Telecom Italia S.p.A. (TIT) Earnings Call Transcript & Summary

Ladies and gentlemen, good morning, and welcome to Telecom Italia Q1 '23 Results Conference Call. [ Paulo Lezo ], Head of Investor Relations, will introduce the event.

Ladies and gentlemen, good morning, and welcome to TIM Q1 2023 Results Presentation. I am here with our CEO, Pietro Labriola, the CFO, Adrian Calaza, and the rest of the management team. Pietro will provide an overview of Q1 highlights and an update of the delayering plan, while Adrian will illustrate the financial results. A Q&A session will follow. Pointing out to our safe harbor disclaimer on Page 2, let me hand it over to Pietro. Pietro, the floor is yours.

Thank you, [ Paulo ]. Good morning, everyone. Back in February, we published 2022 results showing positive operational trends I'm pleased to say that Q1 confirms the same direction of travel of last year with a sequential improvement both in Brazil and in Italy. We expect this improvement to further accelerate in coming quarters, thanks to positive drivers and actions already in place that will progressively kick in throughout the year. Today, we are very confident to achieve full year guidance. Let's go to Slide 4 with the mineralize of the quarter. In this slide, you have a map of the topics I want to cover today, including a focus on the delaying plan and net cost disposal process. We will address each topic in the following slides. So let's start. Slide 5. The improvement of financial trends versus first quarter last year is very clear, both at domestic level and in Brazil, where we will lap all integration in the second half and where synergies are better than we initially planned. At group level, all metrics are now in positive territory. Quarter-on-quarter trends are also improving. The stabilization of domestic business is ongoing. I point out that this is the first full quarter where we have stopped to charge activation fee for most of wireline offers, in line with the new requirement of the Communication Code. I remind you that this is an accounting effect with noncash impact and it is transparent for the client. Therefore, in Q1, we see a 1.7 percentage point headwind affecting the year-over-year comparison of domestic service revenue. We expect a similar impact in Q2, a slight decline in Q3, while Q4 will be substantially clean of this effect. All in all, we are in line with our internal projections and fully on track to reach our full year guidance with broadly stable domestic service revenue and the potential for domestic EBITDA to slightly grow. Slide 6. Let me now give you a high-level update on each of the 4 entities. For [ TnConsumer ], the volume-to-value strategy is ongoing with a progressive repositioning as a premium brand. In Q1, TIM has been the best brand in terms of top of mind and awareness. Last year, we were the only established player to increase FTTH market share, while our main competitors posted a decline. In Q1, we reached approximately 1 million active FTTH customers, further enhancing our leadership. Repricing initiatives are ongoing with a positive impact, not yet at full speed in Q1. Despite these price ups, this quarter, we have strongly improved the year-over-year net debt trend, both in fixed and mobile, where we are once again the best infrastructure M&O for mobile number portability. Small medium business is also improving this quarter with better KPIs and [ ARPU ] of new customers that, for the first time, is higher. These achievements led to an improving trend in total service revenue, both year-on-year and quarter-on-quarter. We're implementing several cost transformation initiatives as well. In particular, we are significantly reducing the frequency of [ coal ], leading to a positive impact on customer care costs and higher efficiencies on sales channel mix. Let's move to TIM Enterprise. TIM Enterprise posted another quarter of growth. I point out that commercial margin increased year-over-year more than service revenue, as we have started to shift the revenue mix towards service generating higher margin. Cash generation also improved as investment for the data center transformation have already reached their peak. We also completed a small acquisition in the cybersecurity space, a further step in the consolidation of meter price as Italy's largest ICT platform. Slide 7. Net total revenues increased 3.4% year-over-year, also thanks to the commercial deal with Open Fiber in white areas, which we started to book in Q4 2022. There is an improving trend also in service revenue, supported by higher fiber activation, representing 70% of total activation in Q1. Overall, we are pleased to see our wholesale revenue share being quite resilient despite open fiber deployment and aggressive commercial promos. The revenue trend will further improve in coming quarters came to 2023 regulated prices, which have been finally approved and that will start to book from Q2 with a positive impact of about EUR 30 million versus Q1, considering also the retroactive effect. [ FTrollout ] is on track at 53% coverage of technical units. We will deep dive on this in Slide 9. Finally, TIM Brazil is over delivering on growth targets versus our plan at the time of acquisition, thanks to higher-than-expected synergies. Our integration is completed. And as you know, from April, we will [ lap ] in terms of financial integration benefits. We are very pleased about the route so far because, as I said, synergies are running higher than expected, especially in terms of cash flow generation. Let's now move to Slide 8. I -- let's now focus on the price environment where we have some positive evolutions. Wholesale 2023 regulated assets prices have