Telecom Italia SpA
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Telecom Italia SpA
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Good afternoon, ladies and gentlemen, and welcome to TIM Group First Quarter '18 Results Call. Alex Bolis speaking, Head of IR. Our CEO, Amos Genish, will conduct the presentation together with our CFO, Piergiorgio Peluso. A Q&A session will follow. After drawing, once again, your attention on our safe harbor disclaimer on Page 1, I'm pleased to hand it over to Amos.
Hi everyone, and thank you, Alex. Let's start with Page 3 in which we summarize team financial results for the first quarter of 2018. As you can see, the group posted solid results reported by the initial execution of the -- our new plan. Consolidated service revenues were up by 3.1% year-over-year while EBITDA was 1.8% up. Group EBITDA less CapEx cost was impressive, standing at 12.2% year-over-year.
Domestic service revenues showed a healthy performance of plus 2%, while domestic EBITDA was slightly below parity due to delays with the unions in renewing our Personnel Solidarity Agreement, which expired at the end of 2017. As you have seen today, we just started the cash integration or Extraordinary Redundancy Fund procedure with the objective to address about 2,800 full-time redundancies. We are looking forward, of course, to resolve this matter with all relevant parties as soon as possible.
Even including this temporary negative, year-over-year personnel-related effect was about EUR 20 million for the quarter. The underlying domestic EBITDA trend net of one-offs shows a 1.3% positive year-over-year. Please refer to the footnotes and to the annex section table for more details on that matter.
Brazil performance continues to be impressive, both in service revenues and EBITDA. Cash generation stepped up materially as suggested by the 40%-plus year-over-year growth we show in EBITDA less CapEx. This supports our 2018 plan, increasing shareholders' remuneration for TIM Brasil about 3x the BRL 300 million level amount paid out in 2017.
In this positive context, as you know, we are defending the interest of the company against the EUR 74.3 million Golden Power fine that was notified on May 8. We are firmly convinced that TIM had no obligations to notify the Italian government of any control issues related to Vivendi and we'll appeal accordingly.
Anyhow, we have posted the full provision for the notify amounts inside the EUR 95 million total nonrecurring cost registered this quarter at group level, which also includes a minor litigation, regulatory and other items.
Let's move now to Page 4, where we show the usual breakdown of total group revenues, which this quarter totaled EUR 4.7 billion, up to -- up by 2.7% year-over-year. On domestic, we highlight the impressive 4.7% year-over-year growth for mobile. As we will detail shortly, fixed retail service -- retail service revenues posted a positive performance of 2.3%.
Notwithstanding Sparkle negative performance, total domestic top line showed a healthy 2% growth year-over-year. Brazil posted a very satisfactory 4.8% positive year-over-year growth in the top line supported by more positive mobile and more fixed broadband.
Let's now take a closer look at our domestic operation. On Slide 5, we show some details about mobile where we achieved impressive results this quarter. One, TIM was #1 in mobile number portability in the quarter. Second, mobile broadband LTE users were up 158,000 and 354,000, respectively. And last, active customer base grew 1.4% to 27.4 million users. All this was reflected in the strong revenues year-over-year performance, close to 5% up on total mobile revenues and -- to 4% up on service one with consistent growth in ARPU.
We can now move to Slide 6, where we give you some details of the positive evolution of fixed. On the right, we highlight the very solid quarterly ultrabroadband net adds performance of 634,000 net additions, almost equally divided between retail and Wholesale. TIM coverage and quality continues to support our premium player position from which we shall continue driving fiber adoption supported by the following: new, simplified and flexible offer portfolio on retail; then revised commercial approach in Wholesale; optimized channel mix among direct online installs with smart targeting; reinforce convergence proposition, focusing on contents and FMC, fixed mobile convergence; new end-to-end delivery process aimed at better productivity and customer satisfaction; and last, continued coverage improvements with the most appropriate technology mix. Overall, the fixed access remain unchanged with Wholesale net adds compensating some retail erosion and with a clearly positive performance in broadband.
Moving now to the left side of the slide, we see how the premium growth we are pursuing is visible from the performance of fixed ARPU Consumer up plus 2.7% year-over-year and fixed ARPU broadband, which grew double digit. As we just mentioned, we are also moving on the convergence. At the end of March, we launched TIM 100%, which gives 5 giga of free data per month to every mobile customer who also has a fixed line with TIM. Then in April came TIM Connect, which through an attractive modular approach, offers fiber together with a reinforced mobile component, better monetizing our pay-TV offering.
In the last quarter, TIMvision fixed base customer grew to above 1.4 million. We'll continue to support its expansion with high-quality content, including free-to-air channels with catch-up features, always within a financially disciplined approach.
We now move with Slide 7 to TIM Brasil. The strong results, you already know, just speak for themself. I only wish to point out our continuous mobile ARPU growth, which posted plus 13.8% year-over-year performance in Q1 and was supported by 3 million postpaid net adds. In the past 12 months, again, robust performance of our fixed broadband business have delivered a very healthy EBITDA margin, which was 35.2% for the quarter, up by 3.6 percentage points year-over-year.
I will now ask Piergiorgio to update us on OpEx, CapEx and debt performance.
Thank you, Amos, and good afternoon to everyone. Let's start with domestic OpEx. On Slide 9, we show how our efficiency program met operational priorities in the first quarter with measured improvements in the way we're running our cost base. Savings were accomplished throughout all the baseline, driving resources from supported commercial levers and implementing further discipline on the rest.
