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

Ladies and gentlemen, good morning, and welcome to TIM's First Half 2024 Preliminary Results Conference Call. Paolo Lesbo, Head of Investor Relations will introduce the event.

Ladies and gentlemen, good morning, and welcome to TIM Preliminary First Half 2024 Results Presentation. I am here with the CEO, Pietro Labriola, the CFO, Adrian Calaza, and the rest of the management team. Today we open the presentation with the highlights of the first half and we explore [indiscernible] the following three sections. The first one explains the implication of network closing. The second reviews TIM ServCo financial and operating results based on preliminary like-for-like estimates, i.e. considering the new perimeter and the relationship between TIM and NetCo, regulated by the master service agreement. The third section outlines TIM new capital structure. A Q&A session will follow. Pointing out our safe board disclaimer on page 2 and 3, let me hand over to Pietro. Pietro, the floor is yours.

Thank you, Paolo. Good morning, everyone. The last 6 months were quite eventful. We successfully completed NetCo disposal. As a result, we achieved massive deleverage, credit rating improvement and capital structure optimization. The relation between TIM and NetCo will be regulated by the MSA with no value or volume commitments. I repeat, this is not a TowerCo deal. H1 performance was robust and financials were in line or ahead full year guidance. Domestic business grew as expected both on revenues and EBITDA and H2 will be supported by positive drivers and favorable seasonality. Transformation plan execution is ongoing with more than EUR 100 million EBITDA after lease minus CapEx savings in H1. The stabilization of TIM Consumer top line continues supported also by Beyond Connectivity initiatives. Growth at TIM Enterprise accelerated, fueled by ramp up of National Strategic Hub and an increasing interest by private sector on cloud and security services. TIM Brazil delivered strong growth thanks to the value proposition both in mobile and wireline. Group performance was fully on track and leveraged. Target below or equal to 2x by year end 2024 is confirmed. Let's review each topic starting from NetCo disposal. On the 1st of July we completed the sale of NetCo to KKR. This was our ambition since we took office in 2022, to put the company on a new industrial path. Now it is a reality. We achieved this milestone by meeting all targets within the announced deadlines and terms. It was not a given and very few people were confident. We have structurally solved the leverage issue the company had been dragging for more than 20 years, giving an industrial future to the group. This turning point comes after 2.5 years of hard work, which intensified since last October when we received the binding offer. In just 8 months we have closed a complex negotiation with KKR, obtained the unconditional approval by the Golden Power authority and by the EU Antitrust and carried out a huge amount of work to fiscally split the company. This has entailed transferring almost 20,000 employees and 50,000 real estate assets to NetCo, successfully completing the largest-ever liability management in Europe, ensuring business continuity through the cutover of hundreds of IT systems and allocating thousands of contracts between TIM and NetCo just to name some of the tasks we have performed in a such short period of time. Therefore, my first message today is for all the people working both in NetCo and ServiceCO. You must be proud for the outstanding effort and commitment you have put through in this period. For my part, I'm proud because we have achieved the result that many thought almost impossible. We have delivered flawless execution, managing unprecedented complexity whilst at the same time delivering on our plan, as we will comment later in the presentation, like no one has done for this company in recent years. At the end of June, we reported group net debt after lease of EUR 21.5 billion. This was based on the old perimeter which still included NetCo. On July the 1st we completed NetCo disposal which led to a material group net debt reduction. The expected deleverage of EUR 14.2 billion pending customer post-closing adjustments was achieved as originally announced. Consistent with the disclosure included in the addendum to the Capital Market Day published on March the 11th, closing adjustment and separation costs amounted to EUR 0.4 billion. So net deleverage was EUR 13.8 billion. Note worthy, the cash component of EUR 0.4 billion corresponding to the NRRP advances relating to FiberCop was deconsolidated as part of the transaction. Taking all these into account, TIM ServiceCO pro forma net debt after lease was EUR 8.1 billion. This slide answer a question most of you ask. Namely how we get to the leverage target below or equal 2x at year end with net debt after lease around EUR 7.5 billion. Let's see the cash dynamic we expect in the second half. For the sake of clarity, we present the same metrics used in the Capital Market Day addendum. It's clear how the dynamic is different pre and post NetCo. First with the reduction of financial charges driven by the deleverage. Second, the ordinary working capital is expected to revert from absorption in the first half to generation in the second thanks to favorable seasonality which typically delivers a positive cash contribution especially in Q4. It's worth mentioning that there will not be further effects on working capital related to NetCo since all of them were settled at the closing through the adjustments. Third, cash-outs related to extraordinary working capital [indiscernible] in Brazil were entirely concentrated in the first half. Last, organic EBITDA after lease minus CapEx is expected to accelerate also considering the growth driver we will explain later. All in all, we expect positive net cash flow of approximately EUR 0.6 billion in the second half, which will allow us to land at year end in line with the leverage and net debt target. I remind you that you should not take 2x EUR 0.6 billion to estimate next year cash generation. TIM remain an infrastructure-based operator, therefore the typically working capital dynamic with absorption in half 1 and reversal in half 2 will continue. Also, as disclosed in the Capital Market Day, some extraordinary working capital payment will impact the coming years typically in the first half even with lower amounts compared to 2024. The business relationship between NetCo and TIM is regulated through a 15-year term master service agreement renewable for a further 15 years. Let me briefly record the key principles and give you an indication of the value at stake. First, the MSA regulates the provision of services in both direction from NetCo to TIM and vice versa. On the right-hand side you find a map indicating the nature and values of the respective services. Figures are cash view like-for-like based on a full year 2023 actual volume and MSA prices. Obviously TIM costs towards NetCo are the predominant component, approximately EUR 2 billion, 70% of which are access services while the remaining costs are mostly passed through. For example, energy and real