Telecom Italia Group: Board of Directors approves the Half-Year Financial Report at 30 June 2016

07/26/2016 - 07:28 PM

- + Text size
Print
  • BEST QUARTER IN ITALY SINCE 2009

  • EBITDA UP 25.4% IN SECOND QUARTER AND 2.4% OVER SIX MONTHS

  • NET PROFIT OF ONE BILLION EUROS

  • NEW GUIDANCE: LOW SINGLE DIGIT ORGANIC GROWTH IN DOMESTIC EBITDA EXPECTED FOR 2016

  • STRATEGIC PARTNERSHIP WITH FASTWEB HAS BEEN APPROVED TO DEVELOP THE FIBRE (FTTH) NETWORK IN 29 TOWNS AND CITIES

 

  • CONSOLIDATED REVENUES AMOUNTED TO 9.1 BILLION EUROS (-4.9% IN ORGANIC TERMS COMPARED TO FIRST HALF OF 2015);
    DOMESTIC CONSUMER REVENUES UP BY 3.6 BILLION EUROS (+1.4% COMPARED TO THE FIRST HALF OF 2015), IN PARTICULAR THANKS TO A STRONG IMPROVEMENT IN THE MOBILE SEGMENT WHERE REVENUES REACHED APPROXIMATELY 1.8 BILLION EUROS (+7.3% COMPARED TO THE FIRST HALF OF 2015).

  • EBIT: 1.7 BILLION EUROS, +0.7% IN ORGANIC TERMS COMPARED WITH THE FIRST HALF OF 2015.

  • RECCHI: "WE ARE VERY SATISFIED WITH THE RESULTS OF THIS QUARTER: IT IS THE FIRST IMPORTANT STEP OF THE TURNAROUND THE BOARD OF DIRECTORS WISHED FOR FOR SOME TIME AFTER YEARS OF DECREASING TURNOVER AND MARGINS. I SEE IT AS THE START OF A GROWTH PATH THAT WILL FULLY UNLEASH THE POTENTIAL OF TELECOM ITALIA."

  • CATTANEO: "IN ITALY TELECOM HAS RECORDED THE BEST QUARTER SINCE 2009 DEMONSTRATING THAT THE ACTIONS TAKEN TO DATE ARE BRINGING SIGNIFICANT RESULTS. THE ORGANIC EBITDA HAS STARTED TO GROW AGAIN ON BOTH A QUARTERLY AND HALF YEAR BASIS, THE TURNOVER OF THE MOBILE SEGMENT HAS IMPROVED ITS DEVELOPMENT TREND AND THE LANDLINE SEGMENT HAS SHOWN IMPORTANT SIGNS OF RECOVERY, PULLED ALONG BY THE INVESTMENTS IN ULTRABROADBAND. WE ARE THEREFORE IN THE BEST CONDITIONS TO FACE THE SECOND PART OF THE YEAR, WHICH FROM SEPTEMBER WILL SEE FURTHER NEW DEVELOPMENTS."

 

The results of the first half of 2016 will be illustrated to the financial community during a conference call scheduled for 27 July at 10.00 am (Italian time). Journalists may listen in to the presentation, without asking questions, by calling 0633168. The presentation slides will be available at: http://www.telecomitalia.com/1H2016/eng.

Those unable to connect live may follow the presentation until 3 August 2016 by calling 06334843 (access code 970247#).

 

 

The Telecom Italia Group First Half Financial Report at 30 June 2016 was drafted in accordance with art. 154–ter (Financial Reporting) of Leg. Decree 58/1998 (Consolidated Law on Finance - CLF) and subsequent amendments and supplements and prepared in accordance with the international accounting principles issued by the International Accounting Standards Board and approved by the European Union (defined as "IFRS"), as well as the provisions issued in implementation of art. 9 of Leg. Decree 38/2005. The First Half Financial Report at 30 June 2016 is submitted to a limited audit. This activity is currently taking place.

The accounting policies and consolidation principles adopted in the preparation of the Condensed Half-Year Consolidated Financial Statements at 30 June 2016 are consistent with those adopted in the Annual Consolidated Financial Statements at 31 December  2015, to which reference can be made, except for the new Principles/Interpretations adopted by the Group starting from 1 January 2016, which had no impact on the Group's Consolidated Financial Statements.