The net result was a year-on-year increase of EUR 44 million in addressable OpEx base, excluding interconnection and other as we're aiming to attract new customers, consolidate the existing ones and increase market penetration in fiber-optic products. Here are some underlying details. EUR 28 million year-on-year in commissioning, net of the change in modem-related impact, explained in the footnote, were mainly related to a further successful commercial push. Mobile gross sales increased by 17%. Minus EUR 3 million year-on-year industrial cost were achieved notwithstanding larger provisioning volumes for the network. G&A, IT and labor net performance was impacted by EUR 24 million year-on-year in labor costs, mainly because of discontinuity in solidarity, an agreement that support full-time equivalent management with shorter working months. This measure expired at the end of last year and, as Amos mentioned earlier, is in the process of being renewed or structured into similar agreement of customer integration.
Fixed cost reduction contribution is in the area of EUR 100 million on a full year basis. Outside of the efficiency area, EUR 43 million in other, mainly represented by interconnection, include the Roam-like-at-home impact and EUR 19 million of vendor rebates in first quarter 2017.
On Slide 10, we now move to domestic CapEx. As we know, our fiber coverage now reaches about 80% of the country. It will still gradually increase but a different pace that we should be following from 2018 onwards has already started to generate a year-on-year reduction of EUR 98 million in domestic CapEx for the quarter.
At the same time, we are strictly monitoring and controlling capital allocation on a daily basis, scheduling projects based on progress, updating strategic priorities and IRR evaluation. On the slide we detail the year-on-year changes of the various main cluster.
Commercial and customer division grew by EUR 17 million, mainly related to commissioning and fiber installation costs paid by the customer. Fixed and mobile network were down in total by EUR 85 million following, as we said, a more selective and focused residual coverage plan both for in general and LTE. IT related decreased by EUR 33 million, mainly due to the careful streamlining of our running costs.
In Slide 11, we show how the group net financial position evolved during the quarter to EUR 25.5 billion, EUR 0.2 billion higher than year-end '17 figure. It was actually EUR 0.15 billion lower excluding the VAT split payment effect, which absorbed the EUR 379 million worth of working capital in Q1 as shown in the pink box on the left side of the slide.
A change in Italian tax law eliminated from July 2017 the possibility to net out VAT payments, which are now due on a gross basis. So we cannot compensate anymore VAT debit and credit, and we have to pay the full VAT debit every 90 days.
As TIM settles year-end VAT advance payment based on the average of the 3 previous quarters, given the timing of the tax law change, the amount to be paid in December 2017 was low. Therefore, as expected, there was a balance during February 2018 that impacted our net debt for the quarter. In the future, there will be no further drag from this item.
In second half '18, we will compare the 2017 quarters, which follow the same methodology, but this will not reduce the working capital absorption in Q1. As all the other elements impacting debt are self-explanatory, I will now pass it back to Amos for him to complete the presentation.
Thanks, Piergiorgio. Let me move straight ahead to comment our progress on transformation. As you all know, on March 7, we presented our strategic plan for 2018-20, which is based on the 4 key pillars we show on Slide 13 from customer engagement through digital and agile customer journey, continue our leadership positioning in all key markets, accelerating cash flow generation while building an agile organization. With that, we have also presented a very detailed strategy for each of the business segments as you can see in the Annex section on Page 22.
Moving to Slide 14. I'm pleased to inform you that our transformation plan is on track following the delivery of solid results. Overall, we achieved already 27% of the operational and financial goals of our transformation agenda for 2018.
On the right side of the slide, you can see how the major goals are divided in each of the key areas of the company. I will not go through each one of them, as you have them already in front of you. I will only mention some of the key ones.
In the commercial area, we can see the impressive ramp up of fiber migrations that have already been mentioned in presentation, as well as the launch of new offers aimed at driving more convergence in customers as well as more multi-cloud and hybrid services on the business cluster. On Wholesale, again, the migration to fiber played a leading role as we reduced delivery time and increased productivity.
On cost efficiency, there are already some signs of improvement, especially in the CapEx area while some other initiative that will take longer to bring results in particular on the OpEx side. On digital, we already did some significant restructuring. On the front end, we are progressing significantly in building a new interface for customers. More to come in the next few months while we are substantially [indiscernible] our back offices with the right IT systems. This help us to show some initial results in online acquisition.
In addition, we launched the first few big data use cases to help us to make more intelligent decisions. And last but not least, we started working with a new organization that is less silos and more result-oriented. And it's already bringing, I believe, a new momentum for the company.
So summarizing this page, we are progressing well on transformation. We believe that our actions will bring more actual numbers as we go on in the second half and in 2019, but it's a good beginning.
Moving to our final takeaways for this presentation. There are 2 key things to highlight. We posted solid results for the second quarter of 2018 and, as I mentioned, fully support our transformation, fully support the main goals that we have targeted for the plan.
Thank you very much for your attention and back now to Alex.
Thank you, Amos. The Q&A session is now open. [Operator Instructions] Let's start now.
[Operator Instructions] The question comes from Mr. David Wright from Bank of America.
My question is just on the shift back from 28-day to monthly billing. Vodafone, obviously, flagging a quite significant headwind from that particular dynamic and not being able to necessarily offset the price difference in the very short term. Could you talk about what measures you have taken? And any regulatory response to those and how that could impact the phasing, perhaps, of growth over the next couple of quarters?
