Ladies and gentlemen, good morning and welcome to Telecom Italia Q2 2023 Results Conference Call. Paolo Lesbo, Head of Investor Relations, will introduce the event.

Ladies and gentlemen, good morning and welcome to TIM Q2 2023 Results Presentation. I am here with the CEO, Pietro Labriola; the CFO, Adrian Calaza; and the rest of the management team. Pietro will provide an overview of Q2 highlights and an update of the delayering plan, while Adrian will illustrate the financial results. As usual, a Q&A session will follow. Pointing out our safe harbor disclaimer on Page 2, let me hand it over to Pietro. Pietro, the floor is yours.

Thank you, Paulo, and good morning, everyone. These are the topics I will cover today. The focus would be on where we stand against full year guidance on domestic and TIM Brasil performance, but I will also update on the delayering plan and net cost disposal process. I will address each topic in the following slides. So let's start. While TIM Brasil continues to perform in line or better than expected, I'm pleased to confirm that in Q2 domestic revenues are back to growth and EBITDA is stabilized. In H1, the group performance fully support full-year guidance. Service revenue are up to the 3% year-on-year, in line with low single-digit growth target. EBITDA is up 4.7% year-on-year, in line with mid-single-digit growth target. So far, the positive drivers and the action taken in prior quarters have unfolded as expected and will support domestic revenue and EBITDA trends also in Q3 and Q4 as they are largely secured. TIM Brasil's performance will remain strong in coming quarters. Combining Italy and Brazil, we have good visibility on revenue and EBITDA trajectory in H2. I repeat, the full year guidance is therefore confirmed and reiterated. Let's go to the next slide with a deep dive on Italy. These are domestic business trends over the past five quarters. In Q2, total revenues are finally back to growth after five years. Service revenues are on track towards stabilization. EBITDA is positive after 21 quarters, and net of the activation fees headwind, the underlying year-on-year growth is 5.5%. I point out that 2024 will be without this headwind. Our performance in Q2 is not a sparkle in the night, but the result of the solid and continuous effort of the entire company. That's why I point out the sequential improvement. All KPIs are better versus Q1, which was better than Q4, which in turn was better than Q3. In a nutshell, the direction of travel is very clear. Of course, this is not enough. We can and must do better taking the domestic business back to structural growth. There is no doubt that the Italia operation are steadily improving and all the way in 2023, we are delivering what we promised. Going forward, we will have easier energy and labor comps in Q3 and Q4. The effect of re-pricing and of higher wholesale tariffs will continue as well as the stabilization of the customer base, while the drag on activation fee will reduce this quarter and finally fade away in Q4. The stabilization of TIM Domestic in the second half will contribute more and more to the group results. If you do easy math, you can see that if we replicate in Q3 and in Q4 the EBITDA performance in absolute terms of Q2, the domestic guidance is in sight. Slide 7. Let me now give you an high level update on each of the four entities. In TIM Consumer, the volume to value strategy is in full steam. Starting from the value component of the equation, we remain focused on price actions across the footprint. Selective price ups communicated to the customer this year involve more than 5 million wireline and more than 7.5 million mobile lines and are expected to generate an overall benefit of almost €70 million this year. The ARPU drop through is visible. Fixed ARPU consumer is up almost 5% year-over-year and Mobile ARPU consumer is finally stable. Some improvement also for the volume component where we see a strong recovery in mobile KPIs, line losses are down 75% versus Q1 thanks to higher gross ads and significantly lower deactivation. Moreover, TIM this quarter had one-month with positive mobile number portability net balance after five years. Fixed KPIs are softer. Line balance is slightly better year-on-year and broadly in line with the Q1, with lower gross ads partially compensated by lower churn thanks to the market cooling down. In Q2, we passed one million active FTTH customers, enhancing our leadership. Customer satisfaction and net promoter score improved year-on-year and sequentially both in fixed and mobile. As part of our turnaround effort, we have improved the credit risk of the customer base. Bad debt is at a record low and so is the cost of credit. I highlight this because it is an enabler of our customer-as-a-platform strategy, building a portfolio of services beyond the core to increase customer stickiness and tapping to new revenue stream to meet top line growth. We are moving the first step in this direction. In July, we started to sell insurance policies in our shops. Slide 8. TIM Enterprise posted another quarter of growth, however, at lower pace versus Q1, mainly due to the contraction of connectivity volumes. Due to its nature, TIM Enterprise revenue dynamic is influenced by phasing of the contract. Therefore, quarterly fluctuation in the revenue dynamic are expected; if we expand the time of observation, service revenue in the last 12-month posted a solid 7% year-over-year growth. The pipeline is very strong with around €1 billion from ongoing negotiation, of which €300 million are related to National Strategic Hub, which is the tender for the migration to cloud of public administrations. This is slightly delayed, but its overall size of revenues has