Telecom Italia SpA
MIL:TIT
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Telecom Italia SpA
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[Audio Gap] I am pleased to welcome you to our first quarter 2019 results presentation. It is a pleasure for me to introduce our CEO, Luigi Gubitosi; and our CFO, Piergiorgio Peluso. They will provide an update on the plan execution and on the main strategic initiatives and present our first quarter results.
A Q&A session will follow where also TIM Brazil's CEO, Pietro Labriola, and our Chief Revenue Officer, Lorenzo Forina, will be available to take your questions. Pointing out to you our safe harbor disclaimer on Page 1. Let me remind you that our comments are based on IFRS 9/15 standards comparable to last year's results and that we are also showing an after lease view on which we are basing our guidance, in line with most of our peers. So, Luigi, the floor is yours.
Thank you, Carola. Good afternoon to everybody and actually good morning for those of you who are connected from the Americas. So what did we achieve in our first 6 months, in the first standard 80 days now? The management reshuffle is substantially complete and this is changing the pace at which the company works, maybe we should say at which the company runs.
The agreement with the unions that we signed at the end of February alone secured about 1/3 of the promised cost cuttings by 2021. In June, we have the first window and we expect about 1,200 to 300 (sic) [ 1,300 ] people to leave the company in that month. Delivery units are up and running. For example, we kept the delivery time of FTTH by 6-day in order to improve customer experience.
Very importantly, our decision to focus on quality, rather than prices, led the entire market back to rationality. And already, in this quarter, the new mobile customer app was increasing Q-on-Q, and mobile number portability washing machine has cooled down, more on this later.
We expect consumer mobile ARPU to stabilize Q-on-Q from Q2. Our first deployment of the VRAN mobile technology is showing very promising and that will translate in further efficiency and quality of services.
In Brazil, we have appointed Pietro Labriola as CEO to drive the change. Pietro has a very safe pair of hands, and we expect that he will do well. In fact, he has reiterated the guidance despite some local headwinds. We've been able to reduce our net debt in a quarter normally absorbs cash. In fact, we have upped net working capital outflow. And our funding plan for 2019 is substantially completed, with cost of debt, which is 3 base -- 0.3 percentage points lower than last year, now at 3.8%, I believe the lowest cost in the history of Telecom Italia. We have finalized the sale of Persidera as we have accepted the binding offer that we have received. And of course, we're dedicating significant time to our extraordinary transaction, what we call typically the organic part of our activities.
So moving on Page 4, let me update you on where we stand. So our network sharing partnership with Vodafone, we except to sign a contract by the summer, as we told you before. It basically is in line with the plans. And we have identified and quantified the synergies that this corporation could generate for us.
On the basis of our preliminary analysis, we estimate that the synergies will be on a yearly basis between EUR 100 million and EUR 150 million coming from active sharing, allowing TIM to reduce CapEx and OpEx services, backhauling services, although this value is not included in the mentioned figures. But basically, TIM will offer services on backhauling on its towers. And passive sharing that will allow INWIT to increase revenues. This repatriation of TIM and Vodafone antennas is currently not hosted by INWIT to save cost -- I mean, the ground leases cost through the commissioning of overlapping towers and also to achieve financial synergy through a more efficient capital structure, which will reduce weighted average cost of capital, taxes and a lower beta as we have been serving 2 MNOs instead of 1.
Second point, Open Fiber. We have substantially completed our industrial assessment. And we believe we are in a position to confirm strategic and financial benefits for all stakeholders. Obviously, this will have to go next to our Board and we expect that we examine the option first in the strategic committee and then in the Board by the summer. And then after that, we'll talk with Open Fiber shareholders based on the feedback from our own Board. But I'm -- actually, let me regress on one aspect that I'm very happy with, and I thank our shareholders for it is that, as you might have noticed, the last couple of months have been very quiet for TIM Board, for our standards has been very, very quiet. We're working very well together. We're sharing our strategy with the Board, then the Board has been working very, very smoothly. So I expect that as people get to know each other better, this will continue to improve. So as I said, Board is very united on these aspects. And we'll -- I expect the Board to examine the option by December and then we'll move forward.
There is one more transaction I want to talk to you about. It's what I call the consumer credit JV. Basically, one of the issues that we told you created a problem, both in terms of bad debt and in terms of working capital absorption, has been the decision to get into installment sales couple of years ago. And we're now considering to do an -- basically to do a JV with somebody who is structurally equipped to do better, so in order both to create capital and to reduce credit cost risk. We have initiated talks with a number of financial institutions specialized in consumer credit. And I think we are quite keen on moving forward over the next few weeks and months with this institution to identify a partner with whom to offer our customers credit.
Moving to the next page. As you can see, our service revenue have declined 3%. Actually, this is 2% if we exclude certain services -- certain transaction that we had Sparkle doing at basically no margin. So -- but even considering those transactions, as I said, our domestics were basically down 3.9%. Brazil was up 1%. So all in all, minus 2.7% domestic side excluding Sparkle, which led for domestic EBITDA decline in minus 4%. Those results are basically in line with our guidance. Brazil at a positive performance with an increase in EBITDA of 5.5% compared to the previous year. EBITDA minus CapEx is positive, and net debt has been reduced in this quarter notwithstanding the fact that this is typically a quarter -- a weak quarter -- seasonally it's the weakest quarter for our company. So equity free cash flow has done a good performance. And this reflects the attention we're giving to the matter. As you all know, basically, we titled our plan "TIMe to deliver and delever." And there's a lot of focus within the company on that.
