Telecom Italia SpA
MIL:TIT
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Telecom Italia SpA
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Good afternoon, ladies and gentlemen. This is Alex Bolis speaking from Investor Relations. I am pleased to welcome you to the TIM Group Third Quarter '18 Results Call. Our CEO, Amos Genish, will lead the presentation, first of all, summarizing the latest events, and then taking you through the key results of the third quarter. Our CFO, Piergiorgio Peluso, will then give you an update on cost, cash flow and net financial position. Our Q&A session will follow. Let me point out to our safe harbor disclaimer on Page 1 and hand it over to Amos.
Hi, everyone, and thank you, Alex. This last quarter has been a turbulent one for the entire Italian telecom sector in sequence to the complex phase which developed in Q2. Two main adverse factors played out. First one, with regard to a decision of reverting to [ 28-days ] billing from April, which still continue to impact the overall sector, as well as the entry of Iliad in the Italian mobile market that unsettle prior positive trends. Mainly because of these elements, the external environment changed significantly. However, TIM was able to make the best out of this new scenario, posting a quarter that shows resilient operating performance, consistent EBITDA, less CapEx growth and debt reduction.
Let me know briefly comment on yesterday impairment decision. First of all, we remind you that due to the quarterly reporting standards, in the presence of certain situations, we need to run an impairment test, following international accounting standards. Generally, such test are happening every quarter at Telecom Italia. The majority of our Board of Directors decided it was prudent to write down the goodwill of our core Domestic Business Unit by EUR 2 billion in response to the relevant increase in current government bond yields impacting diverse -- adversely our weighted average cost of capital, as well as the current situation of market dynamics as represented, among others, by analyst consensus. The related impairment charge represents 3.8% of total group asset base. After this write-down, TIM S.p.A. distributed reserve of EUR 4 billion.
I remind you that the last impairment on domestic business was done in 2013, and prior to that, in 2011. So the write-down is entirely noncash in nature and does not change the strategic priorities outlined in our plan, to which we'll remain directionally committed. The Board of Directors shall review our [ main goals ] target in the usual cycle of our [ rolling fields ] planned update, which we will communicate with full year results and which will reflect incremental measures to ensure a material deleverage in our net financial position and a robust growth in our equity free cash flow. In taking its decision, the Board of Directors did not, therefore, have the benefits of the availability of the new plan.
Let's now dive into our quarterly performance, starting from Slide 3. Group service revenues have been stable, with domestic showing resilience and [ both in ] Brazil and INWIT delivering continued growth. EBITDA visibility improved quarter-over-quarter, both at group and domestic level, with Brazil [ continuing ] its positive trend. Double-digit year-over-year EBITDA less CapEx performance continues, driven by higher EBITDA and by planned normalization of our CapEx spend towards our capital intensity goal of below 20%. [ First-level ] cash generation is not yet translating in free cash flow at its full potential, as Piergiorgio will further comment. [ This view towards ] working capital absorption elements, mostly generated by external or one-off factors affecting 2018, as we have already detailed to the financial committee while discussing our 3-years plan presented last March. Nevertheless, both on year-over-year and year-to-date basis, debt is being reduced.
Slide 4 is a dashboard of tangible results achieved in the last year in our domestic transformation. Let me single out just a few. We have been increasingly reaping the benefits of our ultra-broadband investment since third quarter 2017. We nearly doubled FTTx adoption on our customer base, now close to 5 million lines. This is about 1/3 of the active broadband lines served by TIM. We are more than on track to reach our target of 9 million FTTx lines by 2020, upgrading both retail and wholesale clients. Second, we are significantly deepening innovative ICT service penetration on business customers, now 20% -- 21% of total Business segment's revenues, 3 percentage points higher year-over-year and well on track toward our [ wholesale ] goal of 25%. Decommissioning is on its way, involving the progressive shutting down of about 7,000 central offices. This will lead to material cash cost saving at the run rate of a few hundred million euro per year, expected to be achieved after 2020. Fourth, we have started as well to decommission IT system, which -- with about 34 of them already closed to date. Our goal is to close 300 by 2020 out of total of 700. Fifth, the company continues to be strongly focused on the digitalization of its business. More than 100 application programming interfaces, API, have been introduced, among which I wish to highlight the integration done with Alexa and Google Home. Sixth, we have deployed 8 big data use cases, which, among others, help us to increase customer engagement. And last, in third quarter '18, nonregulated wholesale revenues grew year-over-year by 22% to EUR 82 million, indicating the health of these components. As you can see, we are generating new revenue opportunities, delivering on cost efficiencies and supporting cash flow growth.
Turning now to Slide 5, domestic wireline. Let us now review domestic Fixed, which posted for the quarter retail service revenues a growth of 1.1% year-over-year. This result was enabled by our more-for-more strategy in both Consumer and Business segments, which partially offset the [ 28-days ] billing reversal impact and compensate for the line losses, which are a consequences of the current highly competitive environment, as well as the inevitable erosion of our voice-only line portfolio. We have made TIM vision even more attractive with the new Amazon and [ sports board customer ] DAZN partnerships, adding to our successful one -- with the current one we have with Netflix and offering more reasons why to move to our superfast broadband. Netting out Sparkle and equipment, core domestic top line was up by 1.3%.
Moving on to Slide 6. I wish to highlight again the mitigation for our customer base of [ FTTx users ]. Following a very healthy path [ we found ] at 21,000 active lines upgraded this quarter, we are now 40% of our retail Fixed Broadband base on fiber, up from 24% a year ago. Broadband net adds are showing a more subdued performance, still positive by 62,000 retail plus wholesale amidst robust competition. In this tough environment, we have been successfully working to increase conversions with richer and more attractive offers without introducing any significant discount. As for results, our n-Play base is now more than 40% of our consumer Fixed Broadband line, and it will go further in line with our plan.
