Ladies and gentlemen, good morning and welcome to TIM first half 2025 results presentation. Paolo Lesbo, Head of Investor Relations, will introduce the event.
Ladies and gentlemen, good morning and welcome to TIM first half 2025 results presentation. I am pleased to be here with the CEO Pietro Labriola, the CFO Adrian Calaza, and the rest of the management team. Today we will walk you through the highlights of the period and review the main operating and financial results. As usual, we will close with the Q&A session.
Before we begin, a quick reminder. As was the case in Q1, Sparkle is classified as a discontinued operation in line with the guidance provided last February. It is therefore excluded from the perimeter of these results unless otherwise specified. This treatment will remain consistent in the coming quarters. Please also refer to the Safe Harbor statement in the appendix for further details on the scope of reporting. With that, I will now hand over to Pietro to kick off the presentation. Pietro, the floor is yours.
Thank you, Paolo, and good morning everyone. Let me begin with the key takeaways from today's presentation. TIM delivered a solid operational and financial performance in Q2, both in Italy and Brazil. At the halfway point of the year, we are exactly where we plan to be.
Results are fully in line with our budget and we remain firmly on track to meet full year guidance. In Italy, the competitive environment in the consumer segment remained stable. We saw a continued improvement in mobile number portability dynamics and resilience in the wireline business. The enterprise segment grew in line with expectations while Brazil maintained a rational market approach on the 98 consensual fee. While we await the final court's ruling, we have already secured almost the full amount in July through an advanced payment arrangement with two leading banks. Also in July, TIM Brasil successfully refinanced and extended the size of the 2023 bond, lowering its cost of funding. This is in line with our broader strategy to strengthen the group's capital structure and enhance the natural edge on our Brazilian operations by rebalancing the exposure towards the Brazilian real.
Lastly, the Board of Directors yesterday acknowledged the resignation of Adrian Calaza, Chief Financial Officer, and Eugenio Santagata, Chief Public Affairs, Security and International Business Officer. Adrian will remain in office until November 6th for the presentation of the third quarter results and in the company until December 31st to ensure the necessary support for the CEO and the new CFO. Eugenio's resignation will be effective August 31st. Effective October 1st, Pier Giorgio Peluso will return to the group as advisor to the CEO. Pier Giorgio will assume the role of Chief Financial Officer immediately following the presentation of the third quarter results. Thanks to solid execution, strong operational performance, and disciplined cash management in Q2, TIM closed the first half fully on track with our plan both at group and domestic level.
TIM continued to rank among the fastest growing telecom operators in Europe, driven by the stabilization of the consumer segment, robust enterprise growth, and the strong contribution from Brazil. Let me walk you through the key figures for the group. In the first half, total revenues grew by 2.7%. Year- on- year, service revenues by 3.3%. EBITDA after lease increased by 5%. CapEx stood at €0.8 billion, around 13% of total revenues. As a result, EBITDA after lease minus CapEx rose by 12%, reaching €0.9 billion. Equity free cash flow was slightly negative in the first half at around €0.1 billion, reflecting the usual seasonal impact of working capital. However, it turned positive in Q2, slightly ahead of plan, confirming the structural improvement versus last year when NetCo was still consolidated. Adrian will cover the cash flow dynamics in more detail shortly.
Net debt after lease remains stable at €7.5 billion with the leverage ratio below 2.1x . At domestic level, performance was equally solid. In the first half, total revenues grew by 1.6% and service revenue by 2.2%. EBITDA after lease increased by 4.2%. CapEx amounted to €0.5 billion, around 11% of total revenues. Consequently, EBITDA after lease minus CapEx rose by 10%, reaching €0.5 billion. The detailed Q2 results are available in the Annex. As usual, at the halfway point of the year, we take stock of our position versus the full year targets. Overall results are in line with guidance, while EBITDA after lease is slightly below. Let me provide some clarity on this point. Firstly, EBITDA itself is certainly where we expect it to be, as I mentioned earlier.
Moreover, the plan envisages an acceleration of domestic EBITDA in the second half, particularly in Q4, supported by several positive drivers that will progressively come into play. First, the full effect of the price increases implemented in Q1 and Q2. Second, the seasonality of the TIM enterprise business, which typically accelerates in Q4 this year. This effect would be amplified by a stronger contribution from the National Strategic Hub. Third, additional OpEx reduction driven by the cost transformation program. Fourth, labor cost savings following the renewal in July of the Solidarity Agreement, which includes a reduction of working hours for TIM employees to the end of 2026. That said, EBITDA acceleration will not immediately translate into significant year on year growth in Q3. We face tough comparison. Hence, most of the growth will be concentrated in Q4, also driven by easier comparison.