So EBITDA margin improved, and this is showing that of our cost and cost capital is delivering such impact. So all in all, I think, we're fine with our guidance, but we'll discuss the guidance further afterwards.
If we can move to the next page, basically, you can see in the figure upward that there's been a decline in mobile number portability. Actually, it's quite interesting to look at the picture of mobile number portability over the last 5 quarters. And you can see that Q3 of last year was -- let me define a mess, with 5.7 million customer changing hands. And I think it's very important that, A, there is a positive trend in prices, but B, the washing machine is losing steam. And that's very important both in terms of cost, commissioning basically, but also to create a more stable and rational environment.
In fact, we have given you some examples of price movements of TIM and 3 other operators. Basically, as you can see, we all have moved up at different points prices. And as a market leader, we have led the market towards more rationality. This obviously might have some short-term cost, but it makes a lot of sense strategically. And Kena, or Kena in Italian, if you like, has been less utilized. It's prices is higher now. So we're basically avoiding cannibalization of our own customers with that.
Let's move to the next one. So as you can see on our KPIs, we're seeing an improvement in line losses, but not as much as we would have seen if we had not changed our commercial strategy. As I said Kena net adds halved in Q1 versus Q4. Quality of net debt is improving. So the ARPU is lower than last year, but we project a stabilization, and this will start from Q2.
As we said in our last roadshow and many of you that met with us might recall, we always said that it takes months, maybe 9 months to a year, to see the results. So what we're seeing now in our results is the effect of a very irrational and erratic 2018. So as time goes by, we'll start seeing the improvement coming in. Service revenues were down 11.4%. This is in line with our largest competitors, and we estimate this better than our other competitor. In fact, if we included -- such variation includes a few one-offs, 20 days building, mobile termination, accounting adjustment on Q1 '18, the underlying decline was minus 9.8%. As I said, we expect improvement in the coming quarter, have stabilization Q-on-Q, means, year-on-year, we'll fall -- we'll gradually narrow in the coming quarters.
Finally, we're reducing the sale of handsets. You might recall that we told last year that we lost money on handsets. I think we're very much in line to achieve our objective of at least reaching breakeven on handsets if not making a profit. I mean, eventually, we'll make money on handset sales. At the moment, as I said, our short-term objective is to reach breakeven, and we will do that this year and then we'll move to profitability, but we'll definitely eliminate losses on handsets.
So if we move on Page 9 on the fixed service revenues. Basically, you will notice that revenues were substantially flat year-on-year, but actually they grew 1.8% excluding Sparkle.
On the retail business, the 1.5% growth is driven mostly by positive trends in the Business segment, plus 2.3%; and ICT that is continuing its double-digit growth at last year's 16%.
In the consumer segment, the ARPU growth is affecting the line losses, and we will see in the next slide.
Domestical sale was flat year-on-year before considering the impact from regulatory pricing, mostly related to 2018, $8 million roughly. Indeed, we expect the full year to be stable year-on-year as the trend in the underlying KPI is strong, with fiber volumes more than offsetting lower copper lines and nonregulated services growing strongly as well. We already spoke about Sparkle, so I would say that move to slide #10.
Fiber lines continue to grow double-digit. We have now reached 6 million lines, retail plus wholesale, with an increase of 10% over the previous quarters and 58% year-over-year.
Clearly, customer are loving fiber-to-the-cabinet. I can say the same on FTTH, which will take more time to take up. Overall, retail losses were 273,000, with an improvement over Q4 '18, but not as much as with the VAT in case we had not changed our disconnection policy, mostly in order to improve credit management. It took too many months before to disconnect line in many cases. We've now shortened the process very much. This means, basically, you'll have to wait until H2 before seeing the benefit of action we have taken and from our competitors repricing.
I'll remind you, our main competitor has announced increased on the existing client base that will kick off in July reducing our price premium. As mentioned before, wholesale, we have increased the numbers of lines. And I guess, this is a surprise for most of you with fiber lines growth more than offsetting the decline in copper lines proving enough our competitors are not testing as much as the market fears. The Wholesale unit is also working on its efficiency and process improvement that are already impacting productivity and customer satisfaction. In short, we're quite happy with our wholesale performance.
Moving to Slide #11. You will see our cost structure, which is basically the same we show you in the plan. Costs have been reduced by 6% year-on-year, some of which obviously has interconnection as mostly to do with Sparkle, but we're happy on the cost side. As I mentioned before, you're not seeing yet the effect on label, which will start from this June. At the same time, we got some negatives, which were the price of energy, which was poorly purchased last year. We expect lower cost to kick in, in 2020. And basically, throughout the systems, we are very active in reducing cost. As a matter of fact, you will recall that certain cost has low to show improvements because they're different over a number of years. But on a cash basis, they're definitely much better and it is showing already. So I would say that we're comfortable about -- what we told you about cost, going forward.
Let's talk about CapEx on Slide 12. You will notice about EUR 50 million decline year-over-year. This is consistent with our EUR 3 billion guidance versus EUR 3.2 billion the previous year. FTTH is approximately -- FTTx, I'm sorry, is 80% in terms of coverage, while FTTH target is 40% by 2023.