Let's now move to Slide 7 for domestic Mobile. As expected, this quarter feature the first full 3-months impact of the new entrants. While peak commercial activity and aggressive launch promotion were taking place, TIM was able to limit service revenue and ARPU impact to low single digit. In our more digitalized and agile customer environment, this encouraging result was enabled by specific initiative of loyalty and convergence and some well-aimed retention activities for our [ main ] brand as well as practical price action to our Kena [ fighter ] brand. Well, we highlighted our business division resilience, both in line and ARPU. On Consumer, it is worth noting that our performance improved during the quarter. We can better see it on Slide 8.
The new entrant champagne effect, as we can call it, dominate July and August. Then we saw a market change in September, when aggressive promotions toned down, the market environment improved, although it remained fluid. As the quarter progressed, the monthly net overall mobile and other portability balance of TIM plus Kena move towards parity, and we saw further improvement in October.
Let's now move to Brazil, which we recapped on Slide 9. As you have already seen from the results, TIM Brazil have continued to perform positively in service revenues, posting 3 plus -- 3.3% up year-over-year. This was delivered in the face of weaker macro and consumer sentiments. During this quarter, on top of a 2.9% Mobile service revenue growth, TIM enjoyed continued robust double-digit positive performance on Fixed. Our TIM Live ultra-broadband ARPU was up by more than 10%, and our Mobile one was grown at the same pace by 10.3%. We remain constructive in the continued positive performance of our Brazilian business as we continue to upgrading our base to LTE and to postpaid, and we continue expanding our residential UBB, building a way to selective convergence. Let me also remark now that in October, [ FX ] and consumer sentiments have been visibly improving after the loss seen in Q3.
On the corporate side, as already communicated, the merger between TIM Celular and TIM S.A. simplify our company structure, generating operation and financial synergies and unlocking about BRL 1 billion in tax losses carry-forward from 2018.
Let's now comment on Slide 10, the Italian 5G auction, which closed on October 2 after the bidding process of 171 rounds that lasted more than 3 weeks. The securing of 80 megahertz in the 3.7 gigahertz band represent a key competitive advantage for TIM and will occur over a long time. And with the final auction results, TIM has confirmed its leadership position, reinforcing and future-proofing its ultra-broadband access-agnostic service all over Italy, ensuring that we eliminate any [ divide ] in terms of speed and quality and fully enabling us to offer a nationwide high-end seamless experience. The 700 megahertz we were awarded with are crucial to maintain Mobile Broadband quality, both indoor and in less dense populated area and where important for service requiring low latency and [ capillarity ] coverage. Our leading allocation on 3.7 is essential for TIM to defend its position on existing services and to evolve them towards gigabit performance. Finally, 26 gigahertz will complement in developing new services for industry automation.
On the cost side, 5G will offer huge advantages. First, it will lower substantially the operating cost per gigabit, enabling unlimited capacity for the bandwidth [ available ], so more efficient delivery, active and passive sharing and spectrum pooling. In addition, we will be benefit over time from introduction of virtualized radio access network, VRAN, a new generation radio-based station. All-in, 5G enable us to enhance Mobile Broadband and gigabit Fixed Wireless Access as strategic complementary technologies, massive machine-type communications and ultra-reliable and low-latency communications. The price was above expectation, but after careful consideration [ worth it ] as it will further enable TIM to move ahead of the [ carded ] market.
At this point, I'll ask Piergiorgio to update us on OpEx, CapEx and performance, please.
Thank you, Amos, and good afternoon to everyone. Let's start with domestic OpEx on Slide 10. As Amos has previously detailed, this has been a quarter of increased competitive pressure. Extra effort went to support top line in a challenging context, both for Mobile and Fixed, ensuring effective sales-related actions. These drove total commercial cost up by 4.4%. However, the caring subset show the year-on-year improvement due to the initial efficiencies introduced by the digital tools.
In the other areas, we are supported by sound structural initiative and solid ongoing projects. Industrial costs were flat year-on-year. We remind you that we allocate in this cluster the network-related cost, industrial-[ face ] rental, related power consumption and R&D. G&A and IT posted a relevant reduction of minus 9.4% year-on-year, helped by a good pace in implementation of our office-based reduction project, which released about 380,000 square meters. Labor cost performance was minus 3.3% year-on-year, was supported by a reduction of about 1,500 full-time equivalent units in our employee base. Summing up these performances, our addressable cost base remain flat year-on-year. Other costs, excluding one-off, remained flat as well year-on-year, with interconnection of certain credit-related costs, including the ones associated with sales of receivables.
On a 9-month basis, total CapEx -- on the Slide 13. On a 9-month basis, total CapEx stood at EUR 1,975 million, down [ in spectrum ] by EUR 575 million, bringing CapEx on sales ratio of the period down to 17.5%, 5 percentage points lower year-on-year. This relevant capital-intensive optimization derives from the fact that our FTTC and [ NT ] roll-out programs are now largely completed. We then -- we have well managed the relevant traffic growth of about 45% year-on-year. Our future network investment will be aimed at FTTH and 5G, supported by new efficient VRAN technology and by complementary use of Fixed Wireless Access.
On Slide 14, we give you an overview of operating free cash flow generation, which, at group level, stands at EUR 1.5 billion on a 9-month basis, growing year-on-year by EUR 459 million. While this performance includes the 2017 spectrum payments, at the same time, we remark that a number of other factors are impacting negatively our 2018 cash flow performance, and in particular, domestic working capital.
As we have detailed to you while presenting our 3-year plan in March, VAT split payment and cash cost roll-down effect have already produced this year relevant working capital absorption, reflecting underlying evolution in trade payables and other, which will not recur in the same measure in 2019. The item that we continue to observe, working capital, is cash-out for early retirement, associated, as you know, to labor cost reduction.
On Slide 15, we give you a full representation of our debt performance in the last year. On a year-on-year basis, group net financial position went down by more than EUR 1 billion, and with respect to year-end 2017, by more than EUR 100 million. I remind you that in third quarter, we paid about [ EUR 190 million ] in taxes, mainly in Italy. Let me remark that the overall debt reduction trend in a very challenging context. As you already know, in consideration of several factors, including the adverse competition and regulatory environment in our domestic operations, the Golden Power fine, the FX rate weakening in Brazil, the company is not reaffirming the 2.7 net financial position EBITDA pre-spectrum target ratio for year-end 2018. At the same time, we remain fully committed to ensure our deleverage path, taking more additional organic and inorganic measures such as the sale of [ Persidera spectrum ].