estate. However, there is also a flow of revenues that TIM generates from NetCo, approximately EUR 100 million. Second, the MSA is a commercial agreement not financially committing TIM. Services will be provided without any minimum purchase commitments except for engineering services. It means that if a customer churns, TIM will stop paying the related cost to NetCo. It also means that where NetCo doesn't provide FTTH coverage TIM will be free to whole buy from other suppliers. As far as MSA prices, NetCo is a wholesale-only operator, means it will not be subject to [indiscernible] regulation and cost orientation. This new status however must be ratified by AGCOM, the national watchdog, in the market analysis that we kick off soon and will likely be effective from the second half 2025 onwards. Until then, NetCo will apply regulated prices where relevant. For all services other than access, which by nature are non-regulated, prices will be at arms length. Last, while benefiting from the most favored client close on a non-discriminatory basis, TIM has granted exclusivity to NetCo. Let's now move to the second section. With the sale of NetCo behind us, we can finally open the new chapter. Today, TIM is a group with a sustainable business model that can allocate resources on growing businesses in Italy and Brazil. At domestic level, TIM can enjoy a latter regulatory profile and is financially strong to compete as a customer-focused service company while retaining the largest portfolio of telco assets. TIM Brazil and TIM Enterprise operate in 2 healthy and growing market and generate 70% of group EBITDA after lease, making the group a well-balanced and diversified portfolio that can mitigate the risks arising from the intense competitive dynamic of the consumer market in Italy. Let's now benchmark TIM ServiceCO first half results against full year guidance starting from revenues and EBITDA. All in all, the performance was robust at group level, thanks to the performance of Brazil and in Italy. Group revenues grew 3.5% year-over-year, fully in line with the target. Domestic revenue were up 1.6% year-over-year with an acceleration from 0.5% in Q1 to 7% in Q2. Group EBITDA after lease increased double digit and above guidance with the Brazilian operation growing above expectation so far and domestic EBITDA after lease almost in line with guidance. While 11% growth in Q1 was driven by [indiscernible], Q2 increased at almost 7% more than we internally expected. Domestic EBITDA is expected to accelerate in second half thanks to positive drivers that will progressively kick in FTTH offering in white areas thanks to an agreement we signed with Open Fiber. The full effect of price up that we concentrated in Q2, geo marketing offering, the new [indiscernible] deal that will support ARPU, the steady ramp up of cloud revenues linked to the national strategic hub and the benefit of vendor consolidation. There will be also easier comps in Q4. First half was a bit light in terms of CapEx intensity, in particular at domestic level where CapEx on revenues stood at 11%. This was due to the phasing related to MAXX web project and efficiencies due to transformation while volumetric CapEx and MAXX web project were on track. We expect MAXX web projects related CapEx to pick up in H2. Consider that we don't just run shops and we don't just sell devices TIM remains the operator with the largest asset portfolio in Italy ranging from the mobile network to data center to IP backbone. All in all, combining Italy and Brazil, we have good visibility on revenue and EBITDA trajectory in H2. Domestic revenue and EBITDA target that were considered challenging are in sight. Full year guidance is confirmed on all metrics. Let's now review the performance of the 3 entities. As indicated at our Capital Market Day, our strategy on TIM Consumer is to stabilize the top line by increasing ARPU while keeping churn under control. The results of the first half indicate that our action are working, all metrics are performing in the right direction. Let's see what we did so far. First the price up. We've been very active in increasing prices to over 5 million wireline and 4 million mobile customers. As you can see, the increases were concentrated in Q2, so the effects will be fully visible in the second part of the year. This action led to a further increase in fixed ARPU. TIMvision, which is currently the main driver of our Beyond Connectivity strategy is also playing a role. You can see in the last 3 years ARPU grew 2.5x times with a stable customer base. Mobile ARPU decreased year-on-year but was stable compared to Q1, reverting the downward trend we saw in the past. In all these, you see that the churn has been remarkably stable regardless of the number of customer we have targeted in any given quarter, including Q2 when we made the bigger push. All in all, in the first half, total revenues were flat and service revenue grew 0.5% year-on-year. Overall, the performance is in line with the guidance. Our ambition of TIM Enterprise is to continue to outgrow the market by further expanding into the ICT sector where we want to consolidate our leadership. A strong position on cloud also enables to protect our connectivity business, which is still sizable, but unlike other European incumbents has already been impacted by competition and today contribute to just around 30% of TIM Enterprise total revenues compared to 50% of some of our peers. In the first half, total revenues increased 5% year-on-year and service revenue over 6%, with an acceleration in Q2 respectively plus 7% and plus 8%. In the mix, the decline of connectivity was limited to minus 0.9 year-on-year, better than our budget, while ICT combined increased 12%. The growth come from all lines of business with cloud up almost 20%. While Italian public administrations are progressively migrating to cloud, TIM Enterprise is taking the lion's share of this business under the National Strategic Hub. We also see an increasing interest by private sector on cloud and security services. The value of contracts signed in the first half increased by over 40% with the growth mostly driven by cloud. For the rest of the year, we expect growth to remain very robust. However, we do expect some quarter-on-quarter fluctuations, which are typical of this market. TIM Brazil reported better-than-expected H1 results. It's clearly on a solid path with half of the journey towards full year target completed. Mobile postpaid was the main lever to boost service revenues. More for more initiatives and migration strategy are supporting ARPU performance and a well-executed customer base management, improved net addition growth through migration and churn reduction. Also, TIM UltraFibra and B2B grew significantly. And in the first half, service revenue were up over 7% year-on-year, driven by mobile. EBITDA grew 10%, with record level margin for the second quarter. The commissioning of towers paved the way for EBITDA after lease performance, up by almost 18% as recurring lease expenses keep reducing. Q2 was the 9th consecutive quarter of EBITDA after lease double-digit growth. EBITDA after lease minus CapEx grew 37% in the first half. I now hand over to Adrian for the rest of the presentation.