I think a couple of aspects are important. The first one is that FTTH take-up is still slow. Customers still have a limited perception of difference between FTTC and FTTH, thanks to the exceptionally short loop, which is between cabinet and homes in Italy. In Italy is basically the shortest in Europe.
TIM FTTx is fast and wide. Basically 45% potential customer can have an average speed in the range of 100 megabits to 1,000 megabits per second, 64% can experience an average speed over 50-megabyte per second. I think it's quite important that looking at the picture on the right side that we state the fact that we're the only one in Italy that basically can access all technologies available. As a matter of fact, FWA is showing very significant promises. It's a very promising technology that can have a lot of application as we're seeing around the world. And basically, we'll have the entire pallet of products to satisfy most customers, including FTTH. We have about 3.5 million connected and sellable. I think this is probably the largest pool of connected houses, so at least it's on par with our competitor. We have over 4 million houses past, but obviously, houses past is not sellable, is not connected. So we want to focus on the numbers that we can actually sell, which, as I said, is 3.5 million. Over time, we'll connect also the others, so we keep on connecting. So in short, we have an unbeatable combination on networks, and we'll continue to maintain our technological lead.
Now if you move on Slide 13, I think that since TIM Brazil has already had his call and we have Pietro Labriola available if any question will arise from you on Brazil. It's suffice to say at this point that, as I said before, we have reappointed really Pietro and I put the re in brackets because he has been in the company, has been one of engines for quite some time. I think what we said in Brazil about last quarter still holds. It's a very interesting country with interesting dynamics, competitive dynamics. And we look forward for Pietro to deliver consistent and significant results.
With this, I will leave the mic to Piergiorgio Peluso to comment on the following slides.
Thank you, Luigi, and good afternoon to all of you. So let's take a look at the net debt evolution on Page 14.
The positive cash generation in the quarter is mainly due to the better working capital dynamic that impacts the operating free cash flow, which is EUR 541 million -- which is EUR 548 million higher than last year. Interest expenses are lower as well, taxes slightly lower and other impacts make up for the difference, leading to a net cash flow of EUR 190 million and a net debt of EUR 2,580 million (sic) [ EUR 25,080 million ].
In the lower part of the chart, we have shown the evolution of the various components in first quarter '18. Let me highlight the very good performance versus the first quarter '18, in particularly the EUR 229 million increase in net debt in first quarter '18 was positively impacted by EUR 140 million net effect of year '17 debt reduction related to the unwinding of financial leases of real estate assets re-leased or renegotiated.
Let's move to Slide 15. This slide shows for the first time our cost of debt in an after lease view, in other words excluding the financial lease cost. As you can see, it is 3.8% in historical minimum and it has fallen 0.3 percentage points quarter-on-quarter, thanks to the bonds issued in first quarter.
As you will see in the appendix, adding finance leases would bring the cost to 4.1%, consistent with full year 2018, which means including year '17 impact and adding also the financial lease to 4.4%, which means including also the IFRS 16 impact.
Importantly and considering the bond issued in April and considering the credit lines negotiation with the bank counterparties, we have substantially finalized our funding plan on the market for this year, succeeding in securing resources at very competitive prices paying no premium on a secondary market.
Let's now have a look at the net working capital on Slide 16. As said, the main driver of debt reduction in this quarter is the improved working capital that accounts for 3 key differences over last year; lower inventories, thanks to the new handset policy introduced this year; and 2 elements affecting 2018, the VAT split payment and change from billing in arrears to billing in advance. Net working capital evolution in this quarter confirmed the progressive stabilization that we presented to you in the plan. The consumer credit JV will support this evolution.
Moving on to Slide 17. As most of our peers, also Telecom Italia is showing the results after -- under and after lease view, which are slightly lower at EBITDA level and much better, of course, in terms of net debt since in this view we are not including EUR 1.9 billion financial lease liabilities that instead were included in last year accounting, as you know that comes from the year '17 accounting standards. EBITDA trends are slightly better in the after lease view and consistent with the net financial position, we have adjusted the EBITDA excluding year '17 effect adding back depreciation and financial expenses.
Let's now move to Slide 18 showing the net income evolution. Net income is, indeed, helped by lower nonrecurring items, interest expenses and taxes. Our total net income is in line with previous year, with a negative and noncash impact on depreciation related to the CapEx increase last year and a positive contribution coming from reduction of financial charges and things.
Before passing back to Luigi, I would like to thank you. This is, as you know, will be my last call as the CFO for Telecom Italia. It has been a pleasure for me to interact with all of you through my 7 years in the job. I am sure we will keep in touch, but let me thank all of you as I feel I really learnt a lot from the financial community.
Thanks, and back to Luigi.
Thank you, Piergiorgio. And moving to Slide 19, we would like to reiterate our guidance and actually give you an update, basically given the IFRS 9 and 15 and after lease. The changes are minor. In essence, adjustment, accounting changes would effectively mostly reduce EBITDA -- sorry, CapEx by about EUR 100 million a year, EBITDA is not impacted as expected. The guidance remain unchanged. And in Brazil by BRL 500 million cumulated.
So equity free cash flow remain unchanged. The adjusted net debt becomes EUR 20.5 billion in terms of target. And basically, the difference would have been lease reimbursements, which remains, obviously, but is not feasible enough to lease view. And this is again to be announced during organic action, presently not included, but on which we are working. So the target include in inorganic will start with 1 obviously. And over the next few quarters, we'll try to tell you what's the second digit.
