TELECOM ITALIA GROUP. 1H 2014 Results. Milan, August 6th, Telecom Italia Group. 1H 2014 Results. Marco Patuano Piergiorgio Peluso

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1 TELECOM ITALIA GROUP Milan, August 6th, 2014 Telecom Italia Group Marco Patuano Piergiorgio Peluso

2 Safe Harbour These presentations contain statements that constitute forward looking statements within the meaning of the Private Securities Litigation Reform Act of These statements appear in a number of places in this presentation and include statements regarding the intent, belief or current expectations of developments and changes in the customer base, estimates regarding future growth in the different business lines and the global business, market share, financial results and other aspects of the activities and situation relating to the Telecom Italia Group. Such forward looking statements are not guarantees of future performance and involve risks and uncertainties, and actual results may differ materially from those projected or implied in the forward looking statements as a result of various factors. Consequently, Telecom Italia makes no representation, whether expressed or implied, as to the conformity of the actual results with those projected in the forward looking statements. Forward-looking information is based on certain key assumptions which we believe to be reasonable as of the date hereof, but forward looking information by its nature involves risks and uncertainties, which are outside our control, and could significantly affect expected results. Analysts and investors are cautioned not to place undue reliance on those forward looking statements, which speak only as of the date of this presentation. Telecom Italia undertakes no obligation to release publicly the results of any revisions to these forward looking statements which may be made to reflect events and circumstances after the date of this presentation, including, without limitation, changes in Telecom Italia business or acquisition strategy or planned capital expenditures or to reflect the occurrence of unanticipated events. Analysts and investors should consult the Company's Annual Report on Form 20-F as well as periodic filings made on Form 6-K, which are on file with the United States Securities and Exchange Commission which may identify factors that affect the forward looking statements included herein. The accounting policies adopted in the preparation of the Half-Year Condensed Consolidated Financial Statements as of and for the six months ended 30 June 2014 have been applied on a basis consistent with those adopted in the Annual Consolidated Financial Statements at 31 December 2013, to which reference should be made, except for the new standards and interpretations adopted by the Telecom Italia Group starting from 1 January 2014 which had no effects on the Half-Year Condensed Consolidated Financial Statements as of and for the six months ended 30 June Please note that the limited review on the Telecom Italia Group Half-Year Condensed Consolidated Financial Statements at 30 June 2014 has not yet been completed. Following the classification, starting from the fourth quarter 2013, of the Sofora - Telecom Argentina group as a disposal group (Discontinued operations/noncurrent assets held for sale) the consolidated financial statements data of prior periods (including the first half 2013) have been restated accordingly and therefore the Sofora - Telecom Argentina group is no longer separately presented as a business unit. Furthermore: starting from the First Quarter 2014, Organic change in Revenues, EBITDA and EBIT are determined excluding, where applicable, only the effects of the change in the scope of consolidation and exchange differences and therefore don t take into account, as in the past, non-organic income and expenses, including those non-recurring; starting from the Interim Report at 31 March 2014, the Domestic business unit includes the Olivetti group, in addition to Core Domestic and International Wholesale. This different presentation reflects the commercial and business placement of the Olivetti group and the process of integrating its products and services with those offered by Telecom Italia in the domestic market. In the past, the results of the Olivetti group were included in the Olivetti business unit; as a result, the data for prior periods under comparison have been restated, accordingly. Marco Patuano - Piergiorgio Peluso 2

3 Agenda TI 2Q 14 Results Financial Update Take-Aways Appendix Marco Patuano 3

4 2Q 14 Group Highlights Service Revenues 4,871 mln Organic Performance at -7.1% YoY vs -6.5% in 1Q 14 reflects: Domestic trend stabilization with a consistent improvement in mobile service revenues. Good acquisition trend in Fixed & Mobile UBB; Slight erosion in TIM Brasil figures impacted by full MTR drag in 2Q Solid growth in Mobile Generated Revenues Ebitda 2,145 mln Organic improvement to -4.8%YoY vs -5.7% in 1Q 14 driven by: +0.8pp in 2Q in Domestic operations (+2.5pp net of subsidy); Continued Sound performance of TIM Brasil Innovative Capex ~250 mln OpFCF generation 1,058 mln Net debt 27,36 bln Constant progression in this key area: Italy: 83 municipalities covered with fiber, 60.5% population reached by LTE, TIM recognized by AGCOM as best network in Italy for speed in data transmission; Brazil: 66 cities covered by mobile BB project (+13 cities vs 1Q 14) Strong Performance in 2Q 14: +11% YoY Reduction of 0.2 bln vs 1Q 14 & -1.5 bln vs 2Q 13 Marco Patuano 4