Thank you. Let me just try to summarize the situation. The 20 days billing matter has definitely created some negative impact. It is not over yet, and this will still create some further bumps mostly in the second quarter. But let us focus on the positive side. Fiber net adds are moving ahead strongly with more than 600 additions -- 6,000 additions. Mobile service revenue is now record high at 3.7 and with our -- about 80% fixed ultrabroadband coverage already achieved, there will be an important CapEx benefit this year. So we expect for EBITDA performance to build up in the second half with our renewed labor initiative agreements to follow. So in a nutshell, I will say yes, clearly there is some effect in -- especially in the second quarter as we had to change the increase from 8.6 to lower rates in order to align ourselves with the antitrust decision. We had some delays in some of the repricing that had some effect. But this mostly will be affecting Q2, some drag on -- for Q3 and 4, but mostly Q2. It's -- I would not see it as a permanent, clearly, gaps but more of a one-off almost that we'll have to live with for the quarter. Anyhow, things have been resolved, I believe. And we are back on track from Q3 on with respect to the right pricing level in the market. And I think we don't have any other significant issue with respect to this. There's clearly some other left over to be discussed with the regulators. There's the issue of should the tellers, in general, should give rebate back for the period being discussed and some other minor items. But generally, I believe, the industry moved on from this issue, still some things to be resolved, but we are moving on, looking forward for a new scenario with respect to pricing increase and repricing.
Could I just follow on? So have you guys actually put through any corrective pricing measures? And how have -- how has the regulator responded to those? I'm just trying to understand the current state of affairs.
I mean, let's just go back to the history of that. When the move was done in beginning of February 2017, TIM, which is, I believe, one of the last operator to adopt that measurement from 30 to 28 days billing. It's reflected the price increase, yes, about 8.6% that move. When we been forced to move back to 30 days, companies repriced with a similar 8.6% embedded. So it's not additional or increase of price, it was just, I think, try to equalize the annual pricing to 12-billing cycles versus 13-billing cycles, yes? So there was no price increase actually with the change from the customer point of view. It was just the cycling were different. So repricing was not done and will be done mainly as we do annually. But this time will be done more in the third quarter. We did not did it, as usually, in the second quarter in full-blown manner because of all the debate on the 28 days billing. So there is some delay on that as well.
Next one comes from Dhananjay Mirchandani from Bernstein.
I normally play by the rules and ask one question only. I'd appreciate it if I could sneak in two. Now so first, the political landscape in Italy is quite fluid. I mean, what is your reading of the common telecoms' infrastructure policy of the Lega Nord and Five Star? And how does this potentially impact your stated position on the control of TIM's fixed infrastructure? That's the first question. The second one is, your fixed and mobile ARPUs, they continue to expand although you're incurring human line losses in mobile and your broadband retail subscriber growth has been rather anemic in the last quarter, at least. I mean, how do you respond to concerns that this commercial strategy is setting you up for a material repricing risk in both businesses given that you have a new entrant in the form of Iliad at your doorstep?
With respect to the first question, we had the chance to read the draft of agreements that been circulated between the parties -- political parties. There's a chapter about communications infrastructure and so on. We did not see anything relevant for the telecom sector in that draft, so I cannot really comment beyond it. But clearly in that draft agreement being circulated, we did not see any specific comments relating to the sector. So we'll have to see once this government will establish what policy they will make. But I believe, again, all governments have the same and the best interest is continue letting the market to evolve in the best manner possible and allow companies to be able to invest and generate cash flow in order to invest in infrastructure to support digitalization of Italy. So I would not be concerned about any change with that general direction we saw from previous governments and other places in Europe. With respect to the erosion of number of clients while ARPU is increasing, I would say, generally, TIM has a premium position. We are very confident in that position. I think we are -- yes, pricing higher than most players. We are not participating in many of the sometimes tactical campaigns and price reduction of other players. And I think that's helping us to continue boost healthy ARPU -- growth of ARPU. But also, as you can see, in MNP, we are #1 in the market, which means if you look on mobile, you can see that we are winning in that sector. Also, we had the most robust revenue growth compared to other operators in the market or at least the big operators. So clearly, I mean, it show that our strategy, tactics and our quality of service, premium product, retail channels' presence is delivering the results we expected from that. Clearly, we might lose lines that are low ARPU. And that's not our biggest concern at this stage, especially not on mobile. Looks on active users, which is really what's relevant, in active user, we grew 1.4%. Yes, on fixed, we are losing mostly ADSL and voice line, as the trends we saw in the last many years. I think most incumbents in Europe and the world are having the same phenomena. But we are really more than compensating it in ultrabroadband net additions that has higher ARPU and higher loyalty. So overall, again, it's normal phasing out of voice and ADSL while we are moving more to broadband and ultrabroadband. And then mobile, I think, 4G, that expanding dramatically that require higher data package. Again, it's a very data-driven strategy. We have the best quality networks. Since December, we are #1 customer satisfaction index in mobile consumer. All of that is helping us and supporting the outcome we saw in Q1. Thanks.
Next question comes from Mr. Singh Mandeep from Redburn.
Just have one question, please. The impact of IFRS in the quarter was quite big. Could you sort of help us understand, should we expect a similar sort of drag for the remainder of the year, around EUR 60 million? And can you just help us understand how we should think of that as we move further down the cash flow statement? I mean, is it going to be a wash in CapEx in operating free cash flow? Is it going to come in -- or is it into net cash flow, it is something we'll see in working capital? Because just wondering whether the headline EBITDA or the base of EBITDA we need to be looking at under the new accounting standard is a few hundred million lower than we currently know.