Regarding cash flow dynamics, we are slightly ahead of plan. All in all, I am pleased to say that our full year guidance is confirmed. Let's now move on to review the performance of the three entities in the first half. TIM Consumer total revenues remain stable at €3 billion with service revenue growing by 0.3% year- on- year. Revenue performance gained momentum in Q2 with service revenue increasing by 0.7%. Price adjustments across both wireline and mobile customer base continued during Q2. In six months, we repriced 4 million wireline and 1.7 million mobile consumer customers with a lower than expected impact on churn. The full effect of these price increases on incremental revenues will become fully visible in the second half. The benefits are evident. Wireline ARPU continued to rise while mobile ARPU increased for the first time in many quarters.
At the same time, churn remained well controlled, a remarkable achievement considering the multiple price adjustments implemented over time. This confirms the validity of our volume to value strategy launched in 2022. Customers have demonstrated a willingness to accept price increases in exchange for quality services and we are confident that competitors will eventually adopt a similar approach. While wireline net adds remain stable, we maintain our leadership in FTTH net addition, averaging 18,000 lines per quarter over the past 12 months. Moreover, this quarter we finally closed the gap versus competitors in terms of FTTH service coverage. Mobile net addition showed sequential improvement. More importantly, the number portability balance remained virtually neutral, confirming the trend observed in Q1. It's worth noting that SIM cards acquired through number portability have an average ARPU of around €12.13, while other SIMs average just about €1.
This means that most of the mobile line loss in the first half had a limited impact on service revenues. We launched 5G fixed wireless access at the end of last year and in Q2 we saw an acceleration in net addition. We expect this technology to contribute strongly going forward, having expanded service coverage to 70% of the population. A final point on our customer platform, TIM Vision. Customer base is growing well with double-digit year-over-year growth. Q2 marked the 12th consecutive quarter of growth for TIM Enterprise, delivering a strong 6% compound annual growth rate. In the first half, total revenues grew mid-single digit to €1.6 billion with service revenue rising over 6%. Cloud stood out as the key growth driver with service revenue up 25%, reinforcing TIM's position as one of Italy's leading ICT players.
Our distinctive edge lies in the combination of preparatory data center and advanced cloud capabilities, setting us apart particularly in delivering secure and sovereign digital services for the country. Revenues from other IT declined by 5%, reflecting a deliberate portfolio reshaping to phase out low-margin activities and focus on higher-value solutions. Connectivity showed an expected slight decline with the mix. Fixed connectivity grew year over year while mobile connectivity declined due to the phase-out of a large contract to the public administration, which we intentionally chose not to renew. This aligns with our strategy to avoid tenders likely to generate very low or negative margins. I'd like to draw your attention to the bottom right corner of the chart, highlighting the increasing share of revenues generated by TIM Factories, namely Nuvola for Cloud, Tetsy for Cybersecurity, and Olivetti for IoT.
These revenues tend to be higher margin as they are primarily driven by internally sourced services rather than external third parties. TIM Enterprise performance stands out in the European context. Given the strong interest of the financial community in better understanding our business model, positioning, and growth opportunities, we have decided to host a dedicated event in the fourth quarter 2025. TIM Brasil reported last Thursday, so I won't go into too many details. The market remained healthy and rational, and TIM Brasil delivered another solid performance. Top-line growth was mid-single digit in H1, driven primarily by mobile service revenue. Customer base monetization remains a core focus with successful upselling from prepaid to postpaid, resulting in the highest ARPU in the market. Efficient operational execution continues to drive consistent EBITDA growth and margin expansions.
OpEx remains below inflation, and EBITDA after lease reached nearly 38% of revenues with year-on-year growth of 6%. TIM Brasil is also outperforming peers on cash flow generation, with robust operating free cash flow expanding at a double-digit rate. I now hand over to Adrian for the financial results.
Thank you, Pietro. Good morning, everyone. Before diving into cash flow and debt, let me share a few comments on CapEx and OpEx. Group CapEx in Q2 was soft both in Italy and Brazil, totaling around €0.4 billion. Accordingly, overall CapEx intensity in the first half was below our full-year target. This was due to phasing, mainly on mobile access both on domestic and Brazil, and data centers on the domestic business. We expect CapEx to pick up in the second half as it did in 2023. Group OpEx in Q2 were flat year on year. Brazilian OpEx continued to run below inflation, while in Italy costs were fully under control thanks to the cost transformation initiatives. It is also clear that the domestic cost structure has become more volume driven following NetCo disposal. More details will follow in the next slide.