increased and will more than compensate the SPC Cloud, which is about to expire. Considering the three-year average duration of contract signed, a significant portion of future revenues are secured. Regarding our ICT growth strategy, we keep investing in our business and delivery models to stay ahead of the market. A key area of focus is our cloud services portfolio, where we are adapting to market trends by strengthening our multi-cloud offering. This complements our strong position in connectivity, co-location, cyber security and IoT, which make our ICT value proposition unique and distinctive. Slide 9. As expected, NetCo is on a positive revenue trend thanks to 2023 new regulated prices, improved technology mix and the commercial deal with Open Fiber which we started to book in Q4 and has expired in Q2. Sparkle posted a strong performance in Q2 with positive revenue and EBITDA growth year-over-year, also thanks to new submarine cables that have come into the operation – into operation. While FTTH rollout is on track at 34% coverage of technical units, the crew speed of some NRRP tenders have been slow. These are complex projects that require a significant setup time, and in addition we are facing some structural bottlenecks. For example, in Sardinia, there is significant scarcity of specialized workforce which affect the FTTH rollout. The good news is that we are out of the setup phase, so from now on we will accelerate. On 5G backhauling, we are in line with the target. On the other two, we will close the gap. No news on the advanced payment of cash in grants. It is provided by law. So we expect to cash-in in H2. Moreover, we have asked that the advance be recovered at the end of the deployment in 2026 and not starting from next year; we will see Infratel's position on this point. Let's now move to Slide 10. Last but not least, TIM Brasil. Q2 results are rock solid, including an outstanding operational performance with [indiscernible] on pre- and postpaid, lowest churn in the last three years, bad debt at the lowest historical level and an overall NPS improvement. It's clear that the double-digit EBITDA growth is driven by the benefit of M&A, considering that one-month of Oi accounts for 2 to 3 percentage points of group EBITDA and Q2 last year had only two-month of integration. However, TIM Brasil is performing so well also thanks a well-executed strategy all around; improvement in customer service, network quality and clever customer-based management in mobile, coupled with a solid expansion in FTTH. The end game is a robust cash generation, supporting a better financial position. This is the background leading to the debenture issuance we did a few days ago. The holding company of TIM Brasil, fully owned, give access to a source of funding to refinance group's expiring debt at better cost without impacting borrowing capacity of TIM on its reference market. Adrian will deep dive on this topic. Let's now move to Slide 11. On the transformation plan, we are on track with around 25% of incremental full year target achieved in the second quarter and 50% in H1. One of the new key drivers of cost transformation is copper decommissioning, on which we have significantly increased our focus in recent months and which will bear fruits in coming years. We expect a reduction of the notice period we must give to [indiscernible] before switching off copper technologies. This shortens the timeline of project and our new ambitious target is to complete shutdown of almost 7,000 central offices by 2028; this represent around 70% of total exchanges and will save around 25% of our current total energy consumption. We have also anticipated by three years the shutdown of 15,000 public phone booths; this will be completed by the end of this year. On energy, we secured around 10% of energy consumption saving through efficiency and signed nine-year PPA extension for additional 200 gigawatt year supply of green energy. Our needs are hedged at 87%, including pass-through and we have hedged 40% of 2024 needs through PPA, purchase the market and increased self-production. Slide 12. While we are fully focused to improve the group's operational performance, NetCo's process is ongoing. The company is working flat out to meet the end of September deadline. The activities are many and very complex. Honestly, three months for the assignment of this subsidiary to KKR and the deadline for the binding offer are just enough to accomplish all necessary tasks. Having said that, we are on track and do not envisage any delay. We expect corporate and regulatory approvals nine to 12 months after receiving the binding offer. I take this opportunity to share some additional concept on ServiceCo's sustainability. As I already pointed out in the last call, ServiceCo is a portfolio of three distinct entities with a well-balanced mix of cash generation, market maturity and risk profile. The combined pro forma EBITDA after lease is expected to be significantly above €3 billion and operating free cash flow above €1 billion already in 2022. The NetCo transaction will jumpstart TIM's delayering plan, restoring full financial flexibility as a result of sizable deleverage. A less regulated ServiceCo will be able to compete on a level playing field and will regain full strategic flexibility to accelerate growth initiatives, both organic and inorganic across all distinct entities that will be fully empowered to implement their distinct road maps. Post NetCo disposal, ServiceCo target leverage after lease will be in the range of 1.5 or 2 times. Thereafter, ServiceCo leverage will have the potential to fall to levels below best-in-class peers in the medium term. Let me now hand it over to Adrian for the Q2 financial results.