Yes. Thank you for the question. So first point, on the cash flow, so there is no impact, so there will be no impact on the various metrics equity, free cash flow and coming from the IFRS by definition. In terms of the impact, we have, let's say, 2 components, as you know, IFRS 9 and IFRS 15. IFRS 15 basically is different way of considering the fair value of the equipment, and so this explain the impact on service revenues where we have lower service revenues, particularly in mobile because we have a bigger value of the -- bigger impact of the equipment compared to the -- as a consequence of the application of IFRS 15. And then we have also -- but this has -- it's an impact that is potentially replicable in the next quarter. And I mean -- I think is reasonable to consider for the purpose. In terms of the CapEx and net working capital impact, the other impact of the IFRS 15 is related to the commission, particularly on mobile where -- particularly in the certain offers where we have been locking impact. This, as a consequence of the IFRS 15, will imply less CapEx and will be deferred charges that will impact on the net working capital, which means that if we look at our profit and loss where we see the impact of the new principles, EUR 76 million, you see that the OpEx negative for $36 million is more or less compensated by lower depreciation for $34 million. It is exactly the impact related to the commission on mobile that we'll have -- let's say, will be lower CapEx and greater OpEx over the future, while the revenues impact are related, as I said, as a difference of the fair value of the answer and equipment in the contract and the results are a low component related to IFRS 9, but this is a small number. I hope it clears the...
Can I just follow up, please?
Yes.
Just so -- There was a lot of information there. And I'll double-check everything in the transcript later. So I think...
If you want, we can maybe go off-line, because it's rather technical. But of course, I'm happy to answer.
Of course, but just one -- to test my understanding on one point, the impact in the first quarter should be similar in the remaining quarters. About EUR 240 million a year for the full year, is that fair?
I would say it's reasonable to consider. It is not leaner, of course, but it's more or less something that you can consider also for the next quarter, yes.
Next comes from Mr. Mathieu Robilliard with Barclays.
I had a question with regards to Wholesale. So obviously, you posted very strong trends in terms of Wholesale NGN net adds. I wanted to understand if in that you include both Wholesale in your FTTC but also subleasing SLU -- sublet and building, sorry, to companies like Fastweb, for example. And if you could give us a bit of a breakdown between the two.
I think it's clearly that the OLOs are pushing us, well, fibers like us, which is really good news. I think the increase of 300,000 in Wholesale is a positive thing. As we -- ARPU on fiber is higher than ADSL and that migration is positive for us in the market as a whole. I believe this momentum will continue because the OLOs are focusing on fiber migrations and we are pleased to see them moving to fiber. As long as they are moving to fiber, I believe they are more lock-in into such arrangement for longer period because the customer are satisfied and churn is lower. And that's where we would like to see our clients, really moving fiber less than ADSL. We see significant growth in all the OLOs in the last quarter. We saw Fastweb, Vodafone, [ Wind / Tree ] net adds are really -- it's impressive numbers. So we'll have to continue still going forward.
Sorry, if I can follow up.
Yes, of course, Mathieu. Go ahead.
So actually the reason for the question is, if you do Wholesale net adds, which are LS -- sorry, SLUs, the ARPU I think is reasonably low, probably EUR 5 or EUR 6. So obviously that is a slightly different economic and revenue impact than if you are able to Wholesale the whole FTTC. So that was kind of why I was asking the question from how we should think about the Wholesale net revenue trends in the future.
Yes, Mathieu, Alex answering this one. Clearly -- we have clearly considered all these aspects you're saying. Obviously, sub-loop is relatively lower than the full loop or clearly full VULA in fiber. But this is all well-analyzed in our plan. This is moving on clearly when we envisaged our Wholesale business to grow, it considered all these different facets. And this is why overall in the plan we have an optimistic view for our Wholesale business taken as a whole. Remember, that when we presented the plan, we were saying back to growth. So it is clearly a different mix. But there's a growing numbers, there's a growing business, and this is -- it's going on perfectly as expected.
The only I think clearly on -- when you look on that type of product, it's clearly stable and growing and that's positive. There's always the issue of the -- also price reduction that's happening year-over-year on certain product. And that's where we have clearly the right focus there as we talk with the regulator AGCOM and hopefully we'll be able to find a reasonable amount of how such reductions would be happening year-over-year. It's very hard to tell you exactly how this will develop the regulatory services that might be needed to be -- continue discuss. So again, generally, what we see is clearly have stable revenues for Wholesale. Different components, but stable.
Next one comes from Mr. Luigi Minerva from HSBC.
I will try to squeeze two questions, if possible. The first is a very general one to Amos and whether you feel you have the full support of the new board to deliver the 2018-20 business plan. And the second is more technical and it's about understanding what's happening in terms of the fixed line, why fixed line losses in Italy? Because if I look at the trends over the last few quarters, we basically have gone -- in the end of 2016 the pace was between minus 80,000 and minus 100,000. Then we had a dramatic improvement in Q1, Q2 and Q3 2017 where the line losses were around between 45,000 and 55,000. And now we've gone back up to almost 200,000 line losses in this quarter. So can you just explain what is happening? Maybe also going back in time.