Thank you, Pietro. Good morning, everyone. The sale of NetCo not only resulted in a massive deleverage but also structurally changed the cost structure of TIM domestic. With the disposal of wireline assets, we also transformed operational structures, including approximately 20,000 employees and the related costs. Furthermore, following the separation, CapEx is significantly low. Therefore, if we compare the old with domestic perimeter, some interesting points emerge. In the first half, the new perimeter had approximately EUR 0.8 billion less cash costs, approximately EUR 0.1 billion more OpEx as TIM ServCo whole buys access services from NetCo, partially compensated by lower labor costs. And approximately EUR 0.9 billion less CapEx, thanks to the deconsolidation of the investments related to the assets sold. The change in mix means that the cost structure of the domestic business is now more success-driven, hence more sustainable. Clearly we agree that there is also a reduction in revenues. But if we compare the EBITDA after lease minus CapEx between the 2 parameters, there was no difference in 2023. But in the first half of 2024, the new TIM perimeter is higher than the old one by approximately EUR 0.2 billion, and this would have been the trend going forward due to the erosion of wholesale revenues. This trend, combined with the significant deleverage makes the case very clear. Group EBITDA after lease of TIM ServCo grew 13% year-on-year in the first half of 2024, and margin increased by 2 percentage points, a clear sign of the focus on marginality that the group is putting on both markets. The growth on revenues in the domestic business was coupled with the results of the transformation plan that is fully on track with some significant contributions as in customer care with a 16% reduction in human contacts on credit management or on interconnection costs due to deferred initiatives as a few examples, which allowed us to maintain flat our OpEx year-on-year on the first half. At the same time, our Brazilian operations posted a sound growth on EBITDA, thanks to the value proposition together with important initiatives on the cost side, being the most important the decommissioning of mobile towers. Now we focus on team ServCo new capital structure. In this slide, we go back to the NetCo disposal in order to explain how we used the proceeds. On the left-hand side you have the building blocks of the total deleverage and on the right how it was applied. Starting from the left, the EUR 14.2 billion included EUR 1.5 billion FiberCop bank debt that traveled with NetCo and EUR 5.5 billion TIM bonds that were deconsolidated through the liability management exercise. Additionally, the cash component of EUR 7.2 billion included EUR 2.3 billion of FiberCop inter-company loan that was repaid by KKR. Of the cash, EUR 0.4 billion was used for the closing adjustments, another EUR 0.4 billion related to the NRRP anticipation was deconsolidated. And then EUR 1.7 billion repaid the bridge financing, including the winding of derivatives and EUR 2.2 billion repaid the most expensive bank loans of our portfolio. Out of the EUR 7.2 billion cash received from KKR, today we're left with EUR 2.4 billion. In this slide you can appreciate how the capital structure changed pre and post deal. At the end of June, we had gross debt after lease of EUR 24.5 billion, financial assets of EUR 3.0 billion and net debt of EUR 21.5 billion. Thanks to the NetCo disposal, the pro forma gross debt decreased to EUR 13.3 billion with financial assets of EUR 5.1 billion and net debt of EUR 8.1 billion. It is a structural improvement. The massive deleverage triggered an immediate rating improvement. Moody's rating improved by 1 notch with positive outlook from negative. Standard & Poor's by 2 notch with stable outlook from negative. And Fitch by 1 notch with stable outlook from negative. The average cost of debt is expected to reduce by 0.4 percentage points. And we have a significant buffer with pro forma liquidity margin covering debt maturities until 2028. Predisposal, it was until 2025. Furthermore, there has been a significant reduction on the yield of our bonds, taking the spread to levels that we haven't seen since the beginning of 2020. Clearly, a totally different situation. And now I hand over to Pietro for the closing remarks.

TIM Group has now a sustainable financial structure as indicated by the upgrade of rating agencies. Approximately 70% of group EBITDA after lease comes from 2 healthy businesses, Brazil and Enterprise. Consumer that represents the question mark in market evaluation is performing in line with our target and better than the largest competitors in Italy. We expect to generate approximately EUR 0.6 billion net cash in H2. Full year guidance are confirmed. Now we can open the Q&A session.