In the Brazil Business Unit, the management has identified an incorrect accounting entry made in previous years regarding the posting of service revenues from the sale pre-paid traffic. Although this accounting error had no impact in terms of the net financial position or cash and cash equivalents, it meant that the recognition of revenues from traffic prepaid and not yet consumed was posted earlier.  Provision has therefore been made to review the comparative data as at 31 December 2015 and for the first half of 2015, with no significant impact on the economic data compared. Further details are provided in the annex.

In addition to the conventional financial performance indicators contemplated under IFRS, the Telecom Italia Group uses certain alternative performance indicators in order to give a clearer picture of the trend of operations and the company's financial position. Specifically, the alternative performance indicators refer to: EBITDA; EBIT; organic change in revenues, EBITDA and EBIT; EBITDA margin and EBIT margin; net financial  debt carrying amount and adjusted net financial debt.

Note that the section "Business Outlook for the 2016 financial year", contains forward-looking statements about the Group’s intentions, beliefs and current expectations with regard to its financial results and other aspects of 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.

 

 

 

MAIN VARIATIONS TO THE TELECOM ITALIA GROUP CONSOLIDATION SCOPE

The following changes occurred in the first half of 2016:

  • Sofora Group - Telecom Argentina: classified under Discontinued operations  (discontinued operations/non-current assets held for sale) was sold on 8 March 2016;
  • Revi Immobili S.r.l., Gestione Due S.r.l. and Gestione Immobili S.r.l. (Business Unit Domestic): on 11 January 2016 INWIT S.p.A. acquired 100% of the companies, which therefore entered the consolidation scope of the Group.

 

The following changes occurred in 2015:

  • INWIT S.p.A. (Business Unit Domestic): was established in January 2015;
  • Alfabook S.r.l. (Domestic Business Unit): on 1 July 2015, Telecom Italia Digital Solutions S.p.A. (Merged in Olivetti S.p.A.) acquired 100% of the capital of the company, which therefore entered the Group’s consolidation scope.
  • TIM Real Estate S.r.l. (Domestic Business Unit): was established in November 2015.

 

 

Domestic Business Unit trend in the second quarter of 2016

In the second quarter of 2016 the Cost Recovery Plan of the Domestic Business Unit was started, aimed at improving efficiency and the economic performance and giving the Company greater operational and financial flexibility. Based in particular on controlling costs and simplifying processes, the Plan envisages overall efficiencies of 1.6 billion euros by 2018, while maintaining high UBB coverage and service quality levels.

The performance of the domestic segment in the second quarter of 2016 already highlights the positive effects of the efficiency plan, which are expected to be consolidated during the second half of 2016 and to continue for the duration of the 2016-2018 Plan.

In particular, in the second quarter of 2016 the Domestic Business Unit recorded:

  • Revenues of 3.7 billion euros (-1.2% compared to the previous year, in continuous recovery with respect to previous quarters) with revenues from the mobile segment of 1.26 billion euros (+2.0% compared to the previous year) and revenues from mobile services up by 0.7% compared to the previous year;
  • EBITDA at 1.7 billion euros (+6.9% compared to the previous year in organic terms and excluding the effects of non-recurring charges; +39.4% in reported terms).

 

Finally, it should be noted that there was a remodelling of investments focused on the development of new generation infrastructures, with innovative investments at 777 million euros in the first half of 2016 (+31% compared to the same period of the previous year), accounting for 49% of the total (+10pp compared to the previous year).

 

INWIT

The good results achieved in the first half of 2016 by Inwit resulted in an acceleration of the 2016-2018 Business Plan, envisaging an increase in investments of 150 million euros.

Specifically, the investments will focus on the construction of over 500 new sites; the creation of at least 4,000 small cells to improve the quality of coverage in high-density traffic areas and to be ready to meet the requirements linked to 5G; and on the connection of at least 1,000 towers with fibre optics.

 

Brazil Recovery Plan

The updating of Brazil's 2016-2018 Business Plan includes an efficiency target expressed in terms of the reduction of cash costs by 2018 compared to 2015 of 1.5 billion reais (of which 0.6 billion Opex and 0.9 billion Capex), an improvement of 1.6 billion reais compared to the old plan. A reduction of the cash costs is expected in the three-year period, differential with respect to the previous plan and amounting to 4.5 billion reais (of which 3.4 billion Opex and 1.1 billion Capex).  The main efficiency improvement actions will involve organizational adaptation, the improvement of E2E processes and systems and the digitisation of some commercial processes. In terms of the offer, the focus is confirmed on the Mobile segment, supported by innovative and differentiated offers and by the acceleration of mobile broadband coverage.