It is worth mentioning that EBITDA after lease margin in the first half is up half a percentage point when compared to the same period of last year, both at group and domestic level, proving that we continue to find efficiencies across the board. Now, a few comments on cash flow and debt. Last May, during the Q1 results call, I said we expected broadly neutral equity free cash flow in Q2. In fact, equity free cash flow came in positive at approximately €0.1 billion, slightly better than anticipated. While working capital absorption was in line with expectations, we benefited from better EBITDA after lease minus CapEx together with a better evolution of taxes. Another extremely important factor is that we continued optimizing the debt structure after lease. The gross debt declined by €0.8 billion in the first half, so financial charges are decreasing.
Although the average cost of debt remains stable, we have good visibility on cash generation and may slightly exceed the guidance by year end. However, as we still have the second half ahead of us, we prefer to maintain a prudent stance. Below equity free cash flow, there was an outflow mainly related to dividends paid to TIM Brasil minorities. Net debt after lease closed at €7.5 billion with leverage below 2.1x last 12 months organic EBITDA after lease, confirming TIM as the least levered listed telco in Europe. At this stage, we are sure that we will reach our year-end target. Let me now provide a bit more detail on domestic cash costs. Starting with OpEx, we can break it down into two nearly equivalent components.
Revenue driven costs are growing based on top line performance and changes in revenue mix with a higher weight of cloud and multimedia services. In the first half, they accounted for 49% of the domestic OpEx. Addressable costs representing 51% of domestic OpEx and including labor, industrial, G&A, and IT expenses. As shown in the chart, most of the savings are concentrated on industrial costs, which include the MSA. On the other hand, G&A and IT costs are up due to the journey to cloud, since many activities on premises that previously impacted CapEx are now cloud based and accounted as OpEx. Regarding labor costs in the first half, we absorb higher variable components related to 2024 results and additional phasing effects. We expect a lower absolute value labor cost in the second half compared to the first half. OpEx and CapEx discipline is ensured by our transformation plan.
Let me remind you that we measure progress against the inertial OpEx and CapEx trajectory, that is the cost base we would have incurred without the plan. We currently have over 70 transformation initiatives underway, which delivered €90 million in incremental benefits in the first half and are expected to deliver even more in the second half. Our efforts are focused on decommissioning of legacy technology, consolidating ICT vendors, adjusting service levels to match actual customer needs, and optimizing labor costs through renewed Solidarity agreement. As for CapEx, around 1/3 was customer driven while the majority was directed toward infrastructure investments, in particular mobile network, IP backbone, and data centers. Let's now briefly touch base on financial metrics and FX. Following NetCo disposal one year ago, TIM financial KPIs have significantly improved. Leverage stands below 2.1x , the lowest among listed European telcos.
We are targeting below 1.9x by year end, excluding optionalities, especially the concession fee that may arrive yet this year. Interest coverage continues to improve, supported by growing EBITDA after lease minus CapEx and declining financial expenses thanks to a €0.8 billion reduction in gross debt in the first half. Debt to equity is also trending downward. Rating agencies are progressively recognizing our enhanced credit profile, even if we honestly expected some additional positive outlook at this stage considering that we met all our guidances in the last three years and we are full on track this year. Moody's upgraded TIM to Ba2, Fitch confirmed its BB rating and raised the outlook from stable to positive, and Standard & Poor's confirmed its BB and stable outlook but upgraded TIM's business risk profile from fair to satisfactory.
Above all, it is important to underline that the market is already ahead of these improvements. TIM bonds are converging towards those of investment grade European issuers, as you can see on the bottom center graph of the slide. At the same time, with the balance sheet as solid as ever, we remain financially disciplined. We secured a €0.7 billion loan guaranteed by SACE. We monetized the concession fee in July through an advance payment facility, providing low-cost liquidity for working capital needs. In Brazil, the local holding company fully owned by the TIM Group issued BRL 5.0 billion in new bonds after repaying the 2023 issuances. Net proceeds of BRL 1.7 billion increased our natural hedge and enable a new FX strategy. This strategy takes advantage of the favorable U.S. dollar-real rate while maintaining U.S. dollar exposure to naturally hedge the group's dollar-denominated costs, notably those related to Nuven.
Today, 75% of Brazil's equity free cash flow on 2025 is hedged. One final comment from me, as Pietro mentioned, I will remain CFO until the third quarter results are presented and then I will work alongside the new CFO, Pier Giorgio Peluso, until the end of the year. Therefore, today is not my farewell. We need to be fully focused as always and we will have several more opportunities to meet between now and then. Please keep your appreciation posts for later. Now I'll hand it back to Pietro for his closing remarks.