Thank you, Pietro, and good morning, everyone. As Pietro mentioned, group finances in the second quarter are fully aligned with our full year guidance across the board. Group total revenues are positive 2.8% year-on-year with domestic back in positive territory after five years. Group service revenues are also positive 1.8% year-on-year from 2.8% in Q1 with domestic towards stabilization at minus 0.9% year-on-year versus minus 2.4% in Q1. It is worth to mention that if it wasn't for the negative effect of the activation fee accounting notification, service revenues this quarter would be plus 1.2% year-on-year. Group EBITDA improved again at 5.6% year-on-year from 3.8% in Q1 with domestic stabilized after 21 quarters, and we expect this to continue in the second half of the year, not only because of the better comps, but also due to the better evolution of the business. On the other side, I remind you, we are lapping this quarter the effect of Oi integration in Brazil. So the effect of it will fade away already in Q3. Nevertheless, our international unit will continue to contribute to the group's growth and delivering always higher margins. CapEx are overall flat in Q2 compared to last year with a small increase in domestic. As expected, equity free cash flow is negative in the quarter. Q2 was affected by the seasonal outflow of working capital, higher financial expenses year-on-year and a less favorable FX impact. Implicitly, net debt after lease increased in Q2, landing at €20.8 billion. Let's move to OpEx in Slide 15. OpEx are a touch higher year-on-year in Q2 on an economic view, but slightly lower on the cash view thanks to many of the activities considered in the transformation plan. The slight increase on the P&L view is mainly due to the volume driven and industrial costs. In details, variable costs are up 2% year-on-year, with the increase of COGS related to ICT revenue growth, not fully offset but lowering interconnection and equipment sold. Furthermore, COGS increase reflects a different OpEx-CapEx mix, driven by opportunities on specific deals in enterprise. Commercial costs are also slightly up year-on-year, mainly driven by content and higher commissioning on a P&L view. However, they were down on a cash view. On the other side, bad debt is down significantly, minus 12% year-on-year. Industrial costs are up 13% year-on-year as expected, with more than half of the increase related to higher energy costs, even if lower than internal projections, and the rest due to the inflationary effect on INWIT's contract. Indeed, the increase on energy was expected and is mainly related to the lower support measures from the government on systems transfer charges and tax rates compared to the last year. The phasing will revert in the second half, so we expect more favorable comps in Q3 and Q4. G&A and IT costs are down mainly due to lower cost on real estate and also labor costs are down 1%, driven by solidarity and lower FTEs. Next slide. CapEx are overall flat year-on-year in Q2, but 6% below last year in the first half with similar trends in Italy and Brazil. We continue to invest heavily in ultra-broadband deployment with a specific focus on our NRRP initiatives and on the 5G coverage at the domestic level, with our Brazilian unit accelerating the deployment of the 5G stand-alone technology. As anticipated, Q2 equity free cash flow after lease is negative, driven by seasonal absorption of working capital, higher financial expenses and less favorable FX impact. It is worth mentioning that equity free cash flow in the first half was better than our projections and that we expect to have a flat equity free cash flow in the second half and positive if we also consider the partial anticipation of the NRRP funds. Net debt is a touch higher versus Q1 to €20.10 billion after lease. But considering what we just said, we expect net debt after lease at the end of the year to be lower than the current level. Next slide. In Slide 17, you have a recap of all the work we have done so far on refinancing. We worked hard to enforce our liquidity position, and we succeeded, especially considering the tough market conditions. We have raised more than €3 billion since the beginning of the year and overall volume in line with our expectations, but with an average blended cost of 6.9%, which is slightly below our budget. TIM has been the largest issuer in the European high-yield market year-to-date with each of the three bonds issuance oversubscribed more than 2 times. In particular, the two most recent refinancing, so these debentures issued by our holding in Brazil, and the euro bond have been done at an average blended cost of around 7%, reflecting the rise in interest rates, but with a spread similar to previous ones. More in details. The Brazilian debentures was closed at an attractive cost of CDI plus 2.3% in Brazilian real, equivalent to a theoretical 6.5% in euro. As we promised in the recent past, it was our goal to explore different geographies for our financing activities, and we are delivering with these decisions. In addition, this transaction starts to create a natural hedge of TIM Brasil future cash flows, something that we were pursuing from some time. The July euro bond has been issued mainly to proactively address 2024 debt maturities, thus freeing up capacity that can be reinvested in TIM's new debt instruments. Indeed, we have completed a partial repurchase offers on 2024 euro bonds for around €0.6 billion. The buyback yields north of 4% allowed TIM to generate positive net present value returns compared to the short-term placement yielding three or six months Euribor rates. With these last two initiatives, we have almost completed our refinancing for 2023, and as you can see, we are already working to address 2024 maturities. Next slide. So this is our usual chart on liquidity margin and debt maturities. This time, we also include a pro forma at the end of July to show the situation following the latest euro bond EIB financing and the Brazilian debenture. As you can see, we are back to a strong liquidity margin, which fully covers the upcoming maturities until 2025, especially considering that between June 2024 and May 2025 there will be no maturities. With this, I hand over to Pietro for his closing remarks.