On Slide 16, we show you the amount of yearly installment related to 5G auction payments, which, as you can see, are back-end loaded and do not increase our net financial position [ or free cash outflow ]. At the end of October, we paid the first installment of EUR 477 million. Payments, in 2019 and 2020, will amount only to EUR 128 million.
On Slide 17, we highlight our very sound liquidity margin of EUR 8.6 billion, which allows us to cover all debt maturities until 2021, spectrum included. This margin was increased by EUR 500 million since the last quarter, also by the means of securing new competitively priced bilateral loans with an average maturity of 3.5 years. Our sound financial position will continue to ensure that, in any case, all incremental actions we shall take will be driven by value, not urgency. I wish to remind you that the quality of the recommendation of our debt is a very high grade and does not include any material adverse change clause on our bank lines nor does contain any covenant.
With this, let me turn it over to Amos.
Thanks. Piergiorgio. So time to wrap now. Let me just summarize the quarter in 3 main points. From an operational point of view, this has been a resilient quarter, showing broadly stable service revenues, both at group and domestic level, and continued growth in Brazil as well as posting solid KPIs across our main businesses. Second, the outcome of the Italian 5G auction ensures that TIM will continue to step ahead of the competitive crowd in [ both board ] and leadership. At the same time, the company is firmly committed to deleverage, which not will be deviated in any way by future payments of 5G spectrum installments. The third, finally, the company remains committed to the strategic priorities of our plan, which will be supported and enhanced through the yearly plan update on which we are currently walking on, which continues to focus on debt reduction and equity [ cash ] flow acceleration. We are basing this commitment on the current resilient domestic performance; second, the positive results we are accruing from our transformation plan, as we mentioned in the call; and the new action to be taken, among others, on 5G implementation and leadership and disposal -- the acceleration of the decommissioning and the disposal of noncore assets.
I thank you very much for your attention and hand it back to Alex now.
Thank you, Amos. The Q&A session is now open. Let's start, please.
[Operator Instructions] First, today's question comes from Mr. Mandeep Singh of Redburn.
So look, I have 3 really quick questions. Sorry about that. So first one is fiber-to-the-home adds were only 40,000. So the question really is how many homes are currently passed with fiber-to-the-home? And how far could that increase? And why is the number so low? Is it being impacted by Enel? Is it -- or by Open Fiber? Is it being impacted by the big broadband offers out there on mobile? What is the reason for such low fiber adds? That's the first question, and what's the FTTH coverage? Secondly, there's been some press speculation, this also relates to fiber, that you would be interested in becoming a tenant of Open Fiber in the Infratel areas. Is that of interest to you? If so, why? And if not, why not? And the third quick question is do you have a new deleveraging target now that the 2.7x will be missed?
I will start with the third point. We'll -- Piergiorgio will discuss the deleverage targets, and then we'll discuss the FTTH and Open Fiber.
Okay. On the deleverage target, debt-to-EBITDA ratio, as you know, depends both on debt and EBITDA performance. While reducing debt on a reported basis, group EBITDA is lower than expected. Still, as we have closed last year at about 3x, we are aiming to close 2018 in line with last year ratio. On FTTH, Amos, you want to...
Yes. I think starting with Open Fiber and Infratel, I think, again, we've been open publicly and that cooperation with Open Fiber and building the ultrabroadband fiber-to-the-home network in Italy is positive to all parties involved, the company itself; the consumers, of course, that will get it in more accelerate phase; and, of course, for Italy, for the digital priorities and agenda of the government. So overall, this could be considered as positive development, if and when it will happen, and this is clearly welcome by us. On the fiber-to-the-home connected, we have more than 3 million. Again, as you know, fiber adoption in Italy is slow, either again on the FTTx where you can see a significant migration this quarter. On -- FTTH, it's in a lower speed as, again, it's a new coverage. And we expect growth in demand for giga speeds will grow within time, even though it's not materialized yet, but will grow within time and we'll be ready in the right areas when demands will be there.
Next question comes from Mr. Luis Prota of Morgan Stanley.
I have 2 questions. First of all is on the corporate governance and the recent developments we've seen around the Board of Directors. So, I would like to get your thoughts on this, and more importantly, whether this is interfering and creating any major hurdles for your work and execution on the business plan. And the second question is on the Nextel announcement, Nextel binding offer, whether you could confirm and elaborate a bit on the benefits of this potential transaction.
Thank you very much for the comments. Clearly, this question is always delicate. I will just say that I can assure you that management is focusing only on one thing, is really running the business and ensuring best outcome, operationally and financially, and ignoring, as much as possible, the noises around us, whilst we believe that we should be committed to create shareholders' value. I can only hope and expect that all board members, as well as all shareholders, will be supportive to ensure a progression in the government to the highest standards that I believe TIM deserves. To the second question about Nextel. I would say that we cannot really disclose that kind of activities. However, I can say that we have interest in that asset. However, we are in a phase where we are, I also call it, initial. And whatever will happen at this stage is clearly very nonbinding and we will pursue other steps as we go and learn more about the opportunity. That's about that. Thank you so much for the question.
Next question comes from Mr. Julio Arciniegas of RBC.
Can you give us some color on how the competitive dynamic in the NGN space is evolving? Are you seeing like more competition deriving from Open Fiber network? And my second question is regarding the Mobile performance. Mobile service revenue has been under pressure in Q4, and Q3 has the competitive dynamic. That at the end of fourth quarter has improved, remains the same or it's worse? Or just to put it in another way, have we seen the worst from the impact of the new entrant?