Then moving to the last slide on the key takeaways. We continue to be very committed to deliver and delever, which, as we write here, remains our motto. And we want to boost return on invested capital. We intend to stabilize revenues and then to grow them again, cut cost, stop net working capital absorption and optimize invested capital. And as I said, we're working hard on organic action as well. So 3 months after we presented our plans, we believe -- we still believe and are very convinced that it is feasible. We are committed to deliver, and we look forward to answer your call now -- your questions now.
Thank you very much for your attention.
Thank you, Luigi. Thank you, Piergiorgio. So operator, the Q&A session is open now.
[Operator Instructions] First question comes from Mr. Andrew Lee from Goldman Sachs.
Two questions. One on the Open Fiber. And secondly, just on the top line outlook from here. Firstly, can you give us any color on how you got to the point, or what you thought about and how you got to the point on believing the combination with Open Fiber will be value accretive? And do you think greater value accretion will likely be achieved by spinning the asset out? Secondly, you appear more comfortable because that's you are paying, for me that is basing, some useful slides on mobile number portability. Just wanted to ask your view on the biggest risk to top line from here? A lots of posters in the presentation, wanted -- just wanted to understand the risks? And specifically hear from some other companies, including Vodafone, about the rise of SP1 technology, which sounds like it could exacerbate B2B declines and increase the headwind. Is B2B the biggest risk you face from here? Just I don't find any kind of problem areas. Would be useful.
Okay. First, Open Fiber, I am afraid to get the full story, you'll have to join the Board, in essence that is appropriate that we discuss before with the Board and then with the community. But I think we have mentioned a number of times that building 2 overlapping networks doesn't make sense, for the companies and for the country as a whole. This is a waste of money in infrastructure. So as I said, we are now preparing -- or basically tested the results of our analysis for the strategic committee and then the Board and then we'll discuss, but I appreciate the fact that you want some colors. And basically what I can tell you is that, as I said, if you look at the slides where we present our CapEx and our technology, we have a significant number of technologies available. There is a lot of fading borders between the various technologies. And in fact, we are already in talks with some peers around the world basically to understand how they're using those technology and how they plan to use it. And in that respect, a stand-alone Open Fiber, which basically makes limited sense. It basically has an overlap on some of our -- in some of our areas. And therefore, as I said, we think will be a major optimization in CapEx, so we could serve the country with much less CapEx by combining the 2 networks together. And obviously, time is so paramount, in essence because today there is still relatively small network. But as time goes by, some of these efforts they're making and we're making might be a waste of resources for both of us. So I hope that over the next couple of meetings, definitely, next quarter, we can give you more color about it. But as I said, we need to respect priority of our Board and discuss this before with our shareholders and discuss assumption, evaluations and so on with them before -- with the Board members, I meant. Then you were saying what is the risk on top line? Well, let's take our various segments. Basically, one risk overall when you are in this market is the irrationality to come back because effectively what happened in 2018 was a typical price war when everybody becomes poorer at the end. And a market leader, like ourself, should be the more rational. I mean, it's probably the most competitive market in -- definitely among all the various business sector in Italy. And it's the market -- one of the market, if not the market, with the cheapest prices in Europe. Now as we think, this would rationalize over time because, frankly, I am not sure that some of our competitors will ever be profitable at these prices, but obviously each one of us has to mind his own business, so I won't go further into that. But now -- last year basically everybody was trying to keep his number of customers. And actually, even TIM told you that there were various hidden terms on number of customers and that was true, but we were incorporating customers at a much lower ARPU, and that did not make sense in the long run. So we are now -- so if you ask what could be the biggest risk both on mobile, it would definitely be irrationality. The same is also true on fixed, frankly. I think if everybody decide at some point that they want to have lower prices because they think that they can get all the market share, that's the biggest risk that you can have because those plans tends to be very good when you play them stand-alone, but then they create competitive dynamics that brings to reaction, and so it typically doesn't work. So I will say that we now -- over the last few months, we have started positive trend, and we are hoping this to continue, so I'd say this is the biggest. If that does not occur and we continue to have these price dynamics, we will have over time an improvement in -- on the revenue side. Then obviously we have to -- we are working on new services, new tariff structures, trying to offer more to our customers, and you will see more as they're being developed. There is no company that should do cost cutting alone. So cost cutting, obviously, is the first thing that you can do it. Unfortunately, we had a large amount of cost in TIM to tackle. But we do know that we also need to develop revenues and stabilize, it's going to be our first objective, then we'll try to move forward. I think you made a question on B2B business, but it's not -- I'm not quite sure why you see that as a major risk. Would you mind elaborating that again and I'd be happy to answer.
Yes. I was just in asking what you consider the major risk to your top line, but I think you're pretty clear that competitive irrationality on the retail side is the biggest risk you see?
Yes. No actually, on the B2B, we are quite stable. We obviously have a very successful B2B business. But I guess, we probably -- if I have to give you 1 of the 2, I would say the consumer side is probably more liable to attacks than the business side. Also on the business side, we're working on upgrading our offer, and we'll have a more complete offering than anyone on the market. So especially, on the large business. So I'll say that -- and we'll give you more details as we move along. But just to give you a hint, we're trying to be better positioned in the data centers, cloud sector. Having said that, it's obviously a very competitive business. But the evidence that we have is that, today -- and I am sorry I made it a bit long, but let me rephrase it for you, in order to be graceful. B2B, it's fine. The wholesale is going to be fine and actually is proving to be very effective in terms of competition. On the mobile, we are improving, but it obviously will take some time. On the fixed, because of the structure of the fixed revenues, which are somewhat front-loaded we will have some decline in the next couple of quarters. But then again going forward, it will depend on price dynamics. So all in all, I think, we're very comfortable with our guidance if there are no external shocks.