Thank you, Adrian. All the way into 2023, we are delivering what we promised. TIM Brasil continues to perform better than expected, while domestic revenues are back to growth and EBITDA is stabilized. In H1, the group performance fully supports full year guidance. The acceleration of TIM Domestic in the second half will contribute more and more to group results and TIM Brasil will continue to support group's growth even lapping the effect of Oi integration. Combining Italy and Brazil, we have good visibility on revenue and EBITDA trajectory in H2. Also, equity free cash flow after lease is expected to improve. The full year guidance still is confirmed and reiterated. Finally, I would like to thank all our employees and the management team who are delivering these results, which less than three years ago were considered out of reach, while the macro environment was becoming the perfect storm. We must be proud of our achievements so far, but this is just the beginning. What we are doing at the operational level is setting the group back to structural growth. We believe we will achieve this goal. Thank you.

[Operator Instructions] The first question comes from Mr. Fabio Pavan of Mediobanca. Mr. Pavan, please. Mr. Pavan, please.

Yes. Hi. Good morning. Thank you for taking my question. I would like to come back to the enterprise business. It seems that numbers were a touch lighter than expected in the second quarter. So could you just repeat what could be the expectations for the remaining part of the year? And also, what is the contribution from the recovery plan project and when this could be visible on the numbers? And add-on to this question is related to your recent comments on the strategic options you are evaluating for TIM Enterprise, which kind of alternatives are you exploring? Thank you very much.

Thank you, Fabio. Good morning everybody. When we talk about the enterprise business, we are talking about a business that is completely different from the consumer. We cannot evaluate the enterprise business based on commercial KPI – operational KPI that you can follow on a basis because we are discussing about contract that you usually have a duration between three, five, up to seven years and the process to finalizing the contract with our customer is a process that takes some times. So what is important is to look to the trend, and not only in a quarterly basis, but on a larger deal. What does it mean? We don't want to say anything bad, but that we have to evaluate in a different way. For sure, this quarter we didn't finalize some contract that we – that we were expecting to be closed, but doesn't mean that they will not be closed in the third and in the fourth quarter. Let's remember, for example, the performance that we had in the last quarter for the finalization of some contracts that we were planning also to have in the first quarter. So everything is proceeding. We confirm the medium-term view about TIM Enterprise, and this continues to be one of the most interesting market in which we will invest. Above that, you have also to consider that some of this business is related to public administration bidding that are not completely under our control in terms of timing of finalization and deployment. The only thing that is defined is that that amount of money sooner or later will come. The best example is what we try to explain on the Page 8 of our presentation where we show, so we'll answer also to your second question related to the PSN in English...

National Strategic Hub

National Strategic Hub, sorry, because sometimes I forget the acronyms in English. National Strategic Hub, you were discussing about, I think when you were talking about PNRR. When you can see that, the previous public administration bidding process; that is SPC Cloud is ending exactly as we planned, while the PSN, the national – the NSH new plant is starting a little late compared to what we were planning. But with an amount of money that is much higher than what we are forecasting. This is the reason for which we continue to foresee and reinforce that in the medium term, the view and the growth of TIM Enterprise will achieve the pace of the market that is around 4%. About the comment on what we are doing in terms of evolution, it's clear that one of the main element that makes us different from everybody is that we do not sell only cloud services. We do not sell only connectivity. We do not sell only cyber security, but we offer to the customer, to this kind of customer, a turnkey solution. Quite often, what happens is that when you have to close everything, we become also the front-end towards the customer, but we use also some system integrator to complete the offer. In the system integration activities, there is also a good level of margin. So what's happening is that we can work in two different directions. The first one did – to do an agreement with one of the main player and have them as a preferred partner. It will allow us to have a better level of margin, but also in the future to hone or to do something with some of the main player in Italy, mainly local, to increase our share of our portfolio, but in the meantime, to increase the amount of EBITDA that we can gain inside this offer. Adrian, I don't know if I forget something and if you want to complete.

Yes. Thanks, Pietro, and thanks Fabio, for the question. Just to complement a little bit what Pietro was saying, what I think that message is. We are already very clear. So as Pietro was highlighting, in the cloud business we have simply a phasing recognition revenue issue, which, I guess, you can see also from the slide that we have in front of us. Actually, cloud for us is a business made up to twofold. So we have a large presence on private large companies across the country. And then we have a very relevant piece of it, which is focusing on public administration business. So as you can see in this slide, what actually happened is that we knew we were expecting the effect on the dark blue layer on this slide on the left, so SPC Cloud, which was the previous national bid going down to zero. We were also expecting the PSN business to take off much earlier. And let's say for exogenous elements which are not dependent on our business, there was a delay on the kickoff of the international project. But what we see is that number of deals that we were expecting to manage are significantly higher than the forecast that we made one-year ago. So this slide, when you look at the bottom on the right, it tells you that we are expecting in the time horizon of 2023, 2025 to generate less than €0.2 billion revenues on PSN. We have already negotiated contracts for almost €400 million. So there is a phasing issue, but I say this will not change the trajectory of our expected results on cloud.

Thank you very much.

The next question comes from Mr. David Wright of Bank of America. Mr. Wright, please.