I will say that with respect to Open Fiber, I mean, what we can really highlight is the resilient results of the wholesale units that -- growing at single digits already a few quarters. I think that, I think, said it all. We are able to continue deliver growth in that business unit competing with Open Fiber. I think Open Fiber is in the early stage of deployment, and we might see more next year. But as we are now, I think clearly, we are able to observe that competition [ to values ]. We can invest still. Again, the major player in [ wholesale ] access in Italy, and I think that we'll stay like that for the next coming years for sure; while, again, continue building FTTH as well in areas we believe could lead for a gigabit demand. Again, I believe that 5G, as it will evolve, will also have very complementary fixed access in certain areas and enable us to have very diversified technologies addressing different territories better than we are doing it today. Again, I think on the long run, I think again, we will hope to see more cooperation with Open Fiber to avoid network duplication. And I think that's something that all sides should seek in -- for the right reasons. With respect to the mobile dynamics, I think what we are pleased is to see that from October, there is a clear slowdown in MNP losses on TIM's side. I believe the market, as a whole, on the MNP trend is showing a slowdown, which is good overall. Second, I would say it seems that a lot of below-the-line aggressive campaigns that all operators have been involved, including TIM, is start to -- started to phase out late September and clearly in October, which is -- which really can be supportive for maybe a rebound in 2019 in the [ outlook ]. However, I will not assume that in Q4 we'll see the benefits of such a change as still the ARPU -- a lower ARPU we saw in Q3 will continue to dominate Q4. I think such a rebound will take its time to phase out -- to phase in. But again, I would say I'm optimistic on 2019 Mobile as we go on the major KPIs, but I think markets had a hit on Q3 and on the base, on the ARPU. And as market starts to be more rationalized, from my experience, it takes a few good quarters to have more normalized back to business. But again, my impression is that the worst impact is over with respect to the competitive landscape and aggressiveness and line losses. However, I don't think that we'll see the benefit of that quickly over in Q4, but it will take some time and to make sure [ that clients ] will continue. So as we said in the call, the scenario is still fluid, and we'll have to follow closely how things evolving. My perception is that capital discipline will be imposing a certain degree of flexibility to all operators. And none of the operators -- and I think we're all looking forward to see their financial outcome of Q3 in the next few weeks. But I believe all operators have and will have all the reasons in the world to follow a financial and capital discipline in order to assure [ stability ] of their businesses.
Next question comes from Mr. Dhananjay Mirchandani of Bernstein.
Amos, this one's for you. I mean, what is your estimate of annualized broadband subscriber growth across all operators and infrastructures in Italy? How comfortable or satisfied are you with your share of that broadband growth based upon the quarterly numbers, which looked a bit soft, if I may say so?
As we saw in the past, the single -- low single-digit growth markets, yes, that's overall, I would say. Clearly, Italy is kind of behind in adopting broadband, high broadband -- high ultra-broadband usage. But again, it's still growing, not as fast as we'd like to see, but it's still in the single digits. I think as streaming and other services are coming more available and being more adopted, we might see higher growth of that. With respect to the quarter, I think, again, that's the part within FTTx and broadband, yes. FTTx is growing in a massive way. We saw 521,000 net adds, while broadband again is relating to ADSL losses that offset that significant growth on FTTx. And again, ADSL losses, I will clearly say that as long we are not able to serve them with ultra-broadband, there is always a risk of losing them, and that's something that we are trying to improve our FTTC coverage. Even in area that we have coverage, we might not really providing the full benefits of FTTC. We clearly had as well a significant competitive scenario in the last 2 quarters as well. Other players reduced prices significantly on broadband. So I will say competition plus the erosion of ADSL offset the FTTx, but again, on the long run, I believe we are -- we'll see higher growth and better performance on net adds, reminding that we've been able to offset the -- on revenue side, the losses by -- improve on a multiple basis the overall pricing and we could see a better performance on revenues, the growth in fixed line compared to Q2. And I think that trends will be even stronger in Q4.
Could I just very briefly follow up?
Yes. Yes.
I mean, you lost -- or on aggregate across wholesale and retail, you lost about 65,000 lines. That's on Page 6 of your presentation today. Can you just give us a sense of who we are losing these lines to? To what extent are these being lost to Open Fiber or Open Fiber versus general line disconnections in favor of competing infrastructure, Fixed Wireless Access, et cetera?
It's mostly relating to voice-only lines. As I mentioned, voice line is about 1/3 of overall losses. Again, the other 1/3 is about -- or 40% ADSL. So it's mostly voice line and ADSL. As I mentioned, voice line is a big factor. There is erosion in voice line. The average age, I think, of people having voice line is really above 60 or 65. So clearly, that erosion is happening. There's maybe some mobile substitution to some of that, but again, we don't have indication to -- if it's got to any specific operator. I believe that the voice only mainly relating to disconnection, yes, and cancellation, yes.
Next question comes from Mr. Mathieu Robilliard of Barclays.
I had 2 questions, please. The first one on Brazil. So you mentioned earlier that Nextel is potentially something of interest, but if we take a step back, what are the strategic priorities in Brazil when you think about inorganic growth? And how do you balance that against the objectives that you have to reduce debt and leverage? So that's the first question. The second one had to do with the write-down during the second -- sorry, the third quarter. Maybe if you could give a little bit of color, please, to what triggered that and why exactly the goodwill, which kind of assets were impacted by that.
I mean, the strategic priorities in Brazil is continue to grow organically, mainly. Again, Nextel is opportunity we are evaluating. We'll see where it ending up. It's not, I'll say, the main catalyst we are seeing in Brazil. I think the continuous growth in postpaid and continued extension of our Fixed Broadband -- fixed ultra-broadband networks that show very, I mean, significant growth in the quarter is the main triggers of improvement in Brazil. And on the top line, clearly efficiency will be continue an important factor. Tax benefits that we recognize this quarter is another step forward of improving cash flow generation in Brazil. So overall, I think we are very long on this country. We saw stability for selection. And exchange rates and macro, we expect better or improved, I think, scenario going forward. It's clearly one of our best unit in the group and we'll continue to see it as a very important and strategic asset. And, if any, M&A will be complementary. We'll be happy to do so in order to improve their competitive advantage there. With the second question, I will let Piergiorgio to tackle.