 

***

 

The Board of Directors of Telecom Italia met today chaired by Giuseppe Recchi, to approve the half-year financial report  at 30 June 2016.

 

TELECOM ITALIA GROUP RESULTS

Revenues for 1H 2016 amounted to 9,096 million euros, down 9.9% on the first half of 2015 (10,101 million euros). The reduction of 1,005 million euros is attributable primarily to the Brazil Business Unit, for 833 million euros, and for 128 million euros to the Domestic Business Unit. In terms of organic change, calculated by excluding the effect of exchange rate fluctuations and of the changed consolidation scope, consolidated revenues were down 4.9% (-472 million euros).

Revenues, broken down by operating segment, were as follows:

 

(million euros)

1H 2016

1H 2015

Changes

 

 

% of total

 

% of total

absolute

%

% organic

 

 

 

 

 

 

 

 

Domestic (*)

7,247

79.7

7,375

73.0

(128)

(1.7)

(1.7)

Core Domestic (**)

6,736

74.1

6,893

68.2

(157)

(2.3)

(2.3)

International Wholesale

649

7.1

635

6.3

14

2.2

2.2

Brazil

1,858

20.4

2,691

26.6

(833)

(31.0)

(13.9)

Other assets

9

0.1

57

0.6

(48)

 

 

Adjustments and eliminations

(18)

(0.2)

(22)

(0.2)

4

 

 

Consolidated Total

9,096

100.0

10,101

100.0

(1,005)

(9.9)

(4.9)

(*) After the change to Persidera’s mission, the Media Business Unit was incorporated into the Domestic Business Unit (Domestic Core) from 1 January 2016; in the absence of this change, Domestic revenues for the first half of 2016 would have been 7,210 million euros.

(**) Includes the Olivetti company since 1 January 2016. The data for comparative periods have therefore been changed accordingly.

 

EBITDA in 1H 2016 was 3,726 million euros (3,639 million euros during 1H 2015), increasing by 87 million euros compared with 1H 2015 (+2.4%), accounting for 41.0% of revenues (36.0% in 1H 2015 + 5.0 pp). In organic terms there was a 7% increase compared to the first half of 2015.

(million euros)

1H

1H

Changes

 

2016

2015

absolute

%

 

 

 

 

 

EBITDA REPORTED

3,726

3,639

87

2.4

% of Revenues

41.0%

36.0%

5.0 pp

 

Foreign currency financial statements translation effect

 

(156)

156

 

Changes in the scope of consolidation

 

 

ORGANIC EBITDA

3,726

3,483

243

7.0

% of Revenues

41.0%

36.4%

4.6 pp

 

of which non-recurring Income/(Charges)

(91)

(399)

308

 

ORGANIC EBITDA excluding non-recurring component

3,817

3,882

(65)

(1.7)

% of Revenues

42.0%

40.6%

1.4 pp

 

EBITDA for the first half of 2016 reflected the negative impact of non-recurring items for a total of 91 million euros (399 million euros in the first half of 2015). Without these, the organic change in EBITDA would have been -1.7%, with an EBITDA margin of 42.0%, 1.4 percentage points higher than in the first half of 2015.

Second quarter 2016 EBITDA totalled 2,014 million euros, 408 million euros higher (+25.4%) than the same period last year (1,606 million euros). In organic terms and without non-recurring items, the increase would have been 79 million euros, that is +4.0% compared to the second quarter of 2015.  

The positive trend in EBITDA, in both absolute terms and in terms of percentage margin on revenues, benefited from the start of the actions of the “cost recovery plan” announced in recent months, which are destined to be consolidated in the second half of 2016 and then continue over the entire life of the Plan. In addition, in the second quarter of 2016, EBITDA benefited from some non-structural events, particularly in relation to labour costs, connected to the reversal of the 66 million euros provision recorded in the 2015 financial statements, after the conditions for the payment of the performance bonus to employees were not met.