Thank you, Adrian. To wrap up, first half results are fully on track to meet full year targets both operationally and financially. We confirm our guidance for the full year. We monetized the 1998 concession fee through an advance payment from two banks. The related dispute is progressing towards a resolution, which we expect by year end, while our credit profile continues to improve. TIM bonds are already trading at a spread close to or in line with those of investment grade companies. Lastly, I want to thank Eugenio Santagata for his contribution to TIM during these years of deep transformation. Pier Giorgio Peluso will be the new CFO starting in November. Pier Giorgio has already served as the group's CFO for several years, so his appointment ensures continuity and stability both internally and in relations with the financial community.
Adrian and Pier Giorgio will work together until the end of the year. Therefore, the endeavor will be gradual and smooth. We remain fully focused on execution, cash generation, and unlocking value for our shareholders. There's no time to lose. We have to proceed with that. We are ready to take your questions.
Ladies and gentlemen, we will now begin our Q&A session. For analysts who wish to ask questions, please use the raise hand function at the bottom of your Zoom screen. Once your name has been announced, you can ask your question. If you need to withdraw your question, please lower your hand using the raise hand function. Thank you. The first question is from David Wright at Bank of America. Please unmute yourself and ask your question.
Okay, thank you guys for taking questions today. Adrian. Yes, I will. I will hold off congratulating, thanking you just yet. A couple of questions for me please. Very simply, on the concession factoring deal, I assume that is a full recourse transaction such that any issues with the payment, then you would have to return all of the cash to the banks, or am I wrong? If you could maybe just give us a little clarity on how we should expect concession to evolve, when we could next hear from the courts, etc. My second question was on the cash flow. It does look like CapEx a little lower, but yes, that could phase up. The balance sheet sort of efficiencies that you guys are achieving, we could come ahead of this year's cash flow target. Maybe, does that effect not compound a little into the guidance down the road?
Should we be thinking a similar message there, that we could come ahead of the longer term targets? Maybe you guys just remaining a little prudent right now. Thank you.
Hi, David, Pietro speaking. I apologize that we're becoming a boring company, and you know, there's nothing that the market will allow us in terms of mistakes. We continue to try to gain the trust of the market, being consistent and avoiding to overshooting in the meantime. We already mentioned during the first quarter call that we are optimistic on the fact that our number could be better. We don't want to release a guidance about that. Exactly for what I mentioned to you, we don't want to do any kind of mistake in this path to recover the trust of the market. In any case, what is important is that we are not running a 100 m race, we are running a marathon, and we want to bring the company in 2027 exactly as we stated in the plan.
I must be also optimistic, and looking at our number and the operational trend, there are for sure room of further improvement, mainly on the equity free cash flow. I leave to Adrian to give some more comments.
Thank you, David, I will appreciate that in the next whole bit. Anyway, I will compliment on Pietro's comment on equity free cash flow. That's our view. We are not today in a position to upgrade the guidance. I can tell you that as we mentioned in the first quarter, we are ahead of our budget, but there are still six months. Consider that we do not have the final numbers of July. There are still six months to go, and the second half of the year normally has a higher weight than the first one. That's why we want to be cautious. What we do know is that we are fully on track, that we for sure will meet their guidance. Yes, we have today a small upside. We'll see in the second half on the concession fee in terms of monetization.
Clearly, we enter into agreements with the banks. They have today the right of the credit. The only situation that may happen that we should return the demand to the banks is if the sentence is - 14, that's the only case. We factor the full amount of this credit. It brings a significant benefit in terms of financial costs because the cost of the deal is probably 200 basis points below financing the cost that we may find in the market today. It's important to highlight that this is a credit that has a value for everybody. We'll see what happens with the final sentence. We still hope that this is something that may happen in the second half of the year. Peter can comment on that side.
The positive thing is that it has been a source of financing that has a much lower cost than a normal financing.
Okay, very useful guys.
Thank you. David.
Next question is from Ajay Soni at JPMorgan. Please unmute yourself and ask your question.
Hi guys, thanks for taking my question. Just actually a quick follow-up on the concession. You're expecting it towards the end of the year. Is that also expecting net profits in this year, or do you think they'll fall into 2026 on your free cash flow? I think obviously both taxes and financial expenses are tracking much better in H1. What are your expectations for this for the full year? I would assume working capital is still - €500 million for the year. The last one is just on price up. You've done quite a significant amount within fixed and mobile. What is remaining for you guys to do throughout 2025? Do you have a target number which you aim to get to for both fixed and mobile? Thank you.