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

Thanks for taking my 3 questions, please. The first one is on the progression of debt in the second half. I was wondering if you see any risks from the depreciation of the Brazilian currency. Now it's -- the euro-real is above BRL 6, and you have BRL 5.4 average exchange rate implied in your guidance? The second one is on the internal reorganization between TIM Enterprise and TIM Consumer. I was wondering if you expect the appointment of a dedicated management for each company. Or will they remain business units for some time without necessarily being legally incorporated, meaning adding to separate boards, preparation of separate financial statements and double internal structures. And the third one is on the outsourcing of call centers. I was wondering if you are considering this option and if you see a trade-off between outsourcing around 5,000 employees with resulting personnel cost savings and the purchasing of the same services externally.

Sure, Giorgio, thank you for the question. The second question creates some issue here because there are some colleagues that try to see [indiscernible] because if they have to start to work on financial statement for Consumer business after all these marathon that we had to finalize the deal, it could be an issue. Not that -- I'm joking. First of all, there will be no change in the management team, also because the result for which I'm really satisfied on the commercial and operational side that were carried on by Elio and Andrea demonstrated that Elio and Andrea are the 2 people that are best in the condition to continue this challenge that we started together. Then we don't foresee, at least for the moment, in the actual plan, any kind of creation of separate companies to work on these things. But in any case, Andrea will give you some more details because the most we proceed the most we release further information related to all the KPI, economic, financial about the 2 business units. This is really important also for us for the capital allocation and the trade-off between the activities. About the outsourcing of call center, what we are doing today is that we are proceeding to an internalization of the activity that today we have outside our perimeter. I remember that in the Consumer perimeter we have something close to 3,500 employees that work on the call center side that in the last 2 years did a great job to increase the productivity and to try to compensate with the lower cost of the external call centre. So for the moment, our approach is to internalize all the activity, this is one of the area of the transformation that we are carried on. And it will be not only for the call center but also for other activity. So the EUR 400 million target cash cost improvement on the transformation are made also by internalization of the activity, not only in the call center but throughout the company. About the progression, I'll leave it to Adrian to give some color.

Yes. Hi, Giorgio. Good morning. Just complementing on the reorganization in terms of the information that we give, you remember that in the -- in our Capital Market Day, we mentioned that we will be giving this year yearly the evolution of the EBITDA of the entities. We are working hard, honestly, in order to prepare everything for next year, and we'll probably be giving at least each half the information about the entities up to the EBITDA level. Hopefully we will also be ready to give it quarterly, but this is something that we are working on these days. As Pietro mentioned, we are not seeing today that we will be preparing financial statements separately in the domestic business. But anyway, we'll -- hopefully, next year, we will give more disclosure on the entities. On your first question, clearly, this is a matter that we've been working not this year. If you remember last year, when we issued the debenture in Brazil at the holding company level, we mentioned that one of the goals of this financing was to partially cover the exchange rate through a natural hedge. That was the first step. And in April of this year, we entered into an agreement of a hedging position at -- here in Europe of the Brazilian real at BRL 5.57 per euro for the 50% of the equity free cash flow of the year of Brazil. Since the exchange rate evolved mainly starting in June, we think that this coverage will be -- if you consider the full year will be almost covering totally the equity free cash flow of the Brazilian operations. So we shouldn't expect any impact in terms of equity free cash flow coming from the Brazilian operations.

Next question comes from Mr. Joshua Mills of BNP Paribas.

I'd love to just get a bit more color on the competitive environment in Italy at the moment. It looks like the fixed line price rises has landed quite well. And mobile is still under a bit of pressure, but if you could perhaps comment on what you're seeing from your competitors and then what price moves you had planned for the second half of the year, that would be great. And then the second question was just more on the B2B side. You've given some helpful detail here. I note that in the recent Fastweb presentation, they're talking more about deploying AI and about the opportunities they see if they merge with Vodafone. So perhaps, again, you could give a bit of color about the competitive environment you're seeing in the B2B space and whether there's been any big contract wins, losses or repricings in the past few months since that merger was announced?

Okay. Thank you, Josh. I leave the stage to Elio, to Andrea so we can demonstrate that we are a team and that indicates they are the right people to continue to challenge that we started together.

Thank you, Joshua. So the competitive environment in the first half has shown different trends. First of all, we see some signs of rationalization by the main player on fixed and on mobile. We see actually aggressiveness from the new players, especially from the challenges coming from the energy sector. So Enel and other energy providers. But in general, we see some sign of rationalization also with some repricing coming up from the main players. And we have also positive expectation on the rationalization of policy by the merged entity Fastweb plus Vodafone that hopefully will have a different approach to the mobile versus the previous Fastweb stand-alone unit. So in general, I would say that the competitive environment remains relatively tough, but we managed to have a strong repricing campaign that as portrayed also by Pietro is the actually wider repricing campaign, wide repricing campaign we did in the last 3 years. So with escalation of numbers and delta ARPU and positive outcomes. Elio?