Thank you. The first question is very simple, I think. First board meeting we had, there was a clear statement from the Chairman about needing support for management and the plan. So I don't think we should revisit it every time we talk. It's clear, it's there, and I feel very comfortable in moving forward with what need to be done. With respect to second question, as I said, there's no doubt. There was, clearly, increase in line losses in the last 6 months. It -- various reasons for that. I believe one of them is as we move in businesses to more broadband and ultrabroadband, yes, fiber. We're migrating many just voice lines to voice over IP. So that's clearly a migration we want to have. So remember, we are in the plan to triple the number of fiber of the Business section from 300,000-plus to almost 1 million. So there is a lot of work to be done. And in line of fiber business is at the end of the day migrated to VoIP. Second, I believe there is a general effect of the 28 days and the general impressions on customers and churn probably was higher. Q4, Q1 with all the debates about the 28 days. That could be another factor that might affect the churn. We are focusing a lot in retentions and analysis of such a churn. And I believe that with time we'll bring it back under control, although there is always the natural churn that is expected to have in this type of business.
So just quick follow-up. You think we can go back to more normalized line losses level in the rest of the year?
I will say that gradually, we expect to see the peak of Q1 being reduced over time to whatever you call normalized level or not, I mean, but a lower number, that's our expectation.
Thank you, Luigi.
Next question comes from Mr. Jerry Dellis from Jefferies.
I just had a question again on the domestic fixed line business, please. When we look at the trend in retail fixed service revenues in the last quarter, you reported 2.3% year-on-year growth compared to a decline of 1.6% in the fourth quarter. I just really wanted to understand what you think was really the driver of that. Looking through the spreadsheet, the line item, which seems to have changed quite a bit, is the one called business data. It would be useful to understand if there was anything perhaps nonrecurring in nature there. And then if I could quickly add on, please. I believe you returned to 28-day billing in the mobile business at the start of May and in the fixed line business from the beginning of April. I wondered whether -- what the initial, for the customer, reaction has been and whether you've observed any material effect of perhaps customers trading down to cheaper plans in order to make some economies.
I will start with the second question, and then Piergiorgio will tackle the first one. But -- however, again, I mentioned 28 days was an episode we would love not to have as a sector or as a company. There was various interpretations by different regulators and by different companies. We did what we believe was supposed to be right. However, we had to, again, collect it again as the different interpretation by the regulators on that change. But again, as I mentioned, I think now we are now on track with the changes needed to be done. It could, as I mentioned in the previous questions, it could affect sentiments. And that sentiments could affect churn, higher churn. It's hard to really pinpoint if that's exactly the only reason or the -- but we hope it may be the only reason or the major reason because now that this issue has been winding out, we will hopefully see churn back on a normalized level. But there again, it's -- I mentioned, the 28 days episode had a different effect. One of them is higher churn as we saw in Q4, Q1. Hopefully, Q2 and hopefully, clearly more in the second half, we will have a better progress on this front. Now we'll let Piergiorgio to discuss the first question.
Yes -- no. I think that Amos already covered the point that, of course, it's the intent of retail evolution, which is related more or less, to the impact of the 28 days that in consumer fixed that was launched in June 2017. And this explains probably your point there are no extraordinary items. This is just a comparison point.
Could I just follow up? As...
Jerry, I -- no. Thanks for your interest. But there's a lot of people in list for questions. So I would ask you to defer to a later Q&A with Investor Relations so that we can open to the other participants, if I may, Jerry. Okay? I will take this question later, your follow-on later. Thank you.
Next question comes from Mr. [ Kuh Wolf ] from Santander Asset Management.
Yes. Just one question on the interconnection expenses. So even considering the rebate, EUR 19 million rebate last year, the number is still massively up. So if you could explain what's the reason why that number has gone up that much.
The line is not excellent. So may I ask you to maybe repeat this?
I have a question on interconnection expenses. So even considering the EUR 19 million rebate, which you got last year, in first quarter, it's still up by around EUR 24 million including -- excluding this -- taking that into account so if you could explain what's the reason for that material increase in the interconnection expense.
I guess, since we really can't fully understand the numbers, if I may ask you, again, like with Jerry, if you could please write me an e-mail with these details.
I did not understood the point. Because if I remember as -- understood correctly, you're referring to the rebate point. The rebate in the first quarter 2017 were booked for EUR 19 million, and there is no similar booking for rebate in the first quarter 2018. I don't know if this is what -- if this was your question.
Yes, but my question was on interconnection expenses. I'll follow up with IR.
Thank you very much, indeed, for accommodating that.
Next question comes from Mr. Georgios Ierodiaconou from Citi.
It's again on the 28 days, and I apologize for that, but I just wondered similar to a question asked earlier, I think you touched a lot on the KPI implications. If you could perhaps give us any indications on how should we think about the financial impact going into the second quarter when you anniversary the benefit. Are you still confident that we can see growth in the retail service revenue in fixed? And perhaps again, on the financial impact, I know you will -- probably you have your reasons to expect that these penalties will not come through. But if you could give us an indication even as you come where to go ahead with forcing you to rebate customers. And also with functions on the mobile price changes, can you give us an indication what kind of numbers are we looking at in terms of the financial impact?
I will really not get into a very detailed analysis of the 28 days or any guidelines for quarter. However, I will say that the 28 days episode has an impact of, I will say, the tens of millions of euros over the year. And that hopefully will give you some directions about that. About possible rebate, we absolutely believe as a sector, as a company that there is no any solid ground for such request. But clearly, we might be entering into such positive discussions, so a mitigation. But we are very comfortable with our position. With this, I would suggest to move on beyond the 28 days to other questions. Okay? Thank you.
