development as redefined in the updated forecasts, while respecting the priorities and technical innovative programmes of the networks which provide greater impetus to develop the new fiber optic network in Italy. Priority redefinitions are in fact in progress which, by recovering efficiency and areas of spending from the management of the traditional network activities, allow resources to be diverted towards investments with high innovation aimed at stabilizing the EBITDA.

The aforementioned actions are divided into specific projects initiated in both Italy and Brazil.

Financial risks

The previously mentioned unfavourable macroeconomic and market context also forces us to consider the downgrading of the credit rating assigned by the rating agencies as one of the possible risks that the Company must face.

Given that the Group's bond issues do not contain financial covenants (such as Debt/Ebitda, Ebitda/Interests ratios or similar), nor clauses that force the early repayment of loans due to events other than insolvency, the effects of a downgrade would be both immediate and prospective.

With reference to the existing financial debt, a downgrading of one notch would have an insignificant financial impact, equal to around 11 million euros in terms of greater annual financial charges, in relation to bank loans that provide mechanisms for the automatic adjustment of the cost of borrowing to the rating level. Contracts relating to loans taken out with the European Investment Bank (for a nominal total of 3,350 million euros) then contain a clause on the basis of which if one or more of the credit ratings of the medium and long-term debt not subordinate to and not guaranteed by Telecom Italia is less than BBB- for Standard & Poor’s, Baa3 for Moody’s and BBB- for Fitch Ratings, the Company must immediately inform the EIB of this. The latter shall have the right to request that additional guarantees be established to its liking, or rather that Telecom Italia provides another type of guarantee, offering protection in a manner, form and content deemed acceptable by the bank. In the case of non-compliance with the EIB's requests, the latter shall have the right to demand the immediate repayment of the amount disbursed.

The impacts deriving from a possible downgrade on future refinancings, the costs connected to them and the goodwill evaluation process cannot be estimated at present. The increased risk levels for our financial counterparts which would arise from a possible downgrade of Telecom Italia's credit rating may involve an increase in the costs connected to the management of the hedging derivatives Group portfolio, costs that also cannot be estimated at present.

Milan, 2 August 2013