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

(million euros)

1H 2016

1H 2015

Changes

 

 

% of total

 

% of total

absolute

%

% organic

 

 

 

 

 

 

 

 

Domestic (*)

3,184

85.5

2,846

78.2

338

11.9

11.9

% of Revenues

43.9

 

38.6

 

 

5.3 pp

5.3 pp

Brazil

556

14.9

790

21.7

(234)

(29.6)

(12.3)

% of Revenues

29.9

 

29.4

 

 

0.5 pp

0.5 pp

Other assets

(11)

(0.3)

2

0.1

(13)

 

 

Adjustments and eliminations

(3)

(0.1)

1

(4)

 

 

Consolidated Total

3,726

100.0

3,639

100.0

87

2.4

7.0

% of Revenues

41.0

 

36.0

 

 

5.0 pp

4.6 pp

(*) After the change to Persidera’s mission, the Media Business Unit was incorporated into the Domestic Business Unit (Domestic Core) from 1 January 2016; in the absence of this change, Domestic EBITDA  for the first half of 2016 would have been 3,164 million euros.

 

EBIT in 1H 2016 was 1,687 million euros (1,788 million euros in 1H 2015), down 101 million euros (-5.6%) compared with 1H 2015, accounting for 18.5% of revenues (17.7% in 1H 2015, +0.8 percentage points).

Organic EBIT was up 12 million euros (+0.7%), accounting for 18.5% of revenues (17.5% in 1H 2015).

EBIT for the first half of 2016 reflected the negative impact of non-recurring items for a total of 82 million euros (122 million euros in the first half of 2015). Without these non-recurring items the organic change in EBIT would have been -1.6%, with an EBIT margin of 19.4%, an increase of 0.6 percentage points with respect to the first half of 2015.

 

Profits from discontinued operations/non-current assets held for sale in the first half of 2016 totalled 47 million euros (330 million euros in 1H 2015) and refer to the positive contribution made to the consolidated results by the Sofora - Telecom Argentina group for the period 1 January - 8 March (59 million euros), to which were added the effects of the sale that, when the related income taxes are included, had a negative impact of 12 million euros.

 

First half-year 2016 profits attributable to Parent Company Shareholders totalled 1,018 million euros (33 million euros in the first half of 2015) and benefited from, in addition to the trend of the margins indicated above, some items of a purely accounting and valuation nature, which do not generate any financial adjustments, connected in particular with the valuation at fair value of the implicit option included in the Mandatory Convertible Bond issued in late 2013 with maturity at three years (positive for 620 million euros, negative for 360 million euros in the first half of 2015, all figures before tax). In the absence of these impacts, the profits for the first half of 2016 attributable to the Parent Company Shareholders would have totalled approximately 650 million euros, in line with the figure for the same period in 2015, reconstructed on homogeneous terms.

 

Group headcount at 30 June 2016 was 64,852, including 52,498 in Italy (65,867 as of 31 December 2015, including 52,555 in Italy).

 

Capital expenditure totalled 1,983 million euros, 163 million euros less than in the first half of 2015. An investment efficiency plan was initiated in the second quarter of 2016, which will enable the company to significantly increase their efficiency with respect to high UBB coverage levels and service quality.  The investments by operating sector are as follows:

(million euros)

1H 2016

1H 2015

Change

 

 

% of total

 

% of total

 

 

 

 

 

 

 

Domestic (*)

1,575

79.4

1,506

70.2

69

Brazil

408

20.6

637

29.7

(229)

Other assets

3

0.1

(3)

Adjustments and eliminations

Consolidated Total

1,983

100.0

2,146

100.0

(163)

% of Revenues

21.8

 

21.2

 

0.6 pp

 

(*) After the change to Persidera’s mission, the Media Business Unit was incorporated into the Domestic Business Unit (Domestic Core) from 1 January 2016; in the absence of this change, Domestic investments in the first half of 2016 would have been 1,572 million euros.

 

The Domestic Business Unit posted investments for 1,575 million euros, 69 million euros higher than in the first half of 2015. This increase is attributable to the acceleration and growth of innovative investments for the development of new generation networks and services (+184 million euros), which accounted for 49% of total investments (39% in the same period of 2015).

 

The investments of the Brazil Business Unit posted a reduction of 229 million euros (including a negative foreign exchange effect of 127 million euros) compared with the figure in the first half of 2015; these investments were focused mainly on the evolution of the business infrastructure and the sales support platforms.