Yes. Thank you, Amos. First comment on your -- first answer, I would say, that there is no specific assets. And we have a cash generating unit, which is related to the business unit domestic, which means that you shouldn't read at this in relation to any specific assets so -- but also in the press that there was a link with the network or with other things. So this is completely [ around ] from a technical perspective because our business unit domestic is the whole our business units, excluding Sparkle. So this is the first point. Second point is, this year, as we're [ saying in a speech ], of course, we have EUR 29 billion of goodwill in our accounts and we are required by [ 606 ] to check the situation. And, of course, given the relevant increase in Italian government bond yields, which of course impact [ the ] weighted average cost of capital, and also the current situation of market dynamics, the board has decided to take this action. Consider also the external [ trade-like ] market consensus [ a surprise ], but this is not -- this is, of course, something noncash. And as I said, the last impairment was done in 2013. So if you look at on overall long-term basis, it is not something, let's say, so relevant.
If I can come back on Brazil.
Yes. Mathieu, go ahead.
I guess, when you mentioned the question a bit more precise, I mean, if you look at the kind of assets that you think are important to continue to deliver good growth in Brazil, I mean, is it spectrum? Is it backhaul? Is it some parts of fixed infrastructure?
I mean, obviously, everything has a price, but are all of these potential assets equally important for you?
I believe, complementary spectrum is a key on the list, but also fixed infrastructure to promote more convergence is also a priority, although we don't see yet a major target we are interested in at this stage. So not much M&A activity at this stage in Brazil. As you know, we always talk about Nextel and we'll have to see how this develops, but there's no list of targets at this stage for Brazil besides continuous organic growth. And there's clearly opportunities we can capture on a standalone, and if Nextel will come on the way, it would be a great addition but it's not a mandatory addition.
Next question please?
Next question comes from Mr. Georgios Ierodiaconou of Citi.
I have 2. The first one is around operations and about...
Georgios, can you speak up a little more because we hear you very low.
Is it better now?
Better, thank you.
Okay. So the first one is around the operations. And the Slide 8, the improvement you saw for September, October is very useful. I was wondering if you could also give us a bit of color whether this improvement is down to churn reduction or whether it's down to win-backs, whether it was a more, let's say, aggressive returns from -- perhaps from your side. Any clarity around that, that will give us an indication on how the ARPU's would trend in the months after will be great. And similarly, if you don't mind, there was a weak performance again in Broadband B2B, which I guess is not going to be that related to a broader, let's say, trends on the voice side. I just wanted to understand if it's just the price increases, if it's Fastweb winning on the [ capital ] administration contract or if there's any other dynamic that we're not seeing before. And then my second question is just a clarification, if you don't mind, around the bylaws regarding the Savers. My understanding is, following your decision, domestic business will be loss-making this year unless something dramatic happens. Do you need to pay a dividend to the Savers in the event that you have losses? And if you don't mind just running us through what are the preconditions for conversion.
Georgios, I take the Savers one and leave to Amos the other one. It is not point of the values, it is how the Savers are structured in Italy. And it is [ always ] law coming from, if I remember well, 1974. Anyway, the Savers are entitled to receive a minimum dividend and the differential dividend of 2% compared to the ordinary shares. So these are minimum dividend of 5% and differential dividend equal to 2%. So this is how -- the mechanics. Then if you have a loss 1 year, you do not have to pay the dividend that year because, of course, you don't have the profit, but you are obliged to pay that dividend if the following year, you have the profit, which means that they have a cumulative effect where you can, of course, accumulate and be entitled to obtain the same dividend the following year. So this means that technically, if we pay dividend -- if we have profit next year, we will pay also this year dividend.
It is clear, Georgios?
Yes. And around the conversion, I remember it was this 6-month average price, the current share has to be higher or something. Is there other technicalities that need to be satisfied for the conversion to be able to take place?
No. So this is a, let's say -- once you have the conversion, you have, of course, a general meeting of the saving shareholders. For those shareholders -- for those Savers shareholders who do not approve the transaction in case, of course, the transaction is approved by the majority of the special [ SMB ] of the saving shareholders, they have the right to ask the payment in cash. It's a price which is the 6 months average price before the AGM, which means that this is in protection that the [indiscernible] law decided to give to entitle to the savings shareholders in case they do not accept to be, let's say, converted into ordinary. So this is the only protection that they're having. So if they are voting no, they have this protection. If they are voting yes, of course, they will be converted into ordinary at the conditions offered in the special AGM.
If you go back to the first question you have, I think, you know again on the churn, Page 8, relating to mobile, I will say it again, it's a very competitive market. You have gross and net. And I think we should focus on the net because it is a very dynamic market. I mean, clearly, there's the gross and the net and the difference is the churn. However, I believe that we acted well both on gross and the churn to present a very low number in the end of day, which is really the one that's affecting the total customer base and multiple by the ARPU and creating the revenues stream. On the B2B, I will say that overall, we are likely to see a more or higher number of vendors in practical competition. However, as we talked about B2B, several service revenues year-over-year were slightly improved, also quarter-over-quarter. So it's clearly a stable plus a solid performance, and we have positive MNP in B2B. So overall, I think it's -- again, it's a less competitive market than the consumer, that's for sure. We see it less agitated, enabling to the more solid performance [ and having this ] as well on MNPs in consumer, but again a lot of that is a lot of bundles in a very, I mean, I would say generally less competitive market segment of the market than consumer. Thank you. Next question.
Next question, please?
Next question comes from Giovanni Montalti of UBS.
If I may, can we have some more color on the trend of your wholesale revenues in Italy, both on the fixed side and on the mobile side? Do you [ see some ] growth? I just wanted to understand what dynamics are you seeing there and if there is any [ indivisible right to view ], any kind of one-off big deal that you have done in the quarter, maybe with some new entrants.