Thank you, Andrew. Next question, please.
Next question comes from Mr. Giorgio Tavolini from Intermonte.
Could you please provide more color on the central office decommissioning project. You also talked in the past about decommissioning of the entire 3G network. Which timing do you expect? What are the run rate savings? And is that project excluded from your current CapEx guidance? And the second question is on the broadband net adds that are still negative. I understand that this is losing momentum and especially importance with respect to the strong fiber net adds, but could you please provide sort of breakdown between new clients and internal migration within the fiber net adds?
So on decommissioning, and by the way it's not only on the technological side, but -- and possibly even more important because it effects the way we work, it's also on the IT side. No, you was asking whether the 3G has been included in the plan? Not yet. At the moment, we are focusing on end of 2020 for the switch off of the 3G, so that we have enough time to migrate most of our customers. So the number which is being explored now by the technology direction is switched off at the end of 2020, which will also coincide with a significant completion of the 4G project and a significant -- with a significant progress in deployment of 5G, which will start, as you know, to be significant starting beginning of next year. So on the -- and the same applies to cabinets. We have done a number of trial in close -- small number of cabinets. We're now going to increase these numbers as we speak. And in fact, if you're interested, we'll send some more figures specifically. In fact, we are also -- let's say, we're looking for some guidance from the regulators in this respect. And as you might have noticed and what is being discussed at the moment, there is also some component on the commissioning and that should make it easier. I think you had another question, which was on the broad band net adds. I would...
Yes.
Yes, I would ask Lorenzo Forina to speak -- to answer this question more in detail.
As you've seen, we posted an improvement on top line loss right in the first quarter notwithstanding we are proceeding with some cleanup of -- to guarantee more discipline in the line lost execution, so to reduce the credit loss. We expect the cleanup to go on as well in the second quarter and then to be completed. So I would forecast quite a good improvement on the line of balance on wire line in the second half. And broadband net balance and total line net balance is very much correlated.
Next question comes from Mr. Georgios Ierodiaconou from Citi.
I also have 2. The first one is around the cost-cutting drivers and more also around the timing. I believe during the fourth quarter results you mentioned that you're going to look and work on the distribution side. So I appreciate in the presentation you gave us an indication of how the labor cost will face during the year and beyond. I was wondering if you can give us some indications of when these savings can start to come through, maybe accelerate versus what we've seen so far? And then my second question is around the line loss you just commented. There is an element of that, that has to do with cleanup. I was wondering if you can quantify that just so we get an idea of the improvement going into the second half. And just wondering whether part of this has to do with fixed mobile substitution and EBITDA see if you can give us an indication of the patterns of the customer base you're seeing migrate?
Okay. So on the cost side, but in terms of human resources, as we have discussed before, we are targeting 4,650. And these are, typically, happens in windows because INPS this is the Italian State Agency that is in-charge of retirement basically has to check credentials for people. So in June, we'll have about 1,200 people leaving the company, 1,200 to 13,000. Then there is another window expected for a similar amount of people in December. In fact, we're actually trying to see if we can have it -- possibly, at least partially, anticipate it to September, but this is still tentative. So let's say, by the end of the year, we'll have about 2,500 people less, with the balance leaving between June and December of 2020. So that gives you -- and that's entirely provided for. So this is about human resource. With regards to equipment and more in general about purchasing, we're now -- we have a new Head of Purchasing, and we are re-tendering many items. As I mentioned before, we were losing money on handsets and we're aiming at breakeven for the year and possibly better.
With regards to commercial -- the commissioning, which is quite an important cost and effect, thank you for bringing this up. This has already started, and commissioning, which went significantly up, both in per customer and in total cost, it's substantially down this year. Basically, looking at my Chief Revenue Officer to see if it's sensitive that I give a figure about the reduction or if I can. I think the cost from the peak you reach last year is on the fixed side, which is the most expensive, is some 20% down on the per unit basis. And this is -- this -- actually, this happened in the first week and then also in the second quarter. So we expect this trend to continue throughout the year. This is one of the cost that, as I mentioned before, are typically amortized over a number of years. So that effectively you will see more of cash impact at the beginning and then over time also an accounting impact. We continue to rationalize office space. And obviously, as we reduce the number of people, and we make it also more efficient use of our space. We will reduce the number of offices square meters and so on and so forth. We have a new Energy Manager, which we look -- we are the second largest buyer of energy in Italy. And I think that has more attention to the energy cost. So we'll do a lot of effort to reduce energy. We already reducing the actual amount in terms of gigawatt, but the cost per gigawatt went up in this year because of last year purchasing. So we really are moving forward the whole elements. So as I said in one of the slides before, 1/3 of the cost is already -- is going to be determined by people. So it will happen over time, but is already, let's say, achieved or we have reassured that it will be achieved. On the rest, we're working as we speak. And I think, obviously, you see -- you will see an increase as we more and more get into sort of running phase of the saving. But as you can see from this very first quarter, it's by no way backloaded. Then your second question and I revert back to Lorenzo for more color on the line losses.