Yes. Thank you very much, and hello gentlemen. Thank you for the call. It is a question for you on the NetCo separation. I guess this one for you, Pietro. When, I guess, under the discussions with KKR, if you can elaborate, are you guys committed 100% to the NetCo network? Or could you choose to take Open Fiber lines, for instance or maybe even any other fixed line network provider that might be available? Or are you restricted and committed to NetCo in totality? And you talked about the potential sort of 12 months or so regulatory period. Do you think that is sensitive to whether the government is involved or not? Do you think it's important to have the government as a potential shareholder in this agreement? It might be difficult for you to answer, but just any color you can give. Thank you.

David, you are very expert and you know that while in the middle of a negotiation, there are some details that are part of a confidential agreement. What is useful to answer is that, as I also stated several times, this will be an industrial deal. And so we are not putting in place a kind of sale and leaseback. What is always stated that is important, the value of the network, the deleverage that we will reach, but also the financial and industrial sustainability of ServiceCo. And these are the main drivers that we are following in the negotiation of the wholesale contract that will be inside the agreement for NetCo. While related to the time of the approval, it's clear that we put nine, 12 months in the presentation. We do not expect specific issue at the antitrust level. If as we are reading on the press, there will be a participation of some Italian entities in the KKR offer, also the golden power process will be much easier. But let's remember that it's something we are used to work on because also for FiberCop, we did it. And so we have already praised for the golden power rules some, let me say remedies inside the FiberCop agreement. About the timing, you have to keep in mind that we put nine, 12 months also because you have to keep in mind that NetCo today is not yet a company. We have to do a carve-out. And so inside this time, there are also the need to define the spinoff perimeter and to keep it out for at least six months due to retailer regulation. So we foresee that the things are proceeding, it's clear that we cannot give any kind of further details, but our process is driven by the fact that what stay on the ServiceCo must be industrial and financially sustainable.

Okay. Is it possible to follow up? Can you confirm whether you still intend to take this to a shareholder vote in the event that there is a binding offer? Is it still your ambition to take this to shareholders before formally approving? Thank you.

David, this is a decision that must be taken by the Board. And so I think that when we let the offer on the table with all the details, as our legal counsel explained in the last call we will have all the evaluation. For sure, we are working on different scenario, adding you mind different possible output related to the binding offer that we receive. Today, it's too early because we must have the final binding offer to do this evaluation.

Thank you.

The next question comes from Mr. Luigi Minerva of HSBC. Mr. Minerva, please.

Yes. Good morning, everybody and thanks for taking my questions. I have three, if I may. And the first one is actually following up on David's previous questions, and Pietro, I would be interested in understanding how are you thinking about the various trade-offs related to the NetCo MSA negotiations. And I'm not interested in the confidential details, but more into the philosophical approach to it. Because the way I see it is that essentially, if you want to maximize the value of the NetCo, you need to give the NetCo a strong MSA, but at the same time a strong MSA for the NetCo would imply having the ServiceCo constrained forever in a framework which is challenging. So there is clearly a trade-off, maximizing value of the NetCo or having a ServiceCo that operates in a strong – in a favorable MSA agreement. So I'd be interested in your approach on this? Secondly, in your interview [indiscernible], this morning, you mentioned that the key priority for the market in Italy on the consumer side is going from five to three players, and that TIM is ready to take an active role. And, i.e., yes, to the extent in which you can elaborate, I'd be interested in your views? And thirdly, on Sparkle, there were reports last week that KKR may not be interested in Sparkle after all and it's probably a very sensitive asset from the government perspective. So if eventually Sparkle is out of the NetCo, what happens to Sparkle? Will it go back into the ServiceCo or will be put for sale on the market? Thanks.

Thank you, Luigi. I'll try to summarize the trade-off. So first of all, we always declare since July – the 7th of July 2022, that our goal is not to have a good company and a bad company. We are not putting in place something that we'll sell the NetCo and will leave. ServiceCo, as a company that is not so stable, financially and industrially, we underline that towards financially and industrially because you can create a company that from a financial point of view in a short-term is sustainable, but then from an industrial strategic point of view has no options. This is what is driving our MSA discussion. And I clearly stated something – because sometimes someone compares the NetCo deal to a kind of TowerCo deal. We are not going to take commitment in terms of value or quantities because it could mean exactly go against that. So the driver is the price is fair or is not fair related to the value of the NetCo. The second, theoretically, I can receive also an offer of €100 billion for the NetCo. But if it means that to get commitment for €95 billion on ServiceCo, this is not a clever move. For this reason it is important the deleverage, but in the meantime what remain in ServiceCo in terms of commitment, consent and so on. So this is not the kind of sale and leaseback approach, and we must guarantee to ServiceCo all exactly as you were mentioning, leverage that they need to be competitive not in the short but in the short, medium and long-term. We can go in details but then there's an issue about confidentiality, but also technical elements but it's important to define we are discussing about a wholesale contract between NetCo and ServiceCo that tend to proceed. Then in some way, it's important to remember that there are some goal that are common to NetCo and ServiceCo. For NetCo too makes no sense to have an agreement with ServiceCo that doesn't make ServiceCo to be sustainable in the market because it means that they will have some problem and exactly the contrary. So I think that we are working on an accretion based on trade-off that will make everybody satisfied about these things. Then life is complex and we have to manage complexity. Relating to the market consolidation, I think that is something that today is a trend throughout Europe. So if in all the other European countries, everybody are talking about market repair through consolidation, and if we consider the Italian market is the most complex and sometimes the most irrational, why we cannot foresee that this will be, for sure the next level. If you look at the number that was just released by some of my competitors, I think that looking at the number, no one can be satisfied about the result of this market environment that is due to the condition of overcrowded market too many and rules that have to be changed. And this is something that we are working on. It's clear also to better define that. If there is a market repair in Italy, in any case also if we are passive we will have some gain from this process. But to be active, allow us to have a better condition and position. But to do that, we have to sell the network because if we don't sell the network, it will be difficult to be active. We should be only passive in this process due to some antitrust constraints. Then related to Sparkle, what I can tell you is what we told in the market that the non-binding offer of KKR talked about Sparkle. So I want to follow what they did also in the past calls. I'm not going to running back toward the news that come in the press because as you have seen in the last quarter mainly was not exactly the reality. So we have a non-binding offer where Sparkle is included in this area. I hope, Luigi, that it was clear.