Giovanni, Alex speaking. Starting from the fixed wholesale, trend has been positive. We have overall seen a 2.8% growth year-on-year on domestic fixed wholesale. So I would say very constructive results in this highly competitive area. That means that we continue to attract not only retail customers, but also the other players of the market, remain the player of reference. More specifically on the mobile side, you may see -- but we can take further questions off-line at IR level, you may see some volatility in the mobile wholesale revenue from quarter-to-quarter. This is really due to visitors. So I would caution you in taking views on whether or not the market is growing or not. You have to always adjust for seasonality. And clearly, this has been a good quarter in terms of mobile also because of the summer effect. You may remember that the previous quarter was affected by sort of the opposite kind of seasonality. So, again, Giovanni, volatility, but we have seen once again also on mobile wholesale, good growth this quarter.
If I may, a very quick follow-up on the previous question. Understanding in the past, for the same reasons, so a write-off, it would be a write-off, the S.p.A. The Italian legal entity had a net loss, but the board decided to pay in any case on the same year that to the saving shareholders. Is there any view from the management? Is there any view from the CEO and the CFO about the orientation, the suggestion we would give to the board for dividend? Would you consider suggesting to pay the dividend to the Savers regardless of the eventual net loss?
Giovanni, as usual, one thing you best practice and, of course, based on best practice, you can decide to pay the dividends to the Savers, but this question of Georgios was -- it's illegal, so technically, you are not obliged to pay. So, of course, you can do, but technically you are not entitled or obliged to do. And as we -- as you know, in case you don't pay, you have to accumulate the rights in the following year should there be any profit. But of course, based on the practice, it's something that we can, of course, decide to do, but the final decision will be made -- will be taken by the board as usual.
No, absolutely clear on the technicality side. That was super clear. But again, is there any specific view from the management, from the CEO on the suggestion to give to the board, also considering concerns about the leverage?
I believe, again, look on best practices. The company paid the dividends, even in the year when we had a situation similar to this. I believe we should continue to follow best practices. However, again, formal decision always will be taken by the board, and we can talk only on behalf of management at this stage. Thank you.
Thank you, Giovanni. Next question, please?
Next question comes from Mr. Stephane Beyazian of Raymond James.
2 questions if I can. The first one is on your commercial and customer care cost, which remain untouched, [ and after ] quite significant, but I understand [ of your future ] project and your commercial performance. Will you consider making some savings in this budget line as well going forward? And my second question related to the cost savings. Do you believe you have more room to cut CapEx or OpEx going forward? And if you could elaborate a little bit on that, that'd be great.
Yes, of course, we believe that there is additional [ phase ] in CapEx and in OpEx. And we are working on several projects that will be part of the new plan. Of course, we don't want to get into too much detail, but in terms of caring model, we are walking on an important caring model of the design and, of course, the most important area, the acceleration of digital self-care migration in order to increase the positivity and also to increase the [ DIY ] in the entities, so this will be part of an important project that we are working on together with the resale division. On -- in general, on the cost, we are also working on a shared service center. In particular, we are considering over to concentrate some functions where the manual components -- or the administrative component is very high, and we are trying to be more efficient [ onto ways ]. The first one is, of course, to use all these people in a more efficient way. And second, thanks to the, let's say, new digital process trying to, let's say, have additional synergies on these actions. And, of course, this will not immediately create an efficiency, but at least we can use all those people in order to reduce third-parties cost, reducing the outsourcing. So this is an overall project where we have set up a job center and we will fill up the job center. For the people, let's say, in excess, they will be utilized in other functions. Then we have, of course, on the credit management. So I'd want -- it's really a long list, but just to give you the sense that we have a detailed plan for many of these areas. On the credit management today, this year was an important offender of our profit and loss because of the high churn and the cost related to credit implicit in the churn. We are -- we have already developed a plan in order to, let's say, review and reinforce discovering and the early warning system in order to be able to, let's say, to reduce this cost. And also we have launched an extraordinary campaign in order to improve the collection process. Areas where we expect in the OpEx and CapEx, and it's important in practice, of course, the commissioning. We know -- you know that we have already commented in various calls, we have already communicated to AGCOM our intention to shut down at least half of our switching stations, which is in the region of [ 600,000, 700,000 ] switching stations. So it's an important amount. And we are launching in these days the first pilot in order to test exactly the cost, the migration issues with the clients and so on. And this will be part of the new year plan and this will be also something that we are considering on IT in order to optimize the IT infrastructure. So I would say that these kind of actions will be probably at best explained during the plan, but I can tell you that behind all these actions, we have a specific team working on it.
Can we move on to the next one, please?
Next question comes from Mr. Luigi Minerva of HSBC.
They are both on the wave of the 5G auction. So the first is, if you can maybe give us your latest update on where we stand on the rating, because I know the message before the auction was that you could return to investment grade in 2019 and that would have been a precondition to start paying again the dividend. So can you give us an update on your discussions with the rating agencies on this task? And secondly, just on comments made by the Ministry of Economic Development that given the high amounts paid by operators, some of the benefits from the proceeds could be given back to the industry in some way. It wasn't too precise, to be honest, but I was just wondering if in your recent discussions with AGCOM or the government, have they been more practical, more clear on what they intend to do.
On the rating, I take this one and I'll leave to Amos the other one. Upon discussion on the rating agencies [ and our financing ] stable outlook, so we don't have any evidence of -- so stable outlook and no comment on this.
With respect to the second question, I would say that we have opportunity and intention to give back money to the operators, which I think it's more about the government saying there was an excess payment and that might be in some way reinvested in a way that there will be benefit to sector. I believe the 2 things coming in mind is voucher to consumer-customer businesses, traditional-like business and ultra-broadband and 5G as faster as possible. The second is helping industries digitalize, how to make the businesses -- the 5G is really material. And I think that the third one is indirectly improving the electromagnetic emissions that will get -- will remove the major barrier for small cells with respect to 5G. So that's what's coming in mind and I'm sure that the industry is, as a whole, making that case within different meetings we had and we will have in the future with government officials. Thank you.