Regarding the concession fee, if the sentence will arrive in the second half, everything will enter in the net profit of 2025. We have all the impact on our target, and for sure we'll have all the improvement related to the guidance in such a case. About the second point on the equity free cash flow, I leave to Eugenio to answer.
Yeah, hi. On the equity free cash flow, it's pretty much what we answered in the first question. Our guidance is €500 million for the full year. For €500 million, yes, for the full year. As I said, for the first half we are slightly ahead of what we projected. Hopefully, this will be also in the second part of the year. We still need to see in terms of financial expenses. In terms of cash financial expenses, we ended the second quarter with €140 million. The first quarter €105 million, €55 million, but with some specific one-offs going forward. Probably you can project the number of the second quarter. On cash taxes, yes, we had some benefits. There are some other effects that may come in the second quarter. That's why we are fully confident on the guidance.
Is it the right time to say something more or upgrade it now? Probably we still need to work a lot on the second half of the year a t the price ups.
Andrea.
Thank you, Pietro. Yes, on price ups we did most of the activity in the first half of the year. We have some targets that are still flowing in the third quarter, and given the positive outcome on the mobile market that you can see, I. mean there is a slight reduction in T he churn, but most importantly, the volume of portability in the market has reduced year over year by around 10%. Therefore, our results on the repricing action have been a bit better than in the business case. We decided to continue, and we will have also some targets in the fourth quarter to continue the activity.
Great, thank you.
The next question is from Mathieu Robilliard at Barclays. Please unmute yourself and ask your question.
Hello, can you hear me?
Yes.
Hi, thank you very much for the presentation. First, I had a question about B2B. You discussed a bit the change in mix, slightly better, a lower decline in connection, which I understand is a high margin. You've also reduced exposure to some low margin business. I realize you don't publish EBITDA margin on a quarterly basis, but is it fair to say that the trajectory of the EBITDA margin in B2B is progressing well so far this year? The second question was about customer care. I think that unlike many of your peers in Italy, you have internal call centers to service customers and for marketing. I was wondering if AI implementation could be a source of additional savings or is that already embedded in your guidance?
Lastly, if I may, I think at the Q1 you had mentioned that maybe you could share some of the revenue synergies or opportunities with your main shareholder now, Poste , is that something you intend to address a bit later in the year? Thank you very much
Okay, Mathieu, let's start from the third question. For sure by the end of the year, probably during the third quarter result, we will give some more guidelines related to commercial and industrial potential areas of synergies. About numbers, we will disclose everything in the call in February or March when we will present our new plan. About the customer care, if you look in detail at the number of our customer care, we did already a huge amount of efficiency starting from 2022. We have in our plan for the reduction of the cost.
For sure, what the AI can further help in is improving the relationship with the customer. We can have also indirect synergy on a better improvement related to the churn, customer satisfaction, and so on and so forth. Just to give you an idea, today we are starting to record all the claims of our customers on the customer care to understand the touch point of the most nervous, let me say this way, customers to review the process. It's a way to address priority based on the return on the investment. For sure, this is an area of huge improvement. About B2B, I leave to Elio to give a highlight about the trend.
All right, thanks Pietro. Thanks for the question. The straight answer to the question is EBITDA directionally getting better, t he answer is yes. This is a combination of two things. The first one is the one you noticed. Connectivity is trending better if you c ompared to quarter one, the deceleration is lower than it w as in quarter one. All in all, let's say it is in line with what we were expecting at the plan level, at the budget level. More importantly, if you look at the acceleration of the cloud, if you compare on a year-to-year basis, in the first six months, we lost €50 million revenues in connectivity at approximately 50% margin. We won €85 million on cloud at 20% margin. If you do the math, you can understand that the combination of both KPIs makes our margins better. Thank you.
Thank you.
The next question is from Domenico Ghilotti at Equita. Please unmute yourself and ask your question.
Can you hear me?
Yes, Domenico.
Okay, good. A few follow up. The first on the equity free cash flow, I'm trying to understand if the improvement compared to your plan is something, say, s tructure and then can be translating into 2026 or if it is more. Let's say that you are bringing forward some opportunities that were already planned, and the second follow-up is on the concession fee. Should I assume that there is n o more room for a settlement with the government t hat you are just waiting for the final ruling? Just a clarification, so w hen you say we should give back the money to banks in case of negative ruling, if you go back to the previous, to the step one, let's say, if you have a negative outcome, meaning that you are restarting the full trial and last on t he price hikes, can you help us understand what can be the