Thank you very much, Georgios.
Next question comes from Mr. Andrew Lee from Goldman Sachs.
Yes. I had a question just on the -- on Elliott for you, Amos. Elliott's taking the 10 seats in the board, and you are staying. But I wonder if we could just drill down into what agreements or resolutions you have taken with the board to give you the confidence that you have the authority and support to continue to fulfill your role. And maybe if we could refer particularly to fixed network ownership within inorganic strategies and any views on what -- on the dividends absent the awards.
Yes, thank you. As you know, management has already met with the new Board of Directors, which is highly qualified and composed by highly experienced individuals. I believe they will be supported for the value-building embedded in digitizing plan, adding places -- I mean, important contributions to that, clearly leveraging on their expertise. New committees have been formed just yesterday towards the strategy, controlling risk, nomination of remunerations with the internal committee focused on monitoring any related party was also formed. So I think it's a very good start, yes? Moreover, I will say that I was very clear about that. I'm here for the long run. I believe that our plan is fully endorsed by the AGM, as by all the main shareholders and as well has been stated by the Chairman of the Board and the board. So I will continue transforming TIM together in the next coming years, and I'm really optimistic about the possibility of such transformation for TIM going forward. Thank you.
Could we please -- particularly to some fixed network ownership, obviously it's a -- what seems to be a contentious issue. What's giving you the confidence that you won't have to fully -- there won't be pressure to fully divest control of that asset?
The legal separation process of our fixed asset networks was notified to AGCOM on 27 of March. Related consultation is set to start in June. Its perimeter has been defined, and all the related process is moving on. Clearly, we can't go into more details what is the scope. But it's -- clearly from the central to the clients, that parameter is well-defined, clearly has defined the systems and number of people and all of that. We expect really to end the process by the end of the year. That's the time line. And I think we are moving well. I've worked clearly. We'll have to expect and to see what the regulatory framework has been defined for that NetCo. We are not committed to such NetCo unless regulatory framework will be viable for such entity. We'll make it clear, we don't want any extra benefits or larger dividends. We just want to have a fair regulatory that make this company viable going forward and extend the loan and have the resources to invest in CapEx. So clearly, we continue to see that this is a voluntary process that need to be defined well by the regulator, making sure that the definition of the framework is what is needed for such an entity that will be on a stand-alone entity without the umbrella of TIM Group. So that's where we are. And we are looking forward for the public consultation that probably will start in June. Thank you.
That answers your question, Andrew.
Next question comes from Mr. Giovanni Montalti from UBS.
There has been an interview from the Chairman of the Flash Fiber, the JV you have with Fastweb to rollout FTTH. He was hinting at the possibility to roll out FTTH in more than the 29 cities. Just wondering if you can share with us some thoughts about this and the eventual additional CapEx you should commit to this.
I believe this was already shared in the industrial plan, where we mentioned that our goal is to cover 100 cities, 29 with Flash Fiber, additional cities on a stand-alone. I think we believe that there is a necessary overlay of FTTH in hotspots in certain key cities whenever such speeds would be necessary of 1 giga up while most customers will be more than happy with 200, 400 mega, there might be a necessary for businesses and high-end user for 1 giga. So we are going to expand our coverage to additional cities over the next few years to make sure that all the key cities at least for that Phase 1 will be -- have the possibility of FTTH when and if needed.
So just to clarify, the additional 70 cities would be done by Telecom Italia stand-alone, and the required CapEx is already included in the guidance you have provided us?
Correct, all in the plan itself. Yes.
If I may, as a very quick follow-up to the accounting questions we had previously, would you provide us with the 2017 domestic EBITDA reinstated according to IFRS 15 and 9?
No. What we put is the -- what we have included in the press release, and we will have from now onwards the new IFRS EBITDA compare to quarter-by-quarter then. And this is what we are planning to do.
Thank you, Giovanni.
Next question comes from Mr. Julio Arciniegas from RBC.
Regarding broadband net adds, we can see that broadband net adds came a little bit lighter this quarter versus the previous quarters, nearly 100,000 per quarter. In Q1 also, we have seen some of your competitors that they have actually performed a little bit better from net losses. Can you give us some color on how the broadband market is evolving? Should we expect a similar trend for Telecom Italia in the next quarter? So we should expect an acceleration in broadband net adds.
I said it at the beginning. You have to look on the ARPU and not just on the volume. We are a value-based strategy. We'll continue to do that going forward. We are the first one that increased price this quarter. Some of the players moved their prices up only by the end of the quarter. So it creates a gap of 1 or 2 months between us and other players with respect to the price increase. This is really could boost some of our competitors' net adds. However, again, we're looking on overall revenues and ARPU, and I'm very satisfied with where we are. I think the trends forward will improve going forward with that. However, again, it's a very competitive market, and volume is not our main goal as a company. Thank you.
Thank you very much, Julio.
Next question comes from Mr. Nicolas Didio from Berenberg.
I have a small technical one, which is the booking of the brand fees paid by TIM Brasil. Would it -- where will it be booked? Will it be booked at the domestic EBITDA level or elsewhere? And I have a question for Amos. We have CDP as the still largest shareholder, and they own 50% of Flash -- of Open Fiber. Your Chairman is the ex-CEO of Enel. And are you comfortable with that situation?