5 Fixed Mobile Domestic Service Revenues Performance mln, %YoY Domestic Service Revenues 1 Mobile Service Revenues 3,914 1, % -13.3% 3,567 1, Q'13 2Q'13 1Q'14 2Q' % -13.3% 2, % 2, % -18.3% elim. 2Q'13 2Q'14 Calling CB stabilization due to lower pressure coming from competitive environment and almost zero MNP balance ARPU stabilization on a quarterly basis 2 Fixed Service Revenues Double-digit growth in mobile Broadband users. Good LTE take-up 1Q'13 2Q'13 1Q'14 2Q'14-7.5% -7.9% -7.3% -8.6% Stable TI retail line losses per quarter (~140k). CB erosion due to increasing trend in carrier selection and pre-selection disconnections Voice Usage & ARPU erosion Zero support from monthly rental fee increase in 2013 A good set of KPIs in BroadBand. Faster than expected fiber acquisition trend Marco Patuano 5

6 LTE NGN Domestic Capex Italy: Switching Capex to Innovation mln a -49 b -24 c -98 Innovative capex on total: 26% +10pp vs 1H 13 1,347 Efficiency (1) : -153 mln 1,177 network 1H13 IT commercial& other IT others subsidy 1H14 Innovative portion of network capex: 34% +10pp vs 1H % YoY -50 UBB Coverage (2) 83 municipalities + 31 vs 1Q 14 >3x vs main competitor d innovative traditional 60,5% of pop. +10pp vs FY 13 (1) total domestic capex efficiency= (2) at the end of July 2014 a + b + c + d higher than main competitor Marco Patuano 6

7 Fiber CB net adds Fixed service Mobile BB CB Mobile service Italy: New Services Demand is Catching Speed 000 6,853 7,166 8,023 8,444 8,677 9,151 ~+30% YoY Innovative revenues on total (1) 0% 1% 2% 4% 5% 7% 25% 32% 2Q 13 2Q 14 innovative traditional 1Q'13 2Q'13 3Q'13 4Q'13 1Q'14 2Q'14 MBB Users % LTE on MBB Users Investing to support the growth in data and new services >100k clients at the end of June >1.0 28% 32% Q'13 4Q'13 1Q'14 2Q'14 Fiber CB Avg daily acquisition ('000) 2Q 13 2Q 14 innovative traditional (1) net of wholesale Marco Patuano 7

8 2H Key improvement factors Revenues Domestic Mobile: Clear Signs of Improvement mln, %YoY 1, , % -13.3% +8.4% -21.9% 1, , Total handsets Service wholesale Innovative VAS content Broadband Traditional SMS Incoming voice Outgoing voice % -23.3% -13.3% +12.9% +11.5% -24.9% -17.4% -23.5% Q'13 2Q'14 1Q'14 2Q'14 Traditional Outgoing ARPU stabilization Zero MTR drag Constant recovery in calling CB Innovative Increasing smartphone penetration 4G uptake support New digital entertainment services Service Revenues Trend 1Q'14 2Q'14 3Q'14 4Q % -14.9% + + Marco Patuano 8

9 2H Key improvement factors Revenues Domestic Fixed: Leveraging on the Value of BB mln, %YoY 2, , % -8.6% 2, ,664 Total handsets Service 1-6.9% -8.3% % , % 1, National, Int le wholesale + Subs&other Innovative ICT VAS content Broadband Traditional Others Access Outgoing % -4.9% -19.7% +1.8% -8.4% -20.7% Q'13 2Q'14 1Q'14 2Q'14 Traditional F/M traffic erosion reduction due to bundled offers Access valorisation Innovative Constant support from BB CB growth Increased fiber penetration and adoption Continued uptrend in ICT services Service Revenues Trend 1Q'14 2Q'14 2H'14 ARPU CB -7.3% -8.6% + Marco Patuano 9

10 Brazil: Usage of Mobile Data is Rapidly Expanding YoY, % Total Service Revenues Mobile & Fixed Service Revenues Mobile Service Revenues (1) 1Q % -22% +1% -23% +9% 1Q 14 partially impacted by MTR cut 2Q % -18% -1% -30% +7% 2Q 14 fully affected by this year MTR cut fixed (2) mobile +3% ex-mtr received generated Traditional -1% Innovative +44% Outgoing Voice Outgoing SMS -7% flat Data Vas Content & other VAS \ +35% +73% Outgoing Voice Revenues flat SMS declining trend (1) visitors&other revenues non included (2) revenues based on net contribution Excellent take-up in data KPIs in 2Q Smartphone & webphone penetration at 62% Smartphones ~71% of new handset sales Marco Patuano 10