been finally greenlighted by the EU Commission. Considering that last year, prices remained unchanged versus 2021. The new prices can be applied retroactively from January 2023 with a positive impact on service revenue from Q2. These new prices are not fully reflected in our budget. So, we see also a slight upside this year. The gap versus other European markets on copper has been reduced, but not completely closed. So there is more to do on this front. On retail, we have almost completed the first wave of 2023 repricing on more than 4 million fixed line and more than 2 million mobile lines, and we are seeing a much lower effect on churn than expected. We will do more in coming quarters. We expect low churn and an overall positive impact of about EUR 20 million in Q2 versus Q1. We are pleased to see our competitors to follow the same approach with one operator last week announcing price up on its customer base, also due to the wholesale prices increase. At the same time, AGCOM published the guidelines for CPI price adjustment mechanism from 2024. In particular, on new contracts, we can apply CPI without explicit customers' content provided there is no markup. On existing contracts, [indiscernible] is required [ ins ]will likely adopt a more-for-more approach. The consultation is still ongoing. So let's see what the outcome will be. Slide 9. We have good news also in the [ RRP ]. We have obtained the possibility to get 20% Cashin grants in advance. It plays that we'll receive EUR 500 million also this year with a mechanism of proportional reduction in following years, which is still to be finalized. On our preliminary computation, this may translate in a potential upside on our 2025 equity free cash flow after lease guidance of approximately EUR 3 billion. We'll have more clarity once the mechanism is set. The anticipation of the cash-in grants, we secured the funds already at the beginning of the rollout of the [ NRP ] project, thus [ regarding ] our cash flow dynamic. In terms of execution, we are working hard on the Italian 1 giga tender connecting building fast wherever possible. However, the work in checks, we are conducting street by street show a high percentage of not applicable street number in some areas, higher than 50%, calling for a remodulation of the milestone targets. 5G backhauling is progressing well ahead of schedule and 5G coverage is on track with no specific issue. Slide 10. On the transformation plan, last year, we did slightly better than EUR 0.3 billion OpEx saving target. This year, we are raising the bar with incremental EUR 0.8 billion of OpEx plus cash costs and CapEx savings reaching EUR 1.2 billion saving versus the initial plan. In Q1, we are well on track with about 26% of incremental full year target already achieved. I remind you that back in March, we have signed the agreement with the trade unions for 200 voluntary exits in 2023 that will help achieving our labor cost target reduction. Further savings will come from a strong acceleration of the decommissioning plan, which envisaged the shutdown of public telephone booths and the phaseout of a significant number of central offices. The best is yet to come on this project. So, stay tuned. Slide 11. While we are fully focused to improve the group's operational performance, net cost process is ongoing. After having analyzed the 2 nonbinding offers in that, the Board of Directors last week being them not yet adequate even if they were improved. Therefore, considering the readiness expressed by at least one of the bidders to improve the offer, the Board decided to explore the business with the perspective of obtaining a final offer by the 9th of June. We believe it's worth taking a few more weeks to explore this final opportunity as NetCo disposal remain the main option to structurally deleverage team. In any case, having in mind that the price must be fair and at market value, the 2 main elements are time and execution. For this reason, we do not want to have uncertainty and will be key to receive an offer without condition, in particular, on antitrust. I want to stress another important point. ServiceCo is a portfolio of 3 distinct businesses, well balanced in terms of cash generation, market maturity and risk appetite. TIM Brazil is leader in a well-structured and rational market and is exploiting the synergies of OE acquisition beyond our initial expectations. It will generate approximately 43% of 2023-2025 service cost EBITDA after lease on average. And we can consider in Brazil a cash cow. TIM Enterprise is an asset with a unique positioning. If we do well on execution, the growth opportunity ahead of us is huge. It will generate approximately 24% of ServiceCo-EBITDA after lease. It is for sure a star. TIM consumer is active in a market where every player is struggling, not only in Italy but in Europe. The operational turnaround is on track. It will take time, but the direction of travel is clear. For us, it's much to be ready for the market opportunities that will come from in market consolidation and from the new business models that will emerge. In any case, TIM Consumer will account for just 33% of service costs EBITDA after lease. So the right way to look at ServiceCo, is, therefore, to consider the combination of these 3 entities. If we take this approach, we see that Service Corp is already sustainable with a combined pro forma EBITDA after lease expected to be significantly above EUR 3 billion and with positive operating free cash flow above EUR 1 billion in 2023. Furthermore, cash generation is set on a strong growth trajectory on the back of EBITDA increase and CapEx reduction. Let me now hand it over to Adam for the Q1 financial results.