With respect to the brand fees, that will start effectively sometime in May. Again, clearly we explained that well in the fato relevante of TIM Brasil, the reasons, and it clearly was done with the highest governance. And for reason that has been mentioned, we have been penalized by the Italian tax authority. And we just applied the same rate that Italian tax authority believes should be the transfer price of such a brand. Anyhow, it will be probably in the other income. And we'll have to see, I would imagine, ethic income to be in the other income. With respect to the second question, again, so far, I do not see any conflict of interest in any way possible. I think CDP is a financial investor with the company. They have no -- any board seats, and I believe that everyone at the board have only the objective and the interest of TIM itself. And no doubt, you mentioned the Chairman, which is clearly a highly qualified person, that I have no doubt about his interest as building value and creating value for TIM and TIM only. So I have -- I'm very comfortable that the scenario is much simpler than what you tried to mention. Thank you.
Gracias, Nicolas.
Next question comes from Mr. Pietro Solidoro from Fidentis.
I just have a quick question regarding the fine and the EUR 74.3 million. I'm understanding you had to notify the AGCOM regarding that, but it wasn't really like your choice. And I'm just wondering if I understand you are deciding to appeal against the decision. But if the appeal were not to be successful, would there be a possibility you would ask Vivendi to pay for it or appeal or take legal action against them?
I will make it very simple. We are very convinced the fine has no place. And we'll clearly appeal and win on that battle on a stand-alone. Thank you.
Thank you so much for your question.
Next question comes from Mr. Will Milner from Arete Research.
I had a question on the Italian mobile business. Obviously, you called out a record quarter for mobile service revenue growth. And when I look at the drivers of that, it looks like a lot of it seems to be coming from mobile voice. A year ago, that was declining 13%. It's now growing 4%, and it seems to actually be growing faster than your innovative services. So I wonder if you could just help us understand what has happened there. It may be an allocation issue but just something that might explain that. And then also, you launched Kena Mobile, I believe, a month or so ago. And I wonder if you could just give us some early indications in terms of how the demand for that low-end service is proceeding relative to what you expected.
I will take the first one on Kena, while Piergiorgio will answer on the other questions. I mean, Kena is only with about 350,000 subscribers. We launched a TV campaign first time for Kena a few weeks ago. We're very pleased with the outcome. ARPU is about 7.4 at this stage, and main price points of between EUR 5 and EUR 10. So again, a very segmented operator with the right, I think, approach to specific segments of the market. I think so far so good with respect to the net adds and the overall value being created through the ARPU of Kena. So again, we'll have to continue to follow and see the outcome of Kena, but I think we are very pleased with the number of subscribers we have as of end of Q1.
Yes. Thank you, Amos. On my side, there are several other factors that have impacted, of course, the good results of mobile. I would say that, in general, the trend is going quite well, both in terms of operating KPIs and financial KPIs. There is a particularly -- if you look in our spreadsheet and also these numbers in the outgoing voice is going well. And all these operating KPIs are in line. We are also beginning to see in these areas, in this voice also the impact of a certain agreement with MVNOs mobile, which is beginning to be interesting. And it is a small number, but it is beginning to grow also this line of business. So I would say that in general, there is no specific issue explaining the line. But overall, I think KPIs are in the same direction.
Thank you very much.
Next question comes from Mr. James Ratzer from New Street Research.
But question just regarding the kind of relationship with the new board, in particular, on your strategy around TIM Brasil, INWIT and Sparkle. I think it was the 3 assets that Elliott had singled out they would also look to see more value crystallization on. Could you just give us any more steer on whether your thoughts or the board thoughts have changed on potential inorganic action around those assets? And as a quick follow-up to the last question, please. I mean, how long do you think this momentum you're seeing in mobile can continue? Are you seeing any fight back from WIND at the moment?
With respect to the first question, I will say that yes, I think you know, even Elliott prior to the AGM, he was clearly saying, there's no alternative plan. And the only plan is the industrial plan of the management. I believe the board was defining with that kind of direction going forward. So we are not discussing at the board additional changes to the industrial plan. Clearly, in the future, some opportunities might be discussed at the board, which is clearly logical and normal. We see INWIT as strategic for the continuous development of our mobile infrastructure. Also considering the forthcoming strategy development, we believe we will create more value by keeping our current 6% interest rather than selling it, which has been in the past as well. With respect to Brazil, Brazil is a strategic asset for us and is not for sale in any way possible. Any other consolidation that could be happening in the Brazilian market should be assessed carefully. We said, regardless of different opinion at the shareholders' level in the past, I think everyone is convinced that TIM Brasil on stand-alone is a lucrative asset that's doing extremely well. And we failed to see cash flow generation that TIM Brasil starts generating from last year but going in a fast rate to continue support our cash generation at the group level and reduction of the debt and the ratios as we've discussed. So any consolidation that's put at risk, such performance or such cash generation and dividends policy would probably not encouraged by management. And I think Sparkle is an asset we always said in the past is not a core business. We'll clearly look and continue to look forward on any deconsolidation of these assets. However, we all realize that with the Golden Power restrictions and such assets, that might be more complex and longer than generally you will imagine with other standoff assets. So overall, again, the M&A parameters is really -- will be defined for us in the planning stage. However, moving forward, if opportunities will arise, we'll see them unlocking value, we'll continue to consider them positively. I mean, we talked about the NetCo in the past as, again, a possibility of continuing to evaluate additional consolidation on the -- in the market with that asset that might require an IPO. We're all, again, open-minded for that direction. But clearly, not any loss of control or deconsolidation of that asset as we believe that NetCo is an important asset to have as part of the service core. The integrated operators, vertical integrated operators have much more valued than companies that has only service or partial assets. As we are moving to 5G and fiber, the intelligent age, getting much more, I mean, value going forward, and I think we will see a transformation in the telecom market with that agnostic access of 5G and broadband and having both of them under one umbrella, clearly we'll have these benefits. So again, some movement so that parameters could happen in the next -- a few years, but it has to be carefully assessed and clearly a part of overall parameters of the group and with some specific reasoning of deals or unlocking clear value out of it.