 

Cash flow from Group operations was positive for 671 million euros (positive for 701 million euros in the first half of 2015).

 

Adjusted net financial debt was 27,514 million euros at 30 June 2016, 236 million euros higher than at the end of 2015 (27,278 million euros). In the first half of 2016, the benefits obtained from completing the sale of the Sofora - Telecom Argentina group, with the receipt of the sale price and the deconsolidation of the related financial debt, together with the positive trend in operations, only partially offset the requirement deriving from financial management, payment of dividends and the effect of some disputes and the payment of sanctions of a regulatory nature, as well as the property project and the renegotiation of the leasing agreements. The level of debt was also negatively affected by the exchange rate fluctuation of the Brazilian real.

 

Net financial debt carrying amount as of 30 June 2016 was equal to 28,070 million euros (28,475 million euros as of 31 December 2015).

 

The liquidity margin at 30 June 2016 was 10,790 million euros, equivalent to the sum of "Cash and cash equivalents" and "Securities other than investments" for a total of 3,790 million euros (5,047 million euros at 31 December 2015) and unused committed credit lines for a total of 7,000 million euros. This margin covers the financial liabilities of the Group falling due for at least the next 24 months.

 

In the second quarter of 2016, adjusted net financial debt increased by 375 million euros vs. 31 March 2016 (27,139 million euros), due to the payment of dividends, some disputes and sanctions of a regulatory nature and the exchange rate fluctuation of the Brazilian real.

 

BUSINESS UNIT RESULTS

 
DOMESTIC

Revenues for the first half of 2016 totalled 7,247 million euros, 128 million euros less compared to the first half of 2015 (-1.7%), still confirming an improvement trend compared to the first part of the year (second quarter -1.2% vs. first quarter -2.3%). Revenues from services perform similarly to total revenues compared to the same period in 2015 (-120 million euros, -1.7%; second quarter -1.1% and first quarter 2.4%), with a similar recovery trend sustained especially by a structural improvement in Mobile revenues.

In particular, for the first half note that:

  • Mobile service revenues totalled 2,176 million euros with an increase of 14 million euros compared to the previous year (+0.6%); this confirmed the constant improvement trend already observed in the previous quarters (2Q +0.7%, 1Q +0.6%, 4Q15 +0.1%), thanks to better competitive dynamics.
  • Fixed service revenues totalled 4,971 million euros, a fall of 238 million euros from the figure for the first half of 2015 (-4.6%). This downward trend is wholly correlated with the reduction in revenues from voice services (-279 million euros due to the loss of traditional accesses), however this shows an attenuation trend compared to the previous periods. This contraction was only partially offset by the continued development of Broadband and Ultra-Broadband customers, which leads growth in innovative connectivity-related services (+59 million euros, +5.2%). The results of the Fixed segment were also affected by the reduction in the price of wholesale services; net of this impact (of 35 million euros), the fall in fixed services revenue would have been -3.9% vs. first half of 2015.

 

Revenues from product sales totalled 426 million euros in the first half of 2016, substantially the same as in the first half of 2015 (-8 million euros), but the remarkable growth in revenue from sales of smartphones (+46 million euros, entirely attributable to the sale of LTE devices, +69 million euros) supports the development of digital services (internet connectivity and entertainment services).

 

***

 

The Domestic Business Unit operates distinctly in two different reference environments; below an analysis of related revenues:

 

Core Domestic Revenues

 

Revenues totalled 6,736 million euros and fell by 2.3% (6,893 million euros in 1H 2015).

 

The performance of the individual market segments as compared with 1H 2015 is as follows:

  • Consumer: The revenues of the Consumer segment in the first half of 2016 totalled 3,572 million euros, an increase of 49 million euros (+1.4%) compared to the same period in 2015; this confirmed the recovery trend already underway in 2015, thanks to the structural improvement in Mobile revenues, as an effect of steady market share and the stabilisation of ARPU levels.