Thank you, Pietro, and good morning, everyone. Let's start with a summary of group financials. Total revenues and EBITDA improved sequentially versus Q4, with service revenues suffering in Q1 in domestic affected by the drag from activation fees. This drag was factored in our budget. Looking at the trends. Group service revenues were positive at plus 2.8% year-on-year in Q1 from plus 3.6% in Q4. The trend is in line with our full year guidance, and we expect an acceleration in the second part of the year. Group EBITDA improved 3.8% year-on-year from a plus 2.7% in Q4. Also here, we are in line with our guidance at group level, and we expect the domestic business to improve in the second part of the year to positive numbers. CapEx slowed down attached in Q1 compared to last year, mainly due to the domestic business. As expected, equity free cash flow was negative in the quarter, but slightly better than our own budget. Q1 was affected by higher payments impacting working capital and lower help from FX effect. Implicitly, net debt after lease increased in Q1, landing at EUR 20.5 billion. Let's now have a look at fixed and mobile trends. Slide 14. Domestic fixed service revenues were down 1.1% year-on-year in Q1, a bit below Q4, which was a seasonally strong quarter for revenues coming from enterprise on ICT. The main explanation is retail with revenues affected by approximately EUR 50 million activation fees drag, which is not a cash item, as Pietro mentioned. Net of this effect, fixed service revenues would be flat. I remind you that this drug was already anticipated last year, and it will continue in Q2. It would also affect Q3, but with lower intensity. Positive news came from National Wholesale that grew slightly despite competition. International wholesale was slightly down due to less voice revenues at low margin. In terms of market, following the growth in 2020 and 2021 that was fueled by vouchers and COVID 2022 stabilized. Q1 has continued with the same trajectory. For these reasons, retail KPIs are still negative even if improving this quarter compared to Q4. We reported a significant shared containment, now steadily around 1% per month, combined with a historic low level of delinquency. Price have been done in previous quarters on our existing customer base with churn impact below expectation. As Pietro explained, we expect to do more in the coming quarters. Equipment was up year-on-year, reflecting a positive EUR 50 million recognition in Q1 of the wholesale agreement with Open Fiber in white areas. As you know, we already booked a similar amount in Q4 of last year, and we'll finish to recognize the rest in Q2 for a total of EUR 120 million. Moving to mobile on Slide 15. In terms of market dynamics, in Q1, we were once again the best infrastructure MNO in terms of mobile number portability. The market continues to go down and is increasingly rational. And for the first time in several quarters, the total volume of MNP has been lower than EUR 2 million. Even if mobile service revenues were down 3.8% year-on-year in Q1, KPIs are starting to show signs of improvement -- churn was stable year-on-year and the reduction of human lines was 45% lower compared to Q1 2022, notwithstanding the selective price increases done in recent months that supported consumer ARPU dynamic, which was up year-on-year and stable versus Q4. This evolution, together with the efforts already put in place on the customer value management front give us a more optimistic view on the retail side of the mobile business. At the same time, wholesale trend continued to be positive with higher revenues coming from roamers and MVNOs. Next slide. OpEx were just a touch higher year-on-year in Q1 on a PL view and overall flat at plus 0.7% on a cash view. The slight increase was entirely due to volume-driven costs with all other