Okay. That’s great. Thank you so much, Pietro.

The next question comes from Mr. Giorgio Tavolini of Intermonte. Mr. Tavolini, please.

Good morning gentlemen. Just two quick questions on my side, if I may. The first one is on the domestic CapEx, which came at €1.3 billion in the H1 running well behind the full year target of around €3.1 billion. Should we expect a seasonal catch-up in H2? Or do you see room to over-deliver the full year target, thanks to CapEx optimization or better spending? And the second one is a follow-up on the NetCo deal. Based on the early visibility you have today, I was wondering if you had any update on the kind of shareholder meeting to approve the deal. Many thanks.

Sure, Giorgio. On the NetCo deal, as I answer also to David, this is the decision that will be taken by the Board, and we'll have to evaluate that when we let the binding offer because it can define different path. It doesn't mean that we are not prepared to that. We have different scenario, but we have to wait that moment to disclose and discuss with the Board. About the domestic CapEx, I leave the stage to our optimistic CFO because you remember, in the last first quarter call, he was more proactive to give good news. So I leave him to give them.

Good morning, Giorgio. Clearly, we are finding already some of optimizations in terms of CapEx, also in terms of the different prices of the contracts that we have. Clearly, as Pietro mentioned before, when we commented about the NetCo side of the business that we have some delay on the NRRP projects, we think that we can speed up on the second half. But all in all, probably we will be slightly below the guidance for the full year. Then, no it's not that predictable how you can manage the CapEx in between the quarters. We'll see we are working hard. For us, the NRRP projects are a clear target because it's an interesting investment for the company. But anyway, we will probably be below the guidance for the full year on CapEx. Then we need to understand what will be the size of this CapEx.

Many thanks Adrian and Pietro.

The next question comes from Mr. Ottavio Adorisio of Societe Generale. Adorisio, please.

Thank you, and good morning to everyone. Yes. The first one is on the topic day, the NetCo, and the second on prices. On the NetCo, I would like to move a bit away from the semantic and talking a bit about numbers. I know that's difficult to talk about when you're in the middle of negotiations. So therefore, I would like to talk on something that you've been reiterating quite a few times that add value, financial sustainability. If you can give us a bit of some color on what you mean with financial sustainability? I mean, I guess, a link [ph], so therefore if you can tell us what's the sort of gearing you reckon sustainable for the ServiceCo bearing in mind that the agencies may lower the business risk because you no longer have a fixed line infrastructure? Or the other way around, if you prefer, could you tell us which sort of investment or credit rating you're targeting for this financial sustainability of the ServiceCo? And on the NetCo, you also mentioned about the Board will be calling the – will decide to call or not a shareholder meeting to approve the deal. Again, I know it's not been decided, but could you tell us if the deal would be approved by an EGM or an ordinary shareholder meeting. So I'm asking because it's different quorum. So if you can give us a bit of color on that? Moving to the second question, is on the prices. There's been a lot of talks in the previous call about price increases. You've had, I remember well, €4 million fixed line price increases, in Q1 €2 million. You were targeting, I looked at the transcript last call around €20 million. That was around 1.5% impact on retail revenues. But in retail revenues, we only had an improvement of 30 bps rather than 150 bps. So I'm just wondering what went into retail business that somewhat negated when I look at net adds, they all seem improved and anything else, when I look at the chart where you show the improvement from Q2, Q3 and Q4, when I look in the last quarter, Q2 actually was improved in all the fronts, but I haven't seen that improvement. So if you can basically give us a bit of an idea. And there is another question, but for the sake of time, I would just limit to these two? Thank you.