And James, you had a second sort of follow-on, on the continuation of positive mobile trend. We honestly do not see any structural change, any different new action happening on the market that is not already there. Clearly, there can be some specific situations on competitive dynamics, each quarter has its own. We clearly have seen Iliad's postponement, further postponement of entry plans in the Italian market to now mid-June. So we also consider this. We really do not see any major discontinuities, let's say, or big changes for the fourth quarter.
However, the market might be shaping differently after Iliad launch, as you know, soon, a few weeks. However, as we assessed it in the past, we don't believe it to be disruptive to our business model at least in the midterm, long term, yes.
Thank you very much, James.
Next question comes from Mr. Ghilotti Domenico from Equita.
I have a question on the domestic OpEx. In particular, I'm just trying to understand there is just the volume trend in commercial cost that was up in Q1 is expected to continue, together with the focus on the customer base. And on the other end, if there is any impact, any difference in the labor cost if you go through an agreement on the solidarity contract versus the cash integration for the company.
Yes, thank you. In terms of the labor contract, in terms of the impact on profit and loss, there is no significant difference between cash integration and solidarity principle. So you cannot expect any material difference from that. In terms of the commercial OpEx, as you clearly said, the first quarter has an impact -- had an impact related, particularly on the additional strength in the commissioning, where if you look at also the mobile year gross adds that's posted there, plus 17% in the same quarter. So this is, of course, related to the importance of the efforts in this part. There is also a part related to the -- yes, the impact related to the previous year. So in reality, the increase is also split for Wholesale and accounting component. In the next quarter and the next, of course, this will depend how the market will react. But we are projecting, let's say, lower impact in the next quarter at this point.
Yes, Domenico, on the question of the labor, if you think to strip out the delayed agreement with the unions and solidarity -- actually, I think you were pointing out that yes, there would be some reduction in the overall related cost if you strip union and solidarity out, which is [indiscernible], there would be some positive reduction going on there. Thank you, Domenico.
The last question comes from Mr. Prota Luis from Morgan Stanley.
My question is on the headcount reduction, and Piergiorgio just mentioned in this solidarity program and cash integration. But do we -- announcing with the full year results and other plan to let go 4,000 FTE, which I would like to understand. Well, first thing, I presume that this is a different program than the solidarity program. First, I would like to double-check that. And if so, whether you could give us some details on when are you expecting these people to go and what would be the cash flow and P&L implications.
Yes. Clearly, it's a different program, yes. I mean, one is really part of an arrangement for people we have on board. And we have a redundancy of about 3,000 people, and there are different solution for that redundancy. One, which we really -- we don't like so much is cash integration. Yes? However, we've been forced to get to there as the unions were not been constructive in discussions in the last 6 months. But letting us as a company to be the only one responsible for that kind of redundancy is asking, I think, too much in -- from the company in such a competitive market and such intensively investing in networks and so on. So clearly, efficiency has to be there, and we have to cover it. And hopefully, that will be moving forward with the unions as we talk. But again, that's one program. The second one is addressing overall program of reducing the number of people in the company, and that could be done through the early retirement program, Article 4. And we are planning again to have 4,000 people over the plan years, between '18, '19, '20, and stock might be equally distributed. But however, the definition of how many each year is part of the things we would like to negotiate with the unions. Clearly, the unions are favoring such programs. But we have set aside that what are the overall relationship with the union and how this might affect the phaseout of those 4,000 people, yes? And Piergiorgio, if you want to add anything?
Yes -- no. Maybe I can -- there is also a point, Luis, on the cash flow of the Article 4. In the plan, we were considering for 2018 -- you remember that the Article 4 has already been provisioned. So there is no impact on profit and loss, so by definition no impact on profit and loss. We are going to have -- we were planning a cash out in 2018 in the region of EUR 100 million for 2018. Of course, as Amos was saying, that probably the timing will be different given the discussion that we are having. So I don't -- we are not having, let's say, an updated estimate of this number. But I imagine, this could be lower probably before a postponement for the beginning of the Article 4.
So you said EUR 100 million cash outflow from the early retirement...
This was the cash flow projected in the plan that presented in March. As I said, I imagine that amount will be lower and was related to 2018 on Article 4, yes.
Okay. So with a total provision being -- it was closer to EUR 700 million?
Yes.
We should see the 319, 320 or roughly?
Sorry. No, I don't want to give you the figure. The timing is something that is going to be changed and will be different. But the board, in the plan we were having, as you correctly mentioned, EUR 700 million of provisioning. And out of these, the component, the cash component was EUR 100 million. I imagine that in 2018, it will be lower.
Thank you very much, Luis. And we are finishing our conference call. Thank you very much for participating and for your interest in the company. Good-bye, everybody.
Ladies and gentlemen, the conference is over. Thank you for calling TIM.