Yes. So thanks for the question. So I would start from the competitive scenario. So we have basically 3 layers of competitions in the country. You have on the top, large system integrators, [ Accenture Engineering ], [ Ludec ], you name it. Then you have set, a large set of small system integrators. And in both cases, they are on the competitive side, but they are also partnering with us because in many cases we do leverage on their services to provide services to our customers. And then there is a third layer, which is, I guess, the one you are referring to, which is the carriers one, where we do see mostly Fastweb and Vodafone competing with us. And specifically on the artificial intelligence topic you were mentioning, we do believe that on the revenue side we are probably the only player that achieved in the last 18 months to actually generate a significant amount of revenue of revenues on AI because as you probably know, we do leverage on a platform which is inside Olivetti which is a platform where we provide tools to municipalities to make cities smarter. And actually, this is a business going very, very well. We have that platform installed in 17 different cities across the country. And we don't see any other player, honestly, in the country, generating the same kind of effect. On the other side, we are also very active on the cost side because we do believe that artificial intelligence can help us on the operations side. So we are trying to understand how to leverage on the platforms provided by large hyperscalers to optimize costs on the customer operation and on the customer care. And then more in general about growth. We do see cloud doing very, very well, significantly ahead of our best expectation. We can comment on this later on.

Joshua, if I may, I would like to add 2 things, one on the Consumer and the other on the Enterprise. On the Consumer, it's important to highlight to everybody that the number of the first half and the beginning of the third quarter are related to the win which we were used to compete. So no flexibility. So we can imagine this is part of our plan that after the sale of the NetCo on the consumer side we will have more leverage to bundle and compete at a local level, and so it will allow us to give a further speed up. In the meantime, as Andrea mentioned, there is an increase of aggressiveness from players coming from energy, and this is something that must be put under the spotlight because sometimes there could be the risk of cross subsidy between the 2 industries. So this is something that will be highlighted. On the Elio side, let's remember that independently from AI, a real, let me say, competitive advantage is the number of data centers that we have at our disposal. The [indiscernible] data center and the speedness with which were migrated our customer base in the cloud will be very important because once you migrate the customer base in the cloud, it will increase the level of stickiness of this customer, having in mind that the duration of the contract on the corporate segment is in any case between 3 and 5 years. Thank you.

Next question comes from Mr. Mark Watts of Citi.

Couple of questions here. So first is just on your plans for the front-end ServiceCo bond with Telecom Italia. I know obviously they weren't part of the exchange, but what is the imminent plan there? I think from memory, you guys said we'd use cash to potentially redeem? Or are you looking to refinance those? Second question is just on the second half and what you're guiding for. So do you mind just outlining from what I see here, EUR 200 million -- EUR 300 million more of EBITDA CapEx? Could you mind just elaborating on some of the other cash bridge items for the second half? And then just to clarify, so from what you had on Slide 19. So the NRRP, that's now been fully repaid. The only thing that moved across to the ServiceCo was the FiberCop and the bonds, but I'm just wondering whether there are any other debt that's traveled or is this now the clean amount? And what's the kind of the pro forma cash balance now at the ServiceCo? Should I just take this as the gross -- the delta between the net debt and the gross debt, so the EUR 5.1 billion, maybe if it is possible to split how much actual physical cash there is at the ServiceCo, that would be useful.

Hi, Mark, good morning. Honestly, there's a little bit of noise in the line, so I don't know if I got correctly your questions. But the first one was related of our strategy going forward in terms of our outstanding debt. Is that correct?

Yes, yes, on those kind of early maturity bond at the ServiceCo level.

Yes, clearly. Well, we did a lot this year in terms of that strategy, as you can imagine. Clearly, we will be monitoring the market. And we will see if there is an opportunity there, we'll probably take it then. Consider that if we are covering more than 4 years of maturities now. It's a totally different situation for us, not needing to do any issuance in the near future. It's clearly a much comfortable situation. Then about these things evolve. Our bonds are trading very well. So it's a matter of windows in the market. Today, we are comfortable in this situation. I think on the third question is about liquidity, then I will leave the floor to Pietro for the second one in terms of CapEx. The third one was about liquidity, but I don't know if I got it correctly, what's the question about the liquidity?

Yes. I guess I just want to clarify what's the actual cash position at the ServiceCo level, could you give a liquidity position for how much of that is physical unrestricted cash or nontrack cash?

No, today, again, the deal with NetCo helped us also in this sense because there were many guarantees up to the closing now with a different rating as you saw, having 2 rating agencies as BB helps us also in terms of guarantees. So there was a significant reduction in terms of liquidity trapped. There are still some guarantees that are marginal in this pro forma situation. So I would say that almost all of the liquidity today is free to be used for covering maturities.

Okay. So roughly EUR 5 billion of cash [indiscernible]. Sorry, [indiscernible] the question. I just [indiscernible] clarify on the company earn outs and I guess, discussions in the past around [indiscernible] what are your plans? How are you looking at those potential asset disposals, if at all near term? How do you look at that asset portfolio now after NetCo?