In particular, the following should be noted:

  • mobile revenues totalled 1,777 million euros and presented a significant growth trend compared to the first half of 2015 (+121 million euros, +7.3%), confirming the improvement trend of the previous quarters (2Q +5.8%, 1Q +8.9%, 4Q 15 +2.5%). Services revenues increased by 61 million euros (+4.1% compared to the first half of 2015), confirming the major recovery started in the last year (2Q +3.4%; 1Q +4.9%; 4Q 15 +1.5%), which may be attributed to an improvement in the competitive dynamics, with progressive stabilisation of market share and the constant growth of mobile internet and digital services to support ARPU levels;
  • fixed revenues totalled 1,772 million euros, 113 million euros less than the first half of 2015 (-6.0%), with stabilisation of the slow-down recorded in recent quarters (second quarter -6.0%, first quarter -6.0%). This contraction, in line with the contractions observed in the preceding quarters, is attributable to the loss of voice-only accesses (although this dynamic is attenuating, particularly in the last two quarters) and the greater pressure on ARPU levels, which is partly offset by growth in innovative services, thanks to the positive trend in the Broadband Customer Base and the growing penetration of the Fibre offers.

  • Business: the revenues of the Business segment totalled 2,203 million euros, 177 million euros less than in the first half of 2015 (-7.4%), 104 million euros (-4.9%) of which in the service component and 73 million euros (28.6%) in the product component.

Regarding the service revenues:

  • Mobile services revenues fell by 39 million euros (-6.7% than in 1H 2015). In particular, the contraction in traditional mobile services continued (-16.2% of the voice and messaging component, compared to 1H 2015), caused by the trend for customers to reposition on bundle formulations with a lower overall ARPU, and the migration of Government customers to the new Consip offer (the unit prices of which have been lowered), and only marginally offset by  the positive performance of the new digital services (+2.6% compared to 2015);
  • fixed services revenue fell by 66 million euros (-4.2% compared to 1H 2015): despite constant growth in ICT service revenues (+1.8%), in particular in Cloud services, the segment continued to suffer the effects of the slow economic recovery, the contraction in prices of traditional voice and data services, and the technological shift towards VoIP systems.

  • Wholesale: the Wholesale segment reported revenues of 866 million euros in the first half of 2016, a slight fall compared to the corresponding period of 2015 (-44 million euros, -4.8%), almost entirely attributable to a reduction in the regulated prices. Net of this impact (equal to 35 million euros), the downturn would be -0.9%, compared to the same period last year.

 

International Wholesale Revenues – Telecom Italia Sparkle Group Revenues

The 1H 2016 Telecom Italia Sparkle Group - International Wholesale revenues amounted to 649 million euros, an increase compared to 1H 2015 (+14 million euros, +2.2%). This result is due to growth in revenues for Voice services (+8 million euros, +1.9%) and growth in revenues from IP/Data services including Cloud and Data Center services (+5.3 million euros, +3.6%). The other lines of business remained substantially stable.

 

***

 

EBITDA of the Domestic Business Unit for the first half of 2016 totalled 3,184 million euros, an increase of 338 million euros compared to the first half of 2015 (+11.9%), with an EBITDA margin of 43.9%, (+5.3 percentage points higher than the same period of the previous year). The first half of 2016 was affected by the negative impact of non-recurring items totalling 83 million euros, of which:

  • 67 million euros for labour costs (24 million euros in the first half of 2015),
  • 16 million euros for charges consequent to disputes and fines of regulatory nature, and related liabilities, charges connected to disputes with former employees and amounts owed to customers and suppliers (369 million euros in the first half of 2015).

Without these charges, the organic change in EBITDA would have been +0.9%, with an EBITDA margin of 45.1%, up 1.2 percentage points on the first half of 2015 and a positive inversion of trend compared to the first quarter (+6.9% in second quarter of 2016, as compared with the same period in 2015, with respect to     -5.2% in the first quarter of 2016 compared with the same period of 2015).

 

EBIT in the first half of 2016 was 1,581 million euros (1,222 million euros in the corresponding period of 2015), an increase of 359 million euros (+29.4%), with an EBIT margin of 21.8% (16.6% in 1H 2015). The trend in EBIT reflects, primarily, the positive trend in EBITDA indicated above, and the 26 million euros reduction in amortisation and depreciation.

EBIT in the first half of 2016 suffered the negative impact of non-recurring charges for a total of 83 million euros. Without these, the organic change in EBIT would have been +3%, a margin of 23% of revenues.

 

The headcount, at 52,622, decreased by 22 from the number at 31 December 2015, 5 despite the incorporation of the Media Business unit, in the absence of which the decrease would have been 85 employees.