If I got the question correctly, you asked the order of magnitude of the one-off cleaning up of the line loss. And we expect around -- in the range of 50,000 in the second quarter roughly. So it will be some in first and then the second.
Sorry, 50,000 combined first and second? Or 50,000 per quarter, want to make sure?
50,000 mostly in the second.
Next is from Mr. Domenico Ghilotti from Equita.
My first question is related to the discussion with Open Fiber. In particular, we read some -- we know that some issues are related to potential antitrust issues or to the infrastructure standards. So I wonder if you can share your view on these 2 topics and if you feel you can find solutions to these topics? And the second is on the domestic organic EBITDA target. So you're targeting low to mid-single-digit decline. You're starting from minus 4. And you've have been talking about back-end loaded savings on the cost side, improving rationality. So I wonder if you -- if we should think that Q1 was a, say, the worst or the bottom in terms of trend or just you're seeing some headwinds that are affecting the trend in next quarters? And last on the cost savings. Well, I was expecting to see on the labor side some more savings, Q1 was mostly interconnection and equipment. If I'm not wrong, last year, you had solidarity contract that expired. And so I was expecting to see stronger savings, so if you could elaborate a little bit more?
Right. Sure. And let me start from the labor side. I think we mentioned few minutes before that the people are starting to leave the company in June. So in terms of savings on the -- those savings on headcount reduction have not started yet. It will start materializing from -- basically from Q3 .
But is that solidarity contract in place now?
Solidarity is in contract, yes.
Okay. Well, it was not there the year before. Okay.
Yes. And in fact, you see that there's already a saving, although the number of people are the same and some of the cost related to personal were deferred to 2019 by previous management. Enough, not large amount, but enough. It's about EUR 60 million, the guy was telling me.
So you're asking about antitrust. I think it's very preliminary to talk about antitrust when one does not know what the transaction structure look like and what -- this is something that follow, not precede. So I think it's more, let's say -- how could I say, coffee table discussion, say okay, there may be some antitrust issues. Yes, every transaction, which is a combination of 2 entity, which are active in the same business have antitrust issues. But we don't think there is anything that cannot be solved. And with regards to -- you were mentioning about white areas, I think that could be treated differently. I think it's suffice to say at this stage that with the present structure there have not been a lot of fiber handed to the white areas.
So if you look at what has been the white areas interest, I mean, and you look at the state of the infrastructuring on these areas, there's not much after 2 or 3 years. And we think it could -- that could be more that could be done for those areas. So all in all, yes, as in all transaction, there are issues, but I've seen many more -- much more complicated transaction to go through. And basically, we were in the very same state, aiming at, just 3 years ago. So it's not something very unusual for Italy. So all in all, I think we'll have to discuss, obviously, antitrust discussion with the authorities and making sure that they are very comfortable with the transaction, will be paramount to the success, but we'll tackle when time will tell. Time will come and we'll discuss.
I think you were also asking about domestic organic EBITDA target. I think we remain committed to our guidance. You're basically telling us, you're already there. To be very frank, maybe we did it a touch better than we expected in the first quarter. But at this stage after one single quarter, we don't want to add anything to what we say before. We still think that we'll have a low to mid-single-digit decrease.
As I was mentioning before to your colleague from Goldman, people are behaving at the moment, but it's been a quarter of rationality. Let's not call it a year yet.
Next question is from Mr. Guy Peddy from Macquarie.
Just a couple of quick questions. Firstly on your cost base. If you look at your chart on Page 11, most of the cost reduction actually came from interconnection and equipment, which I wouldn't really describe as what I call fundamental cuts in cost. So can you talk about some of the other line items? And what you can see incrementally going forward? And what you're doing to actually reduce cost in things like commercial, industrial and G&A, et cetera? And secondly, just a small point of clarity. In the course a lot of your positive deleveraging was due to working capital. Now I know you've got an agenda to reduce some of your target working capital. But would all the savings in Q1 going to be sustained throughout the year or we're going to see some of it given back just because of timings and things like that?
Okay. And actually, let me start from the back. You're saying about working capital and deleveraging. Actually, we're working to continue to deleverage. So there is no -- there has not been any delay or postponement or anything like that. So our objective is to make it sustainable. You see, managing a company like this should be considered a marathon, not a 100 meter race. And so we won't work to fix a quarter, if that's what your question is. So while there may be swings from quarter-to-quarter, we think that working capital will go down structurally, as compared to the past. The main reason was that there were 2 reasons why working capital was that, 2 main reasons. One was the provision of credit. And the second was to increase in deferred cost that basically affected EBITDA over time. But now, basically -- we basically are not going to -- we're actually going to reduce those costs. Commissioning was an example before. So we think it's going to be sustainable and we expect to close the year with a debt lower that it was at the beginning. No doubt about it, as I mentioned before, we have a target to debt reduction, which is our main target. We think that the debt has been a big issue for telecom, has constrained its development. And in fact, now they make you think about it, that we should after deliver, delever and then develop. So in order to do the third D, we need to reduce our debt. And we're very committed to that so that we are organizing to make it structured. Beside working capital, you're saying about the cost base. We should provide you and we will do that actually is-- I will ask Carola to do it. We told the analysts, actually investors, we want to give you more detailed breakdown on the cost side. And you would see that -- I think, we still, obviously, even if we remove the interconnection, we are achieving some good results in terms of reduction, considering it's only 1 quarter and it's a very beginning of our plan.