actionable cost items down year-on-year. In particular, industrial costs were down 1%, thanks to a reduction in network and energy and even absorbing the inflation effect on the specific contract with INWIT. -- about energy, the hedging policy applied together with the tax credits defined by the decrease issued by the government allowed us to maintain under control this energy line. And as a matter of fact, the first quarter sits well below our budget. Additionally, G&A were significantly down on lower IT and consultancies and professional service spendings. More importantly, labor costs were down 2% due to lower FTEs and the solidarity agreement. On this cost line, we expect, especially in the second half, a better trend also due to better comps. Next slide, TIM Brazil reported another quarter largely beating the guidance on every line, and you can find many details in the company's disclosure down 3 days ago. Nonetheless, it is important to highlight the main achievements of this quarter. All integration is 100% delivered with network integration and client migration completed during March and April this year. Sites decommissioning is fully on track with 1,500 sites already this month with positive financial impact this year. The top line expanded 19% year-on-year with EBITDA net of nonrecurring items growing at 22% following the consolidation of OI numbers. EBITDA minus CapEx margin stood at a robust level of around 23% on revenues, the highest level among its LatAm peers. As you can see from the numbers and even considering the discontinuity in the comparison versus the first quarter of last year, TIM Brazil is fully benefiting from or mobile integration and posted a strong organic performance focused on customers by a strategy that continues to pay off. Slide 18. CapEx were down year-on-year, mainly for a different phasing in the domestic business within the year compared to 2022. We continue to invest heavily in ultra-broadband deployment with a specific focus on RRP initiatives and on the 5G deployment and according in mobile. CapEx team enterprise were attached lower, thanks to the peak already reached on data centers transformation. Equity free cash flow after lease was negative in the first quarter, driven by lower operating free cash flow mainly due to the absorption of working capital related to the significant CapEx level of Q4 2022 and for an additional installment of the [ DASAN ] agreement -- not helping while it was positive support last year and higher financial expenses. It is worth to mention that equity free cash flow in Q1 was better than our projections and that the total for the next 9 months should be positive if we consider the partial anticipation of the NRRP funds. Net debt was a touch higher versus the full year to EUR 20.5 billion after lease. In Slide 19, you find a summary of our debt maturities and the breakdown between fixed and variable rates. We worked hard since the beginning of the year to reinforce our liquidity position, and we succeeded, especially considering the context. We secured EUR 850 million with the issuance of a bond in January, plus additional EUR 400 million in April with the largest tap in the high-yield market since October 2021. The TAP issuance was priced 0.75% above par, thus reducing the cost of the regional issuance. And last week, we signed with the European Investment Bank and guaranteed by such a EUR 360 million loan with an attractive cost for the financing of the 5G rollout. All these actions show the strength of the group, both operationally and financially, and you will see further initiatives in the coming months. It is worth to mention that the average cost of debt at the end of the first quarter was just above 4%, in line with the Italian BTP that stood at 1% only 15 months ago. With this, I hand over to Pietro for his final remarks.