Thank you very much, Luigi. Next one.
Next question comes from Mr. Jakob Bluestone of Crédit Suisse.
I've got 2 questions, please. Firstly, you talked about Fixed Wireless Access and lower broadband in the presentation. I was just wondering, could you maybe sort of help scale the market a little bit? So how -- what sort of proportion of households do you think this would be an appropriate broadband solution for? So what are the sort of areas that you're mostly going to target? And then just secondly on the impairment. Are there any tax effects from that? So can you offset any of it against your tax?
No, the impairment loss is not deductible.
On Fixed Wireless Access, Jakob, the current market is a little more than 1 million today and it's growing. Clearly offers opportunity of complementarity with other technologies. Given the Italian geography, it is suitable for further penetration, for sure. And as you rightly pointed out, if you link it to the 5G spectrum that we just got awarded with, 3,700 is perfectly suitable, it's ideal, if you wish, for this application. And as a matter of fact, one of the major players is already using that wavelength very successfully. So it's a great fit, and we have the customers. We have the network to support it in the best possible way. And it absolutely will become increasingly one of the technologies to cover all of Italy with ultra-broadband.
Next question comes Mr. Fabio Pavan from Mediobanca.
On 5G, please, I was wondering, first, if there could be the option of having some concrete offer already to be launched next year or it's too early? And the second part of the question is following the result of 5G auction, have you revised in some way your strategy on the tower business.
Yes, I will take that question. With respect to readiness of 5G, I will say we are working very closely with our vendors to ensure a launch in mid-2019, maybe third quarter of '19, for some key cities in Italy where we'll be able to actually go beyond the pilot phase we are having today to actual commercial launch. An initial feeling of 5G, we expect businesses and some verticals as well as some consumer application, will be -- depends, of course, on handset on the consumer side. It'll be, I believe, only by some of the suppliers only by June, July of next year. So all in all, I think, again, we are very much focusing on the 5G opportunity. We are really believing that a catalyst for our business, and it will enhance dramatically other years the business model of the company, so that's a trend. However, I think real rollout in major and more cities in Italy will be more in 2020, when these equipments will be more available and the handsets will be more available. On the second question.
Can you remind us? The tower strategy, it was? No?
Yes.
I think -- sorry, no doubt that the 5G rollout in Italy represent a fantastic business opportunity for INWIT. And we see that assets are becoming more valuable overall but not as important, more critical to strategic actions we will take on 5G. Owning that major tower assets will give us advantage going forward with the rollout of 5G and we'll try to leverage that asset to the maximum, but again, it's very -- as much as we see, very much tied to the 5G strategy. So it has clearly boosted the value and importance of the tower business for us at TIM.
Next question comes from Mr. Andrea Randone of Intermonte.
My question is about the project to separate the network. I wonder if you can give us an update and also comment on the regulatory environment and the political environment you are observing about this important topic.
Thank you for the question. NetCo does not change in the status. I think it was a project that was, I will said, more relevant on a standalone, on a legal separation in the past than as of today. And I think currently, I will say public interest in the NetCo legal separation toned down and that's take the project to be more slower than maybe initially expected. And I think we are in continued discussion with AGCOM and other institution, understanding the relevance of the project and any modification needed to that to make it attractive to all parties. So I mean, that's the best I can tell about that. On the regulatory environment, I would say in general, it's clearly, I will say, a challenging one. We saw it on some decision being made in the sector, the 28-days haul back, the modem decision of not being able to integrate it in a house bundle, termination cost being decided recently on [ easening ] determination cost for customers, and so on and so forth. Clearly, there are several decisions that are not friendly to the sector. And as I mentioned in discussion, it's time to -- for regulator to realize that the Italian sector is -- Italian telecom sector is really having really a significant challenges. We are having the lowest price maybe in Europe for some fixed and mobile, extremely competitive market and highly regulated, the sector and on TIM on standalone. So generally, we would love to see and expect to see a more positive regulatory framework and more co-investment for business, and that's what we are discussing those days, our thinking on that subject. But no doubt, it is a very important topic that's affecting our business model. We are having a positive dialogue with the regulator in the last few months about some changes we'd like to see in the regulatory framework. And hopefully, the new market analysis will come in December, will be showing some positive trends compared to the previous market analysis that will be more positive to our business in general, and that's the expectation.
Next question comes from Domenico Ghilotti of Equita.
Two quick questions. Just first, for sake of clarity, could you provide the bottom line of the S.p.A. because it is not so straightforward to move from the write down at the consolidated level to the S.p.A. impact. So this would be helpful. And second question is an update on the early retirement project and on top of that, or the existing project, I wonder if you have any impact from the possible proposed reform of the former law included in the budget law.
I will answer the first -- the second one quickly. Again, I mean, we have the retirement project, 4,000 people. The first 1,000 will be benefiting from that plan by the end of the year. Additional 1,500 the next year and so on. So clearly, we are in that process and that is going on. There's no significant benefit at this stage from the early retirements as suggested by the new law. We're talking about much lower number of people, some 200, 300 people in our data today that might benefit from that. So it's an interesting number but not a significant number. However, I think within time, going forward the next few years, it will be a very relevant factor to reduce labor costs, reducing by few good years retirement we have today, which is 67, clearly will benefit in the mid-term, long term, the labor cost of the company and enable bringing young generation into the workplace. The first one is -- will be taken by Piergiorgio.
Yes, the net profit for the Telecom Italia S.p.A. has a net profit before devaluation. After devaluation we have a loss of EUR 1,052,000,000.
The next question comes from Mr. James Ratzer of New Street Research.
I've got 2 questions please. First, I was wondering if you could go back to the topic of the broadband market growth in Italy. Amos, earlier in the call, you said you'd hoped for...
Louder, James, is it possible?