11 Planned Non-Core Assets Disposals Progress Italy Brazil Argentina Tower Deal Transaction dependent on clear industrial driver: Market analysis still in process before project launch; More than 10k towers potentially involved into the deal. TI Media Merger of the digital terrestrial network operator businesses of Telecom Italia Media and Gruppo Editoriale L Espresso finalized on June 30th: TI Media and Gruppo L Espresso hold 70% and 30% of the shares of Persidera - the new name of TIMB respectively; This transaction has resulted in the creation of the leading independent network operator in Italy, which owns five digital multiplexes with a nationwide coverage infrastructure providing high-quality services; Disposal expected within Tower Deal Well advanced sale process: The TIM Part tower portfolio is appealing for the market due to its further cotenancy potential; Sale process attracted strong interest from various highly qualified buyers; Transaction involves more than 6.5k TIM towers; Expected to be finalized by the end of the year. 700Mhz Auction Fits our continued leveraging on development of mobile data, increasing our 4G frequencies and roll-out: Minimum price and cleanup costs range not yet fully defined; License period: years; Payment preceded by a deposit of 10%; No further obligations. Opportunity for network and spectrum sharing. Asset disposal Sale process in the final phase: Waiting for the Administrative authorizations from the Local Regulatory Authorities to transfer the control of Telecom Argentina; Buyer and seller committed to proceed. Marco Patuano 11

12 Agenda TI 2Q 14 Results Financial Update Take-Aways Appendix Piergiorgio Peluso 12

13 Ebitda - Capex Capex Ebitda Revenues Telecom Italia 2Q 14 Results mln, %YoY 2Q 14 Reported Organic (1) Group Domestic Brazil mln Weight (2) YoY YoY 5,363 3,803 1,558 71% 29% -10.6% -8.2% -15.0% -6.8% -8.1% -3.4% net of new SAC policy n.a. Group Domestic Brazil 2,145 1, % 20% -6.7% -7.5% -4.8% -4.8% -7.4% +8.0% -2.0% -4.1% Group Domestic Brazil 1, % 33% -14.5% -10.9% -19.6% -9.6% -10.9% -7.0% -4.2% -2.8% Group Domestic Brazil 1,122 1, % 9% +1.7% -5.0% +162% +0.1% -4.9% +164% n.a. (1) Starting from 2014, Organic performance includes only exchange rate variations and impacts from perimeter changes (2) Including TI Media, Other & Elimination. Olivetti is included in the Domestic perimeter Piergiorgio Peluso 13

14 Domestic Performance Dashboard Reported data, mln, %YoY Total Revenues Ebitda 4, % 3,803 1, % 1,709 net of new SAC policy -4.2% 2Q'13 2Q'14 2Q'13 2Q'14 on revenues 44.6% 44.9% Capex Ebitda - Capex % net of new SAC policy 684 1, , % 2Q'13 2Q'14 2Q'13 2Q'14 Piergiorgio Peluso 14

15 1H14 Opex Reduction Overperforming FY Targets mln Volume/ Revenues Driven (1) 4,407 1, ,030 1,423 External Opex net of COGs -324 mln YoY Market/ Customer Driven (2) Process/ Asset Driven (3) Labour Cost ,449 1H ,414 1H14 Solid Cost Reduction: Lower competition is reducing marketing expenses Zero-base budget G&A approach Facility services efficiency and rental renegotiations Massive energy saving program based on efficiency, technological upgrades and development of distributed power generation (1) Interconnection, Cost of Equipment, Other COGs (2) Acquisition costs, ADV, Customer Care, Other commercial costs (3) Industrial costs, G&A, Real Estate, Other Piergiorgio Peluso 15

16 Brazil Performance Dashboard Organic data*, mln, %YoY Total Revenues Ebitda Handsets 1, % 1, % 434 Service -2.0% 1,327 1,302 Mobile Service +3% ex-mtr 2Q'13 2Q'14 2Q'13 2Q'14 on revenues 24.9% 27.8% Capex Ebitda - Capex % 337 1H 14 +4% YoY Q'13 2Q'14 2Q'13 2Q'14 * Excluding exchange rate Piergiorgio Peluso 16