Hi, Mark. So we focus the presentation to the today presentation on the business as usual because there were a lot of doubt about the fact that the business as usual was able to deliver the guidance, and we are on target to deaverage. So we didn't put any details about the earn-out, but it doesn't mean that they are not under control. So about more than EUR 4 billion earn-out, the situation is the following. We are quite optimistic in the finalization of the 2 deal about Sparkle and INWIT. Second, about the so-called [ Canon de Concesion ], the litigation of the Italian government, we started the execution to cashing it. It's a formal process. We started at the end of June. It takes 4 months as a deadline. So we expect that some discussion will happen by the end of September. About the earnouts, the deal with the NetCo was closed 1st of July. And so now start the 30 month to have the opportunity to get the earn out from a commercial partner for the merge between Open Fiber and NetCo. On this part again, we are -- we said [indiscernible] also on this part I think that there's only one real possibility that is that Open Fiber will proceed with NetCo. But this is my personal opinion, looking at the number. And if I'm not wrong, you asked also something, your second question related to the EBITDA minus CapEx, again, the second half, I think that the question was how is it possible the EBITDA minus CapEx of the second half is higher of the first half. This is a matter of seasonality. Just to give you an idea with the public number that are comparable. If you go and look at the number of TIM Brazil, first half 2023, second half 2023, EBITDA minus CapEx, you can see seasonality this in Brazil. If you look at our number, usually this quarter as a seasonality related to the roaming and the visitor and the fourth quarter a seasonality mainly on the Enterprise segment. So this is the reason for the increase of the EBITDA after lease menus CapEx between the second half and the first half.

Next question comes from Mr. Fabio Pavan of Mediobanca.

First one is a follow-up on consumer -- many times, you have stressed that you will get a higher commercial flexibility. So my question is, are you expecting already to put this flexibility to work in the second part of this year? Or we should expect something more concrete in 2025? Second question is on Enterprise. Just wanted to be sure to have properly understood the presentation. So for the next half, we should expect cloud revenue growth to remain at this very high level? And what's about 2025? And the last question is open one for Pietro. What's next after NetCo sale? It's much more focus on business or you may consider some actions on selling shares rather you are willing to play a role in the sector consolidation happening in our country?

Thank you, Fabio. So I leave to Andrea to elaborate on the consumer segment. Then Elio. And then I will be back with the M&A, we will buy Apple. But Andrea?

Thank you, Fabio. So no, we actually immediately put in place some changes in the commercial policy. Although we have respected the guidelines of regulation that are still applied on Telecom Italia, we see some very positive sign, especially in bundling content with connectivity. So we already from December we have a campaign in place that is bundling streaming services with connectivity that is giving very, very positive results. More than that, we have plans to put in place already in 2024 back to school some more flexibility -- commercial flexibility in place. And that also explains why we have concentrated the repricing action in the first half whereas we will have a second half that is more focused on the commercial execution with the new parameters.

So thanks for the question on cloud. So let me -- so first of all, we are very, very happy about how cloud is trending in our business. Let me give you a little bit flavor of what happens on the market and what is our relative performance. So this is a market that, as you probably know, in 2023 was a little bit short of EUR 5 billion, out of which we did EUR 1 billion. So we did represent at that moment in time almost 20% of the total revenues, cloud revenues generated in the country. Today, we are -- if you look at actual figures for the first half, cloud accounts for 35% of our total revenues. When you look at the Slide 14, where you see the value of a contract signed, you can see that the trend is speeding up. And our value of contracts signed is at 150% on a year-to-year basis, meaning that the cloud will represent very, very soon almost 50% of the total revenues, which is a unique case in Europe. You will not find Europe or any other B2B telco business with that amount of cloud revenues among the total amount of revenues. When you look at the first half, cloud is a little bit short versus connectivity in terms of total revenues, meaning that the difference between revenues that we generate in cloud and revenues that we generate in connectivity is a little bit smaller than EUR 50 million. By the end of this year, 2024, we forsee cloud to be 15%, 1-5, 15% ahead of connectivity. So by the end of fiscal year '24, we will generate more cloud revenues than connectivity revenues, which is a very, very big achievement because we thought 1 year ago that this would have happened only at the end of 2025. Now in the slide we presented to you that Pietro commented before, we said that this boost was also generated by the National Strategic Hub program. Just to give you the size of that acceleration, out of the 1 billion cloud that you see in the total amount of contracts signed, more than 0.5 billion comes from that program that, as you know, is a program that will last for the next 13 years. So not only we have a solid steady growth on cloud, but we are securing those revenues on a program that will last for many, many years. So this will give also a lot of the resiliency in defending that amount of revenues. So this is basically our situation today on the cloud business. And I think that, as I said, there is no other telco in Europe that has such a small amount of revenues based on connectivity as we do. So we look -- when we look at the business going forward, this looks very, very promising. Thank you.

Fabio, now I apologize if I have some fun talking before about [ Apple net ]. Let's try to be serious. First of all, we were looking on the web, but it seems that [ Tilia ] increased the price. Now it seems that Tilia there is a price on fiber at EUR 21.19, and this is also higher than Enel. This just confirmed what Andrea was mentioning before that the telco market is trying to be more rational and newcomers that are coming from other industry are becoming less rational, but this is something that we'll address during the summer. About the M&A. As we've always stated, now we must be focused in delivering the number that we promised the guidance at the operational level. So I don't want to create any kind of distraction on the management team. It's clear that at the same time, we have to always take a look outside of what can happen. So as I mentioned several times, and it's not B, was declared also at European level that at European level the consumer is a market and need for a consolidation. So in the actual situation, we have the possibility to set the wind to be an active part of the possible consolidation in Italy on the consumer. On the enterprise side, the possibility to grow is for sure organic, but we can look at inorganic growth with different models. But again, this is something that we'll detail more in the following quarters, but it's everything under evaluation. There could be something that is the opportunity, something that could be an acquisition or something with different commercial model that, in any case, can create value for the company. And about the conversion, the [indiscernible] share, this is something that TIM management team have to keep always under control, and we cannot do something different from that. I hope that I gave all the details that you needed.