Thanks, Adrian. Q1 trends improved versus Q4 and were in line with expectations. As you can see at the bottom of the slide, we expect the improvement to further accelerate in coming quarters, thanks to several positive drivers that will progressively kick in throughout the year in the domestic business. It's important to remember that they are not a guess. They are largely secured. The effect of repricing will become more visible. The new wholesale tariffs will be booked starting from Q2. The stabilization of the customer base will continue. There will be easier energy and LIBOR comparison in Q3 and Q4, while the drag on activation fee were reduced in Q3 and [ federaway ] in Q4. Already for Q2, we aim to be broadly flat on domestic. Also, equity free cash flow after lease trajectory is expected to improve throughout the year, thanks to better operating cash flow performance. Our full year guidance is, therefore, confirmed and reiterated. But I also want to stress that the management team and all the employees continue to be focused on the operation. Last year, I said that we want to be the first management team in the last 12 years, capable to achieve the guidance for 2 consecutive years, and we are on track. And now my closing remarks for today, we are facing 2 important challenges, keeping the company on track on the operation as it hasn't happened for years. create the opportunity to begin the industrial and strategic option, teams shareholders deserve. Let's now move to the Q&A session.

[Operator Instructions] First question comes from Mr. Giorgio Tavolini of Intermonte.

This very quick questions from side. The first one is on Idea. Do you see any threat to interact from Iliad entry to the business mobile segment? Or do you think the network quality, your network quality, your consolidated presence in this segment will continue to give you a superior competitive advantage. The second one is on the ServiceCo. Slide 11 also that the service call is a sustainable business based on the portfolio of the 3 different businesses, of which [ Braziliani ] offering very good growth and cash generation profile. So, I was wondering where could further efficiencies to be extracted to turn in consumer around -- and the third one is on INWIT. – INWIT recently mentioned the possibility for the tower cost to expand the perimeter to management of the active infrastructure. So, equipment and things, thanks to a greater outsourcing of activities by telecom operators. So, I was wondering if you see opportunities for team on this side and in particular to boost the CapEx efficiencies. Many thanks.

Thank you, Giorgio. Let's start with the so-called tract on the enterprise segment. It's important to explain that when we talk about enterprise, we mean which is the perimeter of the what we call enterprise, Tim Enterprise that are the largest company in Italy, the largest 1000 company Italy. And then you have the remaining part of the business that is made also by medium company, small business as so. The Iliad offer is most -- is targeting much more the low part of this segment, small office or office. In this area, with all respect with the liar offer, we think that the result will be quite similar to what happened more on the fixed, but not on the mobile of the consumer. Why? First of all, this segment has already bought consumer offer because for fiscal issue, it's indifferent for this segment to buy as a company or as a private Second, in terms of sales channel, usually, this is a segment where what we call door-to-door or, let me say, not shocks are the main challenge to try to targeting this kind of segment. Last but not least, the offer of [ ID ] and that is something that we have to continue to monitor and respect is not so aggressive as the offer that had in the past. So, this in a nutshell is something that we have to monitor and control, but we don't foresee a specific threat out of what we have already planned in our market. Then -- so on the enterprise segment, the offer of IA is not targeting the large corporation where it's not just a matter of price, but you have also to put in place building systems that are able to divide the amount of the expenditure by cost centers and so forth. About service sustainability. As you have already mentioned, it was important for us to explain what this service go. Sorry if I'm back again on this point because sometimes when I read on the press, it seems that service, it's only the consumer. ServiceCo, -- it's a portfolio of business with different level of maturity, cash generation and different challenges. As we have already explained or mentioned, I think that for sure, the consumer is of the 3 business, the one in which we have to be much more focused in terms of restructuring of the business model. It's important to alight this is not only a challenge for them in Italy of for the consumer market, the telco consumer market in Italy. But this is a challenge everywhere to all Europe. What we are doing, and we are on track on that is trying to start to put the right level of efficiency, avoid irrational competition model, increase the level of quality of the service that we will supply to the customer. and try to manage in a better way what is so-called CVM, customer value management. In this market today, it's really important to be able to manage the customer base because the end-to-end related to the acquisition costs, it's less efficient than to be able to contain, but it doesn't mean that we will not try to foresee an improvement on the main KPIs. Last about the INWIT, I think that in any case, it's something that has to be understood, but it's clear that it's quite different also to put in place let's reward in this way. master service agreement when you talk about passive activity, tower, fiber, so on and so forth. When you start to talk about master service agreement related to the active part on a medium, long term. As you are going to define the way which you will approach, for example, the change of technology from 5G non stand-alone to 5G stand-alone, how you will manage the migration to the 6G. How will you manage, for example, some change in technology. This is the reason for which at least for the know-how that you have today about what we are talking about, we don't see immediately an opportunity, while on the so-called passive part, we continue to foresee opportunity not for tint generally speaking for the telco player. I hope, Giorgio, that I was able to give you the color you needed. Many thanks, Pietro. I had no particular for.