Okay. Ottavio, let's start from the second one that is really to prices. In the telco market you know better than me that the final result is made by quantity and price. Then there are some effect in the middle because the price and the ARPU is made by what's happened with the customer that you can get from the market, the customer base, the dilution process. So when we show the impact of the price up, you cannot put an image that you have a stabilized line with this kind of increase because, for example, if you look on the mobile, what is happening is that our customer base was reduced compared to the previous quarter? So we had an effect on the customer base that is reducing, partially compensated by an ARPU that is stabilized while in the past, we had both trend negative customer base and ARPU. So now we were able to stabilize the ARPU, while if you compare with the fixed, we were able to increase the ARPU of the fixed. So the next challenge that we have is to increase the level of ARPU mobile, managing the different effect, price of the new customer, customer that continue to move to the competition that sometimes have an ARPU that is higher than the average and then price up. So it's a mix of the things, but without going too many details about the single case, this is something that you can appreciate in terms of trends. So if you look at the trends, also on the mobile, we're improving in the past we have a customer base that was reducing at a faster pace with an ARPU that was reducing at a faster pace. Now we've stabilized ARPU, and we are improving the pace of reduction of the customer base that will be reflected in the following quarters. If you try to make a comparison with the fixed, in the fixed, we were able to go ahead in terms of ARPU growth. We have an ARPU that is higher that more than compensate the reduction in the customer base. This is something that we are working on. And when we talked about that two years ago to be very clear, first of all, no one was believing on that. We were the first one to move in Europe. Now also looking at the reports of all the player, it seems that everybody talk about, from volume to value, price increase because, again, the European market, not the Italian market and not the TIM condition is the same everywhere, then we can start from different point. So I continue to be optimistic on the fact that we put the right trend. And again, you are much more expert than me. Telecommunication is something that you read by the trends; it's something that you cannot change quarter-by-quarter. When we start to see trends that are going down, and someone say that they will rebound completely from a quarter to the other, perhaps there is something that doesn't work. All our trends quarter-by-quarter are improving. About the first question, that is the financial sustainability. It's important to move again at Page 12, and I think that we are repeating this chart many times because this is something quite similar to what we show the 7th of July of 2022. For sure, what's happened is that we are putting a target in terms of post NetCo leverage of 1.5 to 2 times for the ServiceCo. And let's remember that we have already discussed about the ServiceCo that should be a company that is a portfolio of services with different level of maturity. Here, you can see some of the KPIs in terms of weight of the different entities in the EBITDA after lease of the ServiceCo. Then the industrial sustainability, and then I leave the stage to Adrian – is based also on the industrial sustainability. And this is the reason for which is something that we are discussing also with the credit rating agency with which we are doing and vice versa before to arrive to the final binding offer because we have to have at that moment with everything well defined and prepared is not just a claim for political election. What is important is made by the fact that you have three companies, three entities with different business model, with different level of risk. And sometimes the main mistake that all of us are doing is to consider ServiceCo, the consumer. ServiceCo, I repeat, is not the consumer. It is made by Brazil that is growing by TIM Enterprise that has a huge opportunity in terms of growth and consumer that could be a surprise in terms of turnaround. And Adrian, I don't know if you want to give some more details.

Clearly our view is we need to understand very well in terms of the future of the company. It's not that we want a picture after a NetCo – a NetCo deal in terms of what the leverage is. We think that with these levers that is our target in between 1.5 times and 2 times EBITDA. We will be probably better than the peers in Europe in terms of leverage, but we need to maintain that and improve it maybe in the future because we will need to understand, as Pietro always mentioned, what will happen in the Italian market, and we will like to participate in a theoretical consolidation of the market. So it's not a matter of the initial leverage and of the initial rating that we'll – we are focusing on. Probably the initial rating could not be similar to the future one; it's something that we would like to address in these days. Then clearly, if the NetCo deal goes forward is because for us, it's worth and makes ServiceCo sustainable, though the rating should go up consequently. So again, in terms of sustainability, it means that we need to have a good level of leverage. We would need to understand what's the equity that we will like to have with this transaction, so it's a matter of leaving ServiceCo ready for the future.

Thank you.

Ottavio, but you didn't have a third question too. You told that perhaps you will ask a third question. I don't want to seem impolite. I had understood that you would like to ask a third question after we...

Yes, it's a very straight one. It's basically on some confusion on the press article talking about your coverage on the gray areas that he was saying that you were running significantly behind the targets, it you can clarify that one?