 

BRAZIL (average real/euro exchange rate 4.13001)

The revenues of the Tim Brasil group in the first half of 2016 totalled 7,674 million reais, down by 1,238 million reais (-13.9%) compared to the same period of the previous year.

Revenues from services reached 7,189 million reais, with a reduction of 547 million reais compared to 7,736 million reais in the first half of 2015 (-7.1%).

Revenues from product sales stood at 485 million reais (1,176 million reais in 1H 2015, -58.8%); reflecting a sales policy less focussed on the sale of handsets, as well as the impact of the Brazilian macroeconomic crisis on family spending decisions.

 

Mobile ARPU in the first half of 2016 was 17.2 reais, compared to 16.4 reais in the same period of the previous year (+4.9%).

The total number of lines as of 30 June 2016 was 63,988 thousand, a reduction of 2,246 thousand (-3.4%) on the figure at 31 December 2015; the market share at the end of May 2016 was 25.6% (25.7% as of 31 December 2015).

EBITDA of 2,296 million reais was 321 million reais lower than the first half of 2015 (-12.3%). The fall in EBITDA is attributable to the lower revenues, partially offset by the effects of some efficiency actions, and by lower contributions to other operators; however, labour costs increased (+3.4%), due primarily to the adjustment of salaries to inflation, and non-recurring items for 34 million reais for early retirement costs.

The EBITDA margin was 29.9%, up 0.5 percentage points on 1H 2015.

EBIT amounted to 498 million reais a downturn of 1,404 million reais on 1H 2015. This result reflects the lower contribution made by EBITDA and the effect of greater depreciation and amortisation (+217 million reais). Moreover, EBIT in the first half of 2015 benefited from the capital gain of 918 million reais connected to the sale of the first tranche of telecommunications towers, compared to a capital gain of 37 million reais in the first half of 2016, from the sale of the fourth tranche.

The headcount stood at 12,087 employees (13,042 as of 31 December 2015).

EVENTS SUBSEQUENT TO 30 June 2016

Strategic partnership with Fastweb to speed up the creation of the fibre network (FTTH) in 29 cities with an investment of 1.2 billion euros

TIM and Fastweb have entered into a strategic partnership aimed at speeding up the creation of the ultrabroadband infrastructure with FTTH (Fiber to the Home) technology in 29 Italian cities. The partnership envisages the establishment of a joint venture with 80% of the capital held by TIM and 20% by Fastweb.

Specifically, the new company will handle the creation, on behalf of TIM and Fastweb, and the subsequent rental to them, of a secondary network and the vertical segments up to user homes. The new company's business plan therefore envisages connecting around 3 million homes with FTTH technology within 2020 which will allow connection speeds of 1 Gigabit per second. The total investment is 1.2 billion euros which the joint venture will finance in part with equity and in part with debt. TIM's share is already included in the CAPEX of the 2016-2018 Business Plan.

Moreover, as part of the partnership, TIM will buy from Fastweb over the next 18 months the infrastructure with FTTH technology that will allow around 650 thousand homes in 6 cities to connect to TIM's network one year earlier than envisaged in the Business Plan.

The strategic partnership will allow the two companies to create latest generation extremely high speed infrastructure more rapidly, at the same time permitting synergies in the investments. This is how TIM and Fastweb intend to combine their efforts to create the ultrabroadband infrastructure that will allow Italy to achieve the objectives of the European Digital Agenda even before the deadline indicated by the EU.

TIM and Fastweb will study the possibility of extending the partnership to other collaboration sectors too in order to jointly develop passive infrastructure and technologies for the rapid spread of ultrabroadband.

 

OUTLOOK FOR THE 2016 FINANCIAL YEAR

 

As forecast in the Business Plan, there was a constant and gradual improvement in operating performance in the Domestic perimeter in 2016, combined with a progressive reduction of the debt, thanks in part to the conversion of the Mandatory Convertible Bond (contractually set for November 2016 in the amount of 1.3 billion euros).

The dynamics of commercial and business development, accompanied by a strengthening and considerable acceleration of the efficiency and cost cutting programme, represent the foundation for a further improvement in operating performance, with the aim of achieving low single digit organic growth in EBITDA within 2016.

 

In detail, TIM continues its transformation and transition from traditional Telco to Digital Telco, enabler of the country's digital life: a business model based on the development of innovative infrastructure and an excellent quality of customer service, increasingly aimed at disseminating premium services and digital content.