Next question comes from Mr. Fabio Pavan of Mediobanca.

I would like to focus on the new tariff for Wholesale. If I guided properly, the tariff will have to be applied from January 1, but there was no impact on Q1 numbers. So we may assume some additional contribution could come in Q2 numbers? Second question is the increase in tariffs are in line with the expectations you were having when you're preparing your budget for this year? And the final question is, do you expect other operators may follow December you were mentioning. So, price increases in the retail is just to capture the increasing tariff...

Thank you, Fabio. I think that your question, help me also to be back on the Chart 21 because I would like to like the fact that we reiterated and confirmed the guidance, not because it is a guess, but because there are some mechanisms that will allow us to increase just to give you an idea, if you do the math, you can easily calculate it to reach our target, how much change the amount of revenue and EBITDA that we have to grow on the domestic. How it can happen the growth from the first quarter to the second quarter. It's quite easy. First of all, the tariff for wholesale. As you explained very well, the new tariffs are applicable from the January 2023. But in our number, they were not calculated in the closing of the first quarter. So, in the second quarter, we'll see the new tariff plus the recovery for the first quarter. And this is already a good amount and part of that must be projected also for the following years. On this point, it's important also to remember that the increase of the sales tariff will put pressure also on the other operator to increase price because if not, they will file a part of their EBITDA. And if I'm not wrong, in the reporting season of one of our competitors, they expressly they clearly expressed the willingness to increase the price on all the customer base. Another point, and we received a letter from EU just a few minutes ago. It's important also that in the explanation of the approval at EU level is related to the important to give a premium on the WACC to [ incentivate ] investment. That is something we were fighting for because if you remember, we thought that it's impossible to continue to build network. If you don't have the right return on investment. And this is I think a real breakthrough compared to the past. Let's remember that in the last 20 years, we were never able to have an increase on the sale price. When we move to the second question that is the repricing, this is the second element that will allow us to increase revenue, EBITDA from Q1 to Q2. What's happened that we have already repriced 4 million fixed line and 2 million mobile lines, the communication to the customer base happened in the first quarter, the impact on the revenues and on the EBITDA will appear in the second quarter. And we are going slightly above our expectation in terms of churn because, as you have seen, nevertheless, the communication to the customer base during the first quarter, we were able to have a good level of churn, and it will be a further accelerator and help to reach the target. Last but not least, the third question that you were mentioning that is related to the other operator. I mentioned there are already 2 operators that expressly declared that they will increase the price on their customer base. So, this is a trend in which the markets start to see more rational and mature. And this is something that, if you remember, when we started to discuss about that, first quarter 2022, one of the main point was it was declared 4 years, but it never happened. So, 1 year when they are out later, it seems that this is the trajectory also in Italy. But again, let's move on and the number that -- and the fact that we reiterated our guidance is not based on the gas, but on the debt through the repricing, the wholesale tariff, the comparison compared to the last year we are very safe on the fact that we'll be able to achieve. And finally, we hope to post it in the second quarter flattish revenue and EBITDA on the domestic. That could be a real bet compared to the history of our company. Thank you.