The next question comes from Mr. James Ratzer of New Street Research.

Pietro, congratulations on closing the NetCo sale. And I was wondering that now you are independent from NetCo, could you please give me kind of any thoughts you have or interest plans and actually starting to now buy FTTH services from Open Fiber in the white and gray areas where they've been deploying but the NetCo hasn't been doing so? And secondly, just be interested in your thoughts on whether a potential stake sale in your enterprise business might be on the cards as well. And it sounds like you're progressing with Sparkle and INWIT. But I was interested particularly about whether an enterprise deal could be considered now.

James, thank you for your appreciation for what we did and then report to on the team because sometimes people forget that we did a great job because if you consider that we sign -- we are signing at the end of November and in less than 7 months we were able to separate the company, let all the system work, finalize all the contract was really a huge job that the team was able to support. About the second -- your second question that was on the M&A and disposal of the asset again. As you remember, when in July 2022 we told that we were evaluating the sale of a stake of TIM Enterprise, it was mainly for a financial aspect. I remember that everybody were telling us why if TIM Enterprise is a good, is so good activity you will sell. Now we can evaluate that as an opportunity for growth and not to create for the liquidity for the company. About Sparkle and all the other element, I already told before. Then about your first question, if I catch right is what we'll do in the white and gray areas. So in that areas, what's happened is that as we are already doing and we declared also during the call, we are starting to buy from Open Fiber FTTH where it is needed to compete or to serve the customer with the technology that it's that is fitting the most. Let's consider that in that area, white area and the grey areas of [ PNRR ], the price are defined and are public for everybody. So there is no possibility, noe for TIM neither for other player in the white area, in the gray area PNRR to have specific prices. So no problem. This is also better to remember to everybody. In Italy, we have EUR 20 million line. White area and gray area PNNR of Open Fiber are more or less 7 million line. Then we have one [indiscernible] the gray areas, PNNR of NetCo. So you reach 8.5. In these areas, there is no possibility of specific prices because they are published by the bid. Then you have 4 million lines that are not yet covered, gray areas. And then we have 8 million lines were more or less there is the overlapping between Open Fiber and NetCo. It's important to remember this number because sometimes there's some confusion. I think that -- I hope that it was clear, James.

Are you able to say how many lines you are actually buying from Open Fiber at the moment?

No, we don't disclose this number, but we started to buy since a few months. So there's no problem.

The next question comes from Mr. Domenico Ghilotti of Equita.

Couple of questions. The first is related to a follow-up on the competitive environment in fixed in particular. So you mentioned that you have been raising prices mostly during the second quarter. So if you can give us a sense on any reaction in terms of churn? And maybe also how do you see the line losses evolving considering also the comments that you were giving on the new promotion that you are launching, the conversion promotions. And on this also, I'm trying to -- just to clarify, if you are now allowed to present these market offers freely or if you're still linked to the previous situation until there is a clarification by AGCOM?

Domenico, before to answer to you, I want to complement to James because sometimes James is very polite and doesn't ask the question. If the question was related, do you have [indiscernible] free to buy FTTH from Open Fiber in the white areas, yes, we don't have [ Argos ] or any other kind of [indiscernible] or limitation. So we are able to compete in as best as possible. Sorry if I complemented that, but I was thinking that perhaps the real reason for the question was this one. Coming back to Domenica. About the possibility to move, we already requested formally to the national watchdog to act in a free way because we have no more limitation. There's a formal step that we have to go through, but the formal step will be applied starting from the 1st of July. So the answer is yes, we can move and now leave to Andrea to explain better.

So, on the repricing campaign, thank you, Domenico, we did a very extensive repricing campaign in half 1. That is giving us some advantage also in a year-over-year quarter the performance. You can also see in the chart that is projected that we had a very solid growth of fixed line ARPU, thanks to this. So thanks to the repricing campaign. On the competitive environment, we have seen a relatively prudent approach by our main competitors on repricing campaigns in half 1, but perhaps also following the good results we reported on first quarter we now see in the summer some moves by the other players, some repricing action by some of the main players. And notably, today, as Pietro said, finally, after almost 2 years of very aggressive policy, we had raised also the pricing of their offer for the fixed line, which is very important -- is a very important signal because we know that iliad is coming with a policy of price forever. So they don't do repricing campaigns. So it's their way to raise the ARPU is to change the offer for the new acquisition. As we said, we see in terms of churn, a relatively stable churn trend because of the rationality of the main players that still represent 80% of the fixed line addition in the Italian market. But we see very, very aggressive play by the newcomers, which we believe are far from being rational and far from being sustainable also in terms of cross subsidy rule. So going forward, we expect also from the consolidation, as I said, between Vodafone and Fastweb, Vodafone has been traditionally one of the most aggressive players on fixed and Fastweb is still one of the most aggressive player on mobile. So from the consolidation of the 2 players, 2 massive forces on the market should basically come off. And we believe that they will act in a different way going forward.