Sure. No, no. Very helpful because again sometimes in the press. So what is happening? And sorry in this case, I have to give some more details, but it's really important and I have to give also the mechanic. First of all, when this bid was launched, what's happened is that the minister gave a theoretical number of units that must be connected. It was based on a database that was not completely reliable. For this reason, they put in the bid that we should do some specific working to verify if for each of this unit, there was really a house or there was nothing. And then they clearly stated that what should be happen is that all the theoretical fine and the amount of money should be paid based on the real existing units. What's happened in our case, I don't know the Open Fiber case that doing all the working, we discovered that in the 55% of the cases there's no units to be connected, okay? So now the number that you have read in the press makes reference of an underperformance based on the 100 and not on the 45 that are the real units connected. That is the way in which it must be calculated. Theoretical fine if we will not succeed to proceed. So first of all, we have to look not at the 100, but to the 45. Related then to the 45, the way in which it works the deal is that you have to reach at least per each milestone the 70% of the target. If you don't reach the 70%, you can have also the revocation of the process. If you reach the 70%, you have a kind of curing period that is defined in the bid process to recover that. So in a nutshell, the amount of fine that you read on the press are wrong. Second, there is a curing period of one-year. Third, as we stated in the call, we are accelerating the process. Then just to give you an idea, and again, you are familiar as me in number. The target was 15% in the first half and 10% in the second half. When you start to run 100 meter, the first 10 meters, you will run slower than the second 90. But again, we are and we stated we are confident to recover the gap. I hope that it was clear. Sorry if I was in the details, but it allowed to everybody to be aligned.

Okay. Thank you.

Thank you, Ottavio.

The last question comes from Mr. Domenico Ghilotti of Equita. Mr. Ghilotti, please.

Good morning. Two questions left. The first, we have been talking to the consumer about prices. I wonder if you can comment also on volumes and the competitive environment because I was surprised by the mobile line losses. I wonder if it is really sustainable, this low level of line losses and also on the fixed clearly? And second question is a clarification on the down payment. So it's not clear to me what is the visibility and the process today on the possible down payments related to the recovery fund. And if they are in some way linked to these achievements of the milestones or totally is joined by this?

Sorry, I didn't catch the details of the second part of the second.

No. I mean on the down payments, if down payments are related to the achievement of the milestones or not related at all to this topic? And what is your current visibility on the possibility to get the down payments on the recovery fund?

Okay. In terms, related to the second question if you refer to the down payment that the Italian government announced is not related to the part that is already, let me say, awarded. So it's not a – it's not – it cannot be applied to our case on which we are confident to recover and so we don't foresee any problem. And also to be clear, to be connected to the answer that I did to Ottavio related to fiber, the amount of units it's lower. In our plan, we were already considering this lower amount. So our level of CapEx is aligned with the reality and not with the dream. When we move to the prices, I leave to Adrian to give some more details. But again, is it sustainable in the long-term to have line losses and be back to grow? For sure, it's more difficult because at certain point it will be very difficult to sustain with the price increase the line losses. In the medium-term, this is something that is achievable. This is what we are doing, because the ARPU is sustaining. But in the mid- and long-term, this is not what I'm saying, but what, all the telco players are telling in Europe. This is another crowded market. Then if you look at what's happened in Brazil after the market consolidation is something that was useful also for the customer and the country because Brazil now is the country with the most advanced 5G network with the 5G release 16 [ph] stand-alone that will be an advantage for the population and the country because we have to remember that if you have to invest, you have to generate cash. To generate cash, you must have a rational market that doesn't mean to penalize the end-user customer. But I leave Adrian to give some more details.

Thank you, Pietro. Thank you, Domenico for the question. The line losses versus re-pricing played out well in Q2 and better than expected. It's important to say that we have run an extensive re-pricing campaign on a big part of the customer base, and we are continuing in Q3. And it's also important to say that in Q2, there was a positive outcome from the competitive point of view, also because of the bankruptcy of virtual network operator, which is a signal also of the non-sustainability of the business model of some of the MVNOs that are stressed by the increase of data usage that is also pushing their cost up. So we see the competitive environment unfolding in a better direction because the portability market is actually decreasing in absolute volumes and also because of a mathematical effect because the no-frills operator [indiscernible] MVNO now have a bigger share of the market. So the rotation of customer in the market is also bringing customer back to the main operators. However, I also have to underline the TIM has performed better than competitors – the main competitors in the re-pricing churn effect. So we were down in churn despite the extensive re-pricing campaign, and this contributed to a better calling base performance.

Can you comment also maybe just a follow-up on the fixed market? So the same color.

Also on fixed, our churn performance was better than expected. So we improved the net losses performance year-over-year and this despite a more extensive re-pricing campaign versus last year. So in the competitive environment, we see a stable environment in terms of price aggressiveness versus also the previous quarters. But what is unfolding well is the churn and the migration towards FTTH, where TIM has improved the solid leadership that now we have in FTTH market share.

Okay. Thank you very much.

Domenico, just to complement on your first question about the anticipation of the NRRP funds; I would like to remember that decent anticipation is not only related to the 1-Gig project, but also for the backhauling and the 5G coverage. So it's the 20% of our total CapEx that we committed on the projects. We expect this to happen in the second half of the year, hopefully sooner than later. But we do not see any risk considering the actual level of the project. And as Pietro mentioned, we always think that we can speed up our process and recover in the coming quarters. So this 20% of anticipation shouldn't be at risk, okay?

Thanks.

We thank you all for attending today's call and we wish you a nice summer break. We will be back on the 9th of November for Q3 results. Goodbye.

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