17 2Q14 OpFCF 1,058 1H 14 Operating FCF: Focus on 2Q Improvement mln Domestic 2Q OpFCF Group OpFCF Ebitda - Capex WC & Others 1, , EBITDA - CAPEX WC & Others 2,739-1,722 2,638-1,594 OpFCF 875 2Q Q Fine levied by the Italian AntiTrust OpFCF 1,017 1H ,044 1H Brazilian Frequencies payment OpFCF WC & Others Brazilian 2Q OpFCF ~+60 Leasing LT Amazonas Ebitda - Capex +37 2Q Q 14 Piergiorgio Peluso 17

18 Treasury Optimization Improving our Cost of Funding Cash Financial Expenses Lowering Bond Yields 10Yrs 1.5 Bln $ issued in May14 - Yield: Equiv 7Yrs 1 Bln issued in Jan14 - Yield: 7Yrs 1 Bln issued in Sept 13 - Yield: mln Lowering costs of Bank Facilities Amendment of 7 Bln bank facilities (maturing in 2017/2018): commitment fees lowered by approx. 35% with significant savings on financial expenses (starting from August 1, 2014) 874 1H H14 bln Undrawn portion of committed facilities Cash & Cash Equivalent Liquidity Margin H 14 Robust and Safe Liquidity Position Debt maturities covered until 2017 Tenors well diversified to avoid concentration Strict Guidelines for Liquidity and Credit position: High credit-quality banking and financial institutions Diversification policy among different banking counterparts (limits of concentration by type of investment, sector and counterparts) Deposits generally made for periods of less than 3 months Piergiorgio Peluso 18

19 Agenda TI 2Q 14 Results Financial Update Take-Aways Appendix Marco Patuano 19

20 2Q 14 Group Take-Aways Domestic Domestic business on track with Plan Improving trend in mobile space paving the way to a solid 2H2014 Line losses and voice ARPU weak as expected; increasing BB ARPU and sound fiber take-up rate leading to a better fixed revenues mix Efficiency Plan Continued over-performance on efficiencies with a positive impact on OpFCF Innovative Capex The take-up of innovative services shows we must keep our focus on CAPEX for innovation Brazil Brazilian mobile transformation to a data driven market is underway: data revenues almost offset MTR drag and by 2016 it will account for 40% of total revenues Disposal Non-core asset disposal ongoing FCF generation Free Cash Flow Generation well on track and debt duly managed Marco Patuano 20

21 Agenda TI 2Q 14 Results Financial Update Take-Aways Appendix Marco Patuano - Piergiorgio Peluso 21

22 mobile fixed mobile fixed «TIM Smart» Successful Story A well-managed growth On-air TV Avg. weekly acquisition trend Healthy acquisition trend confirmed also after launch phase More than 150k users by mid July March April May June July Acquisition Mix: 2Q 14 vs. pre 2Q 14 Delta ARPU: 2Q 14 vs. pre 2Q 14 existing CB new lines existing CB new lines stable -10pp stable +10pp Broadly stable Double digit growth Stable Growth TIM Smart: A Proven Value - Accretive Proposition Marco Patuano - Piergiorgio Peluso 22

23 Active CB Domestic Mobile KPIs 000 Mobile CB Highlights 31,858 31,706 31,554 31,221 30,996 30,660 Customer base stabilization due to better competitive environment Constant increase of active SIM on total CB: +0.7 pp in 1Q 14 vs 1Q pp in 2Q 14 vs 2Q 13 1Q'13 2Q'13 3Q'13 4Q'13 1Q'14 2Q'14 TIM MNP Balance Jan Feb Mar Apr May June Highlights Solid sign of healthier mobile market in Italy: -35% total MNP volume in 1H 14 vs. 1H 13 Sound TIM MNP balance vs previous year: +660k clients in 1H 14 vs 1H Marco Patuano - Piergiorgio Peluso 23