As I said, the cap thing has gone up in every quarter for the next 12 quarters and possibly even afterwards. We actually had some increase in certain cost, including energy, as I mentioned before, which was in the region of EUR 50 million for the entire year, obviously not the quarter, which we have to make up for. And as we continue to move to rationalize in line decommission all the IT projects and so on and so forth, we'll continue to seek costs going down.
Again, as I said before, it's a marathon. So we won't look at quarter-over-quarter but we look at the entire picture. We'll try to give you more color next time we meet and it'll be more specific. We'll give you also some targets year-by-year, so that you will have more ability to benchmark us.
Next question comes from Mr. Jakob Bluestone from Crédit Suisse.
I just have one question please, just on the domestic mobile market. You obviously commented on sort of price hikes. And I was just wondering if you could maybe expand a little bit more on what you're seeing in terms of the mobile line, because it's a little bit harder for us to track? I think in slides, you mentioned that was improving as well. And so just if you are able to give a little bit more color on what sort of improvements you're seeing below the line?
Sure, Lorenzo, will you please.
Yes, indeed. Yes, we showed you the above the line prices. But at the same time, the price evolution fully reflect the evolution of below the line price. As of now, I would estimate below the line activities to be below 5% or 10%. So it's getting almost negligible. Market rationality has been proven as of now. As CEO said, it's just 1 quarter, not only in above the line, but well in below the line activity that has barely completely stopped.
Next question comes from Mr. Fabio Pavan from Mediobanca.
The focus is on the JV -- having these JV this platform consumer finance. Could you provide some more color on maybe the benefits you were mentioning this new area may generate, maybe in the timing, maybe just for us to better understand what could be the magnitude of such an area.
Okay. I suppose you're kindly asking what would the impact be. Obviously, we don't know yet because we started the negotiation now. But just to give you the framework, we have, as of today in our books EUR 600 million to EUR 700 million of installment sales receivables. And about another EUR 400 million had been sold and are still outstanding.
So we're talking about EUR 1 billion type of overall business. Consumer credit -- and actually, this started from an experience I had when I was with Fiat. The Fiat had the same issue of not being investment grade and financing customers and so on, which is less than a debt management -- credit management issue. Here we got both. Again, the credit losses in 2018 have been about EUR 400 million. So what we've in mind is that -- is, basically, is to either create a JV or a virtual JV with 1 bank and have it offering credit services to our customers, which will have to remain our customer. It has to be a very smooth service. Basically the customers does not have to realize that when he goes into a shop or so. And it has to be a very smooth, but there are some very large companies owned by banks that do customer credit. And this is typical of the sales of devices or brown goods or white goods in certain store chains.
And I think it was very beneficial for Fiat at that time that the JV that they did with Crédit Agricole still works very effectively. And a number of other companies did the same. So we're exploring this very concept. As I said, the objective as we write in the Slide #4, it's just to free up working capital and reduce credit risk. So we'll -- we have invited 5 institution and I guess, I'll stop to that, because we've started a discussion with them to select the preferred partner in next few days.
Next comes from Mr. Luigi Minerva from HSBC.
Two questions for me. The first is on the fixed line network and whether you believe that Telecom Italia should retain strategic control of it? And the second is a technology question. I was intrigued by your comment on the Fixed Wireless Access. And if you can give us some evidence, like early evidence of why it is such an exciting opportunity in your perspective, and the role it can play within the portfolio of your technology opportunities?
Okay. Let's start from the earlier one. So you're basically saying if we should keep strategic control. As I said that -- as I was mentioning, we have a number of different technologies. It would probably be more beneficial if we were to keep all of them together, meaning that there are areas in which -- and in fact, I will use that to build up on FWA. I mean -- and we also had some road trip to visit other operators and see how they're managing that and we're seeing how FWA is utilized. Basically, there's a number of situation in which is the most efficient way to provide quickly broadband to certain areas where the fiber would be slow, could not -- or would not be baked economically feasible to deploy. So in less dense areas, for example, in the United States, Verizon started to do significant use of FWA and they cap in success, although it's a very, very early stage, seems to be interesting.
In other part of the world this has been the same experience. So we don't see FWA as somebody -- some of our competitors say that's an alternative, it's sort of complement to fiber. And we're very convinced that in order to provide an efficient and effective service to our customers in our country, the best way to do is to combine all these technologies, not to have a single one because otherwise -- you have to be flexible. It's not going to change very rapidly. It's a continuous shift to verify what's the quickest, most effective and most desirable for the customers in terms of experience. And the -- also for us, 5G, it's at the very early stage as you know. In Europe, there are not a lot of other examples of seeing it. But the 2 technologies we're playing most with VRAN and FWA, seems to be quite attractive. Obviously, we'll be able to tell you more as we experiment and experience more.
That's okay. So then just if I can follow-up quickly just to clarify and to make sure if I got your message right. So therefore, you believe it is important for Telecom Italia to keep control of the fixed line network?