Next question comes from Mr. Domenico Ghilotti of Equita.

Three questions. First is the clarification. Just a clarification on a comment from the previous statement. So, when you said that Q2 should be broadly flat at domestic level are you referring to sales or EBITDA? That was not clear to me. And my questions are on the NetCo side, on the NetCo disposal process because we are [indiscernible] about potential, let's say, combined off. So something that okay has to be structured. So, I wonder if the deadlines or the -- that the Board set is really something achievable considering the complexity. And if you would consider keeping a minority stake. And the last question is referring to the customer base stabilization when I do your ambition on your guidance. So the area where I see more risk from my side is on the stabilization of the customer base, given the fact that the market is very, very mature. And so, I'm trying to understand you aren't raising prices. So, there is also this headwind. So, what are the levers that you can execute to really get to the stabilization of the customer base?

Domenico, thank you to have to improve my English, but confirm flattish number on revenue and EBITDA. So this is the answer to the first question. The second, how we foresee a possible combination, as I stated during the call, for us, it's important time and execution. So, for us, it's important to proceed [ fastly ] and to have low risk in terms of execution because this is something that is really important. And so these are elements to evaluate the reliability of the offer, then either someone that wants to merge or combined is out of our possibility to be managed, while about the minority. It really depends. We always told that. Today, we don't want to have [ vitorights ] in any case because if not, we are unable to explore the vertical this integration, that is something important for Netco-Servco because also for Netco, avoid to have a vertical integration allow to have more hens free in the definition of price and return on investment. The same on service -- if you keep a participation, you don't have to iterate, so it becomes a kind of financial participation because you think that you can have a further upside in the future from the evaluation, but it is something that you can have out in terms of earn-out. About the customer base stabilization. Now I leave the stage to Adrian. But let's remember, this is very important. We are working for the stabilization of the customer base, but this is one of the driver of our growth because let's remember that we have a portfolio of activity in which you find TIM Enterprise that has continued to grow, and we have seen the number and the following quarter will be better than this one. Then we have the same national and international -- so the wholesale national we have seen with the increase of price will be better. The international will be also better due to a that we are going to face the seasonality period in our favor and then we have the consumer. Today, in our number, the consumer is projecting improving number quarter-over-quarter, trying to reach a better level of customer base. But as was mentioned also by other players that announced the number before of us, we don't have to look at the customer base stabilization at any cost because it's important to find the right balance between the commercial growth because we have to continue to push and increase our number and the cost for this kind of activity. But if [ Batel ] want to put some more color...

Yes. Thank you, Domenico. A couple of comments and a couple of factors that give credibility to the stabilization of customer base. First of all, the market has improved condition over the last 12 months. We see more rationality in pricing, less aggressive offers on portability, for instance, in mobile. And as a matter of fact, the number of rotation in the mobile market has reduced substantially. So, we see a reduction of around 25% in the volume of portability in the market that clearly is helping us to improve our performance, which we improve better than our main competitors. So, our mobile balance, for instance, improves substantially in Q1 year-over-year. we basically more than half the negative balance, I mean that we do better than a reduction of 50% of the negative bans. Same applies to fixed line. We improved significantly the net negative balance. We are still in the negative, but we improved the numbers versus last year. And this is due to several factors. One is, again, that we see a bit more rationality in the market in a market that is not growing as fast in broadband like it was in '20 and in '21 for a pretty understandable reason, the pandemic driven more net adds, but also more aggressiveness by competitors. But the other thing is that we are working day after day to improve the mix of technologies in the customer base. We migrate customers to better technology. So, we have a much better mix of technologies in the base. Over the last 3 quarters, we gained leadership in FTTH base. So that means that now we have a better mix between DSL, FTTC and FTTH that gives more resilience to our churn.