Yes, where you said at the beginning of the call around domestic broadband growth, you've been hoping for that to return to a recovery. I mean, I share that same hope, but I was wondering if we could kind of try to talk a bit more about what the specific initiatives could be that might drive that further growth? What specifically are you hearing from customers in the market as to actually why growth has slowed this year? Just trying to get more confidence on what could actually drive that re-acceleration in broadband market growth. And then second question was regarding your labor costs. I believe those were down 3% year-on-year in Q2, and they were down 3% again year-on-year in Q3. I would have thought that might have seen an acceleration in trend because of the Solidarity agreements. I just wanted to understand why we haven't seen a further acceleration in the rate at which labor costs are coming down.
I will take the first one. I think that what we're seeing in general is reduction in ADSL lines. That's affecting, and again, as I mentioned, offsetting the FTTx growth. I believe we are trying to reach to more and more people with FTTx, so to avoid losses for ADSL, so I think our goal is to reduce churn. I think we are not issue on the gross-up, but on the churn itself, mainly of ADSL, again providing better technologies through FTTx, FTTH, and FWA will be the key to maintain more and more customers. In addition, we are having plans to more focus on conversions, fixed to mobile to reduce the churn in general of line losses, which is a key thing for us. Reward plan is really in full-blown, 1.5 million customers. So if you're fixed mobile customers, you get different benefits and I think the whole plan is growing fast and I think we'll reap the benefits within time. And in addition, we will try to maintain, through smart caring and data analytics, churn prediction, the churn itself in general. There are lots of activities really focusing in the next coming months to reduce churn, improve Broadband services to enable us to see the full benefits of FTTx growth. But it also, of course, depends on market growth itself. I believe it's there and maybe not fully materialized. The macro economy in Italy, it was not at its best this year, so we hope to see a better trend the next year or 2, but it's all a combination of different factors. Now I will let Piergiorgio maybe answer you the second -- the other question.
Yes, on the labor cost, there are various components that are working with different [ sign ]. Of course, there is Solidarity, which enter into effect in June this year. So in the first 6 months was not present. Then you have the renewal of the [ initial ] contract, which is playing in a negative way because it's a bit increasing the cost of the total labor cost. And then we have, of course, the average exits in this quarter. We had, as you know, an FTE reduction related to 1/3 net overall attrition and one part is -- 1/3 is Solidarity, and then 50% -- we'll say the other part is almost 50% related to [ article 4 ], which is working also in the last quarter. But I would say that overall, in the 2018 in whole year, we are expecting a smaller reduction compared to the previous year number.
Could I just very quickly, Amos, go back to the point you made about broadband market growth, the market overall. You linked that there potentially to macro effects. I mean, are there other effects you think that are potentially at work here?
No, I think it's demand in general. We have significant old population, not yet fully digitalized and that adaptation at that level is taking longer time than maybe other places. So [ it's my call ], population, education and income, several factors is make Italy behind in demand with respect to other European countries. I mean, it's [ supposed -- ] that could take some time to pick up to the level we see in other European. But again, here we hope, and I think government is fully aware of the importance to incentivize broadband usage. We talked about voucher, for example. I think it's clearly -- what we see in this government is their full awareness of the importance to reduce the digital divide in Italy. And I think this is really will probably mean some action taken by the government to get it done. So if the governments will be involved as well, as they're hoping, as we all hoping, as they're declaring, I think we might see a change with respect to pent -- pickup of demand and pickup of penetration. So it's a combination of many factors, but it's not a lost war, we should do our part, the government should do their part and new services that require broadband, as we talk about streaming, the penetration of video streaming services is increasing rapidly in Italy and business is more and more adopting broadband. So I think it's a combination of things that make me optimistic that this is going to be an improved trend in the next coming years. Now I believe we --
Next question comes from Pietro Solidoro of Fidentiis.
I have 2 questions, if I may. The first one is on your 3x net debt-to-EBITDA. Is it still ex spectrum? Or is it including the spectrum in the target? And the second question is during the conference call, INWIT stated that they're interested in purchasing assets, maybe the towers from Wind, which would be like a cash-out according to [ press ], so according -- EUR 1 billion. Would that be something you would be comfortable with or like allowing INWIT to make -- to take that type of debt? Or would you block that tower acquisition?
On the leverage ratio, of course, is including the spectrum payment in October, EUR 477 million.
Looking on the Wind towers that might be for sale, our evaluation is that they are not complementary to our footprint and not adding significant value to the footprint.
Last question comes from Nicola Gifford from Goldman Sachs.
I've got 2 questions related to your free cash flow. The first is around cost-cutting. Has your -- has execution been on track with your guidance? And how should we expect this to evolve in 2019 and 2020? And the second question is relating to CapEx. Should we expect the CapEx to fall as materially as you previously guided for 2019? And how confident can we be that CapEx intensity will not rise again in future years?
I will jump in with the CapEx and then Piergiorgio will discuss OpEx. We are believing that the CapEx trends, as been highlighted in our previous guidance, will be [ kept ] and might even be lower than expected, especially for 2019. So clearly, CapEx optimization is continue happening. We're seeing great opportunities in different areas of our CapEx portfolio, and we will encourage more partnerships on 5G deployment and even in some cases, as I said, in order to optimize CapEx and make sure it is fully ROI-driven. On the mid-term, long-term decommissioning of IT systems as well as central offices will be key to have another -- make a step forward from the below 20 we are talking. I think this is really, again, a mid-term view, but I have no doubt that those 2 things will carry significant OpEx and CapEx opportunities but as well CapEx. So again, in general, the trend is as we expected, could be even better as we move, but we'll probably be able to talk about it more in the new guidelines that we'll publish in the regular cycle. With that, I will go to the OpEx with Piergiorgio.
Yes, thanks, Amos. So on the OpEx, as said in a previous answer, we have [ other ] set of initiatives, which were part in the original plan and now we are trying to accelerate and even to increase in term of extension and also other new [ revenue ] ideas. Also on these, I think we will be able to update you in the next event presentation with all the details, but, of course, I can confirm that we are working on the same framework that was presented in the plan currently [ used ].
So this ends the conference. That was the last question. I will, of course, be happy to take more. Thank you all for being on our call.
Ladies and gentlemen, the conference is over. Thank you for calling.