Okay. If you want me to be -- yes. As I said in the past, I don't exclude any options. So happy to change my mind if I'm proven that other situation would be better for shareholders. Now keeping control also means that there could be different ways to do it. And here I will not elaborate because I need to go to the Board. So before you ask me whether there's going to be a company, separate company, my answer is, I told you a principle. So in principle, should telecom at the moment, based on analysis we have been, should the best solution to have telecom maintaining some sort of control, yes. Have I said that we need to maintain 100% that's not going to be -- I have not, for the sake of clarity and avoiding some misunderstanding, I've not entered into that with you today.
The last question comes from Mr. Giovanni Montalti from UBS.
Just a couple of follow up. Just wanted to understand the full -- the comments you are giving out on Open Fiber being shared with the shareholder [indiscernible] Open Fiber and with the antitrust.
Sorry Giovan, the line is really bad. Can you go closer to the mic or something similar? Can you repeat your question?
Sorry, apologies. Is it better now?
Yes. Much better.
Okay. I want to just understand these comments that we're hearing about Open Fiber have been shared with the main shareholders of Open Fiber and with the antitrust?
If I understood correctly, you must be on some phones not operated by us. But if I understood correctly you were saying what's going to be the dynamic in terms of discussing Open Fiber with the shareholders and then Open Fiber shareholders antitrust. Is that correct?
No. Not really. Is it better now? I'm on fixed line, don't know what's going on.
Okay, try again.
So. No. I Just -- I mean being very generous in terms of performance on Open Fiber, I know this is a topic you still need to discuss with your Board, obviously. I just wanted to understand if the comments that you have been sharing with us in terms of idea, is actually the deal. Is it something that is just the result of your internal analysis? Or is it something that the result of discussions you have already had with the shareholders of Open Fiber? And same for the comments you have given out about potential antitrust issues. You were saying you are so busy with antitrust issues, but I can see them as a deal breaker. These conviction of yours, something that stands for your own internal analysis? Or something that you have already shared initially, obviously, with the antitrust, with the AGCOM or with Digicom per DC and other authorities.
Okay. Thanks for trying, but obviously, I won't comment on discussion with anyone publicly because obviously would be a lack of respect. But I think I will -- I restate how do I see the development. We have done a number of interaction with Open Fiber and analysis on the market and so on. I've reached enough -- I think we're in the months of June where we reach our own conclusion and prepare the analysis for our Board. We'll discuss with our Boards, then we'll check the interest of Open Fiber shareholders to hold talks with us, on a combination. And by the way, in the meantime, we will seek with Open Fiber what we called in the past, less ambitious alternatives, which are in reality not excluded, which are in the short term, we can even do a lot of commercial agreements that can be positive for both. But I continue to say that the most interesting and appealing transaction is the one that combines the 2 networks. So we'll discuss it, as I said, by the summer, which basically means we have 2 Boards in which we can discuss. One is on 27th of June and one is the 1st of August and probably both. And then, as I said, we will check the interest and then once we have an idea of -- once we have, how could I say, a shared view then we will discuss with antitrust. In the meantime, as you might expect, we're doing all of our internal analysis with the help of adviser and experts, but I can't be more specific than that.
So if I just may follow up very quickly because on the price just after your [indiscernible] past days pretty much in line with the comments you're sharing with us today. The CEO of one of the 2 main shareholders of Open Fiber has been cooling down the [indiscernible] and was mainly talking of commercial gains. You sounded very skeptical about the opportunity of an M&A. Are you -- how concerned are you about the skepticism that seems to be still there, among the shareholders of Open Fiber?
Well, I haven't discussed that yet with either shareholders formally. And in fact, I remember the comment was that they've not received any formal proposal. And I can confirm that it would be very awkward for us to send any formal proposal before we discuss with our Board. Time will tell. It's obviously -- if everything -- they're reading our press reports, it is difficult I would imagine for anyone to comment on press reports. I appreciate, but will be mostly inappropriate to hold talks through analysts, if you like.
Absolutely. Sorry. If I may just a very quick one...
It's already -- we guided when we have a lot of investment bankers. Imagine if we have the analysts. Sorry for the joke. I can tell you and I'm doing it, and I think I've been very open about what my opinions and my intentions are, then again, I think, I have an idea of what my shareholders think. And if my shareholders will give me a go ahead once we have shown them what analysis we have done because, don't forget there's also also -- we're not talking about only ideas at the time of discussion on evaluations, which is quite important because, yes, we combined together 2 things, okay, but what are the terms and conditions, those are the very important things. So my shareholders might tell me that, yes, make sense if there are certain values that may not make sense if there are no other -- certain other values, or may even tell me that they know of some other values we should follow in other structure.
So again, at this stage, I cannot, but repeat what I told you. So we're going to complete our analysis in June. We're going to go to the Board and we're going to go, after that we can have more formal discussion, if you'd like.
So thank you very much Giovanni. Thank you very much to all of you...
Sorry, Carola, just follow-up very quickly because there's been a very important restatement on your numbers with -- that you've just shared with us ahead of Q1, possibly revenues of 2018 have been reduced by 10% to EUR 4.1 billion versus previous EUR 4.5 billion. I guess...
Giovanni, I'm sorry, but the line is really getting terrible and we have presented our document explaining all the financial changes, which is on the website. We can follow up with the Investor Relations Department. So I would thank all of you for your participation to this call. We'll be on roadshow in London in the coming days. I'm happy to answer any additional questions that may come, both on this financial aspects and any other aspects. Thanks, again, to all of you. Bye-bye.
Ladies and gentlemen, the conference is over. Thank you for calling TIM.