  • In the Domestic Mobile segment, in a competitive context where there has been a progressive cooling of the pricing lever, greater attention paid to level of service and strong, continuous growth in data consumption, TIM will be focussing on the ever-greater adoption of 4G by its customers, fostered by the growing penetration of smartphones and bundle offers with distinctive digital contents. This will enable the Company to increase ARPU and strengthen its market leadership.
  • In the Domestic Fixed segment, TIM expects to reduce the decline in the number of customers as from 2016, thanks to the acceleration in the dissemination of fibre, convergence and the strengthening of the positioning of services with digital content (Video, Music, Gaming and Publishing). TIM will also continue to work with Italian businesses in their digital transformation process, with its ICT and Cloud services, taking a differentiated approach depending on customer base characteristics, aiming to achieve a distinctive positioning in the vertical markets deemed to be of greatest interest.

In Brazil, the Plan includes and suffers the changes to the macroeconomic, political and market context seen in recent months.

In this context, TIM Brasil has set itself the objective of increasing its market share on revenues and improving its profitability (EBITDA margin), due to a major investment plan (in particular in 4G, where TIM is already leader today), and to a renewed commercial and competitive positioning and great attention to efficiency as a structural element necessary to give balance and financial sustainability to the Plan.

In particular, the latest forecasts on the economic outlook show a further, progressive deterioration for the whole of 2016 of its main indicators: a downturn of almost 4% is expected in the GDP and an inflation rate - also following a series of interventions raising tariffs in regulated sectors - that will remain high and very volatile. This acceleration in inflation may have an increasing impact on the purchasing power of households, consequently worsening financial conditions, particularly for the low income brackets. The exchange rate with the dollar also reached and exceeded 4.0 Reais/USD in 2015, with growth forecast during the Plan up to 4.20 Reais/USD.

The whole of the telecommunications segment (and prepaid Mobile in particular) is very exposed to this scenario, with a decline in the comprehensive market value also as a result of its substantial maturity and saturation. In this context, Oi, the fourth largest telecommunications group in Brazil, with over 65 billion Reais of debt, having found it impossible to reach an agreement with its creditors, filed for bankruptcy, entering into receivership, with still unknown repercussions on competition and on the market.

The evolution of the market presents and confirms a trend of constant, strong growth in data usage, with an intensity that is even greater than that recorded in the other major countries. This phenomenon goes hand-in-hand with a simultaneous reduction of voice traffic and messaging, driven by the aim of optimising and reducing customer spending, as customers privilege use of the services offered by the OTTs as an alternative to traditional methods of using services.

***

Amending the previously published financial calendar, we hereby announce that the Board of Directors meeting called to approve the Financial Report as at 30 September 2016 will be held on 03 November 2016.

Reorganisation of IT business

The Board of Directors has approved the start of the process to de-register and re-organise the IT business, through merger by incorporation of wholly owned subsidiary Telecom Italia Information Technology S.r.l. into the Parent Company.
The company expects to complete the incorporation process by the end of the year.

Corporate governance issues

The Board of Directors, to support the turnaround programme the Company has embarked on, resolved to create a Strategy Committee, to be composed of the Chairman of the Board of Directors Giuseppe Recchi, the Chief Executive Officer Flavio Cattaneo along with the Vice Chairman Arnaud Roy de Puyfontaine and Directors Davide Benello and Laura Cioli.

The new Committee will:

  • ensure support on topics of strategic importance;
  • undertake preliminary assessments concerning the strategic choices of the Group at the request of the Chairman of the Board of Directors and of the Chief Executive Officer, and in coordination with the prerogatives of their duties and powers;
  • supply opinions and formulate recommendation on the business plan proposals to bring to the Board of Directors.

The updated version of the Corporate Governance Principles of the Company and the Regulations for the operation of the Strategy Committee are being published on the company website www.telecomitalia.com.

***

 

The Board of Directors has also appointed the Lead Independent Director for the current year, selecting Davide Benello to succeed the outgoing Lead Independent Director, Giorgio Valerio.

As has been the case for the last two years, the term of office of the Lead Independent Director is one year, expiring at the Shareholders' Meeting called to approve the financial statements of the corresponding year.

***

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

Milan, 26 July 2016