Thank you, Domenico.

Next question comes from Mr. James Ratzer of New Street Research.

Just a couple of questions. The first one, just on the NetCo potential disposal process. Could you confirm, are the offers that are due in on the 9th of June, are you expecting those to be binding offers? Or would those still be nonbinding? And would you take that to tens [Foreign Language] Threshold to be at the shareholder vote. I think it depends on what kind of meeting would be called to discuss it? And then secondly, just interested in the upside in EBITDA going into the fourth quarter around some of, in particular, the labor costs that you flagged on the last slide. I think you've signed an agreement with the unions for 2,000 headcount reduction. Is that a lot of the driver that will start to come through in the fourth quarter EBITDA uplift? Or is that something that could be kind of further improvement going into 2024 to kind of understand that late agreement with the unions a bit more.

James, sorry, we lost the line briefly when you were doing the first question. Can you repeat it, please?

Yes, sure. Sorry, the first question was for the offer you're expecting on the 9th of June, are those going to be binding offers? And also, if you do then go to a process to sell, would this be a shareholder vote? And if so, what level of voting threshold would be required at the vote and believe it depends on the type of meeting you call.

James, about the offer, as we stated in our communication, there will be a final offer will not be yet banning and that depends really from also the counterpart. For us, what is important, as I mentioned, the speediness of the process of the time. This is the reason for which we thought we asked for final offer. And it's clear that from our understanding, everybody working them to reduce eventually the time for further analysis in terms of data room and due diligence. Related to the second question that is on the shareholder meeting, I live just for a few seconds the answer to our legal counsel, Agostino, that can give you some more color. And then Aaron will answer about the labor cost.

So going to your question, the Italian makes a clear distinction between the AO management, which force which 400 responsibility of the Board of Directors and the transaction, which has to be decided by the shareholders' meeting, either ordinary or extraordinary. Now in our case, we are considering to do a contribution of an undertaking to a company, probably the existing fiber op and the sale of the shales. And so according to those actions are actions in the responsibility of the management. Clearly, in our situation, the undertaking we are contributing is huge and makes a difference in terms of company organization. And the question raised by someone is to what extent this change in the organization could raise a substantial change in the scope of the bylaws, where the change of this codebase is something that has to be authorized by the extraordinary shareholders' meeting where you have effectively need to have the 2/3 of the participant to the shareholders' meeting to approve this change. Now clearly, you need to do an interpretation to come to such a conclusion, which is not the case at the moment. We are studying. And clearly, we can have a final position on this only after demanding offers where we have a clear picture of the transaction, the perimeter and the impact on the company organization. I hope that was clear.

Yes. And on the labor cost effect of the agreement we signed in March of this year. Clearly, this is not yet a cash impact, and it will be clearly in the next -- for the next 5 years, probably half of that during '23 and '24. But in terms in economic terms, the effect will be partial this year. And you see that effect on -- again, on Slide 21, when we defined the effect on the fourth quarter about the labor cost comps. And then it will be full on 24 and onwards. Again, this is something that will probably start to have some effect in the third quarter, considering the timing of the exits, but it will be full on 2024 and August then. All these effects were considered on our projections. So, these are already included both on our EBITDA guidance and on the equity figures flow guidance that we gave for the 3 years. So, it was already considered when we gave the guidance.

Next question comes from Mr. Andrea Devita of Banca Akros.

Just 2 from my side. One is on your equity free cash flow, whether or not and in case which part of the EUR 400 million provisions for personnel exits are included in this equity free cash flow. And otherwise, when the cash impact will be felt during the year. And the second point, it is peculiar that it has been booked in Q1. So, I wonder whether and which impact would be in the next few quarters in terms also of economic impact on the P&L. And the second part, the second question is on the Polo strategy for [indiscernible]. So, the strategic national hub for data centers, whether there is any update if the loss has started, when we can have some economic impact on the domestic business.