24 Domestic Fixed KPIs 000 Fixed Access Highlights OLO TI retail 21,016 20,788 20,536 20,378 20,238 20,085 7,238 7,233 7,164 7,169 7,211 7,258 13,777 13,555 13,372 13,210 13,027 12,828 1Q'13 2Q'13 3Q'13 4Q'13 1Q'14 2Q'14 TI customer base erosion due to different mix: stable contraction of TI Retail Calling accesses confirmed (~-140k per quarter) and constant increasing disconnections of Calling Retail OLOs in TI Access Base (carrier selection and carrier preselection): -21k in 4Q 13, -42k in 1Q 14 and -60k in 2Q 14 Broadband Highlights Market BB BB fast ADSL 13,913 13,910 13,867 13,960 14,084 14, ,014 1,045 1,084 1,122 1,155 6,019 5,918 5,842 5,814 5,766 5,679 1Q'13 2Q'13 3Q'13 4Q'13 1Q'14 2Q'14 ARPU Solid performance in Fast BB customer base: +24% ~1.3 mln clients Right mix in CB dynamic: +35k QoQ on Flat users -30k QoQ on Free users Positive BB ARPU trend confirmed +2.3% 19.6 /month o/w Consumer +4.1% 17.1 /month Marco Patuano - Piergiorgio Peluso 24

25 Domestic Mobile Revenues Breakdown Reported, mln, %YoY 2Q 13 2Q 14 YoY 1H 14 vs 1H 13 Total 1,405 1, % -12.2% wholesale (1) % +2.8% Consumer+Business 1,331 1, % -12.9% services 1,238 1, % -15.0% business generated (2) 1,177 1, % -14.8% outgoing voice % -23.9% voice % -20.3% fees&other % -65.9% VAS % -1.4% business received % -19.0% handsets % +16.1% (1) Including Visitors (2) Total Retail Service Revenues net of Incoming Marco Patuano - Piergiorgio Peluso 25

26 Domestic Fixed Revenues Breakdown Reported, mln, %YoY 2Q 13 2Q 14 YoY 1H 14 vs 1H 13 Total Wireline 2,985 2, % -7.6% Service Wireline 2,913 2, % -8.0% Sparkle group Wholesale Domestic Retail Service voice & access internet business data other elim. & other % +0.8% % -11.1% 1,981 1, % -8.1% 1,247 1, % -11.5% % +0.5% % -1.6% % -25.2% (41) (42) n.m. n.m. products % +10.4% Marco Patuano - Piergiorgio Peluso 26

27 Robust Liquidity Margin and Well-Distributed Debt Maturities Liquidity Margin mln mln Debt Maturities 12,411 32,510 1,500 10,800 12,847 6,347 6,500 Liquidity margin Fully Covered until ,789 3,883 2,936 3,272 2,232 1,040 4, ,265 1, ,882 2,701 1,383 1,500 7, Within 2014 FY 2015 FY 2016 FY 2017 FY 2018 FY 2019 Beyond 2019 Total M/L Term Debt 3,042 1,147 1,611 23,159 Undrawn Portion of Facility/Committed Group Liquidity Position (Ex. Disc. Ops) Bonds Loans (of which long-term rent, financial and operating lease payable 1,200) Drawn bank facility 32,510 mln is the nominal amount of outstanding medium-long term debt. Adding by Mandatory Convertible Bond ( 1,300 mln), discontinued operations ( 27 mln), IAS adjustments ( 710 mln) and current financial liabilities ( 442 mln), the gross debt figure of 34,989 mln is reached. N.B. Debt maturits are net of 1,745 mln (face value) of repurchased (of which 987 in the 2013 and 543 in the 2014) own bonds (of which 1,530 mln related to bonds due within 2016). Marco Patuano - Piergiorgio Peluso 27

28 Well-Diversified and Hedged Debt mln Total Gross Debt net of Adjustment: Euro 34,989 mln Discontinued operations 0.1% 28 Op. leases and long 1,216 Other 1, % 4.7% 16.9% Banks & EIB 5, % Bank Facilities 1,462 Maturities and Risk Management Average debt maturity: 7.16 years (bond only 8.09 years) Fixed rate portion on gross debt approximately 67.3% Gross debt 34,989 (of which 28 mln disc. Operations) 70.6% Bonds 24,708 Financial assets (7,226) of which Cash & CE and marketable securities (6,347) Cash & Cash Equivalent (4,983) Marketable securities (1,364) Italian Government Securities (1,045) Other (319) Discontinued operations (405) Net Financial Position 27,358 Around 40% of outstanding bonds (nominal amount) is denominated in USD, GBP and YEN and is fully hedged Cost of debt: 5.5% N.B. The figures are net of the adjustment due to the fair value measurement of derivatives and related financial liabilities/assets, as follows: - the impact on Gross Financial Debt is equal to 2,457 mln (of which 724 mln on bonds) - the impact on Financial Assets is equal to 978 mln Therefore, the Net Financial Indebtedness is adjusted by 1,479 mln Marco Patuano - Piergiorgio Peluso 28