Next question comes from Mr. Mathieu Robilliard of Barclays.

Also congratulations on closing the deal. And [indiscernible] we will focus on what's next. I just wanted to -- in terms of the [indiscernible] can you remind me what are the components of the earn-outs linked to regulation, change in energy subsidies. Also, I don't know if you can -- but I was wondering if you are [indiscernible] result in fiber at the moment. And then last, with regards to free cash flow, I just wanted to confirm that information we gave at the Capital Markets Day about above the low CapEx free cash flow [indiscernible] working capital financial change 2026. If you're still happy with that guidance.

Mathieu, could you repeat the second question related to Open Fiber because we are unable to catch it.

Sorry, I was -- share whether or not you will hold discussions at the moment [indiscernible] maybe combining, yeah, if you maybe don't want to comment --

Mathieu, about the earnout, as we mentioned, after the negotiation that we had, we include the amount of the earnout that were and/or for 2 separate conditions that can happen together, separately that are the application of an RAB model in the definition of the regulatory prices on which our expectation is that probability is lower or a merge or a combination between Open Fiber and NetCo in the next 30 months from the closing. So from the 1st of July. The amount should be up to EUR 0.5 billion based on a percentage of the synergy that will come up from the merger or the combination of the 2. And then there was further EUR 400 million on possible changes in the regulation for saving on the energy. Now if you have to give some probability on the different part -- the combination or merge between Open Fiber and NetCo is the highest level of probability. The second is the energy, but it's a separate basket for the first one. And the third one is the RAB model. I'm not worried about the RAB model because it's a condition that is and/or. What I mean is that the basket of the EUR 2.2 billion over now for the combination and merge can be filled in only by the combination or the merge in terms of synergy that will arise from the combination or the margin.

Hi, Mathieu, I'm Adrian. I don't know if we got correctly your third question, but it's about the guidance by 2026 of the leverage and what may happen below the EBITDA minus CapEx level. I think that, that was the question. If that's the question --

That right.

Yes. Now clearly, we are still targeting the leverage that we guided by 2026. There are no changes clearly. What you may find going forward afterward -- after the outcome of the deal in terms of what we did with the LME in terms of what we are seeing on the evolution of the Brazilian operations in terms of financial expenses is that you may have some -- have some improvement or some efficiency on that line. But then we need to see. We will be working on a new plan already starting in September, and we'll have the new projections. By now we are confirming the guidances for 2024 and also for 2026.

The last question comes from Mr. Ajay Soni of JPMorgan.

I've just got 2 questions. So on Slide 8, you show your net cash flow of around EUR 600 million for H2. Could you provide any color on the seasonality of the cash flow for H1? And any key movements we should be aware of for maybe H1 '25? And then the second question was around Enterprise, which was a key driver of your domestic growth in H1. So do you expect a similar level for H2? Because I noticed that Q4 last year you had some pretty strong numbers. And so I'm just wondering how you expect that to evolve whilst also still hitting your domestic guidance?

Yes. About the working capital seasonality, clearly, as Pietro mentioned in his speech, we are still very well infrastructure company. And these swings in working capital between the 2 hubs will continue. So probably what you will find is that in the first half of 2025 we will have an absorption of working capital. And in the second half, we'll have a positive as we will probably have in the second half of '24. So this situation will probably continue. Additionally, if you remember the disclosure that we gave about the extraordinary net working capital, also in 2025 most of them will be concentrated in the first half. So again, that will be the situation going forward.

About TIM Enterprise, yes, we can consider a speed like what we experienced in the first half because usually the fourth quarter is always a seasonal quarter in the TIM Enterprise segment. But your question, give me the opportunity to do a quick recap about all the elements. So first of all, ServiceCo is a group where 70% of the EBITDA after lease minus CapEx is coming from 2 healthy business, Enterprise and Brazil, and we are delivering the number that we promised. The third business, Consumer, is performing around 0. That was something that a lot of people consider challenging, but we are performing that. At the domestic level, because no one is arguing Brazil, but domestic. The main question was, are you able to grow in term of revenues mainly because of the consumer, the consumer is stable [indiscernible] is performing as planned. The second question was your EBITDA come from revenue and flat cost you are experiencing in the first half. At the domestic level, our level of cost is flat year-over-year. So we are following all the things that we promised, and we want to achieve also in the second half, and we foresee that the possibility to repeat that so to confirm the guidance that we are stating today.

That's great. Can I just have one clarification? And I think earlier in the Q&A you mentioned that cloud will be 15% higher than connectivity with Enterprise, did I get that right, 15% higher?

Yes. Today -- so the actual number at the end of each one is that cloud is -- the total amount of revenues is 10% lower than what we generated in connectivity. By the end of 2014 (sic), we will have a cloud ahead of connectivity by 15%, 1-5.

So there are no more questions. I want to thank everybody. We will follow up with the IR team in some meeting. I want to thank you all the team for the huge work that was developed by us in the last month. And I think that this is a starting point of a new history where we are giving to our company a new strategic and industrial view. Thank you to everybody.

Ladies and gentlemen, the conference is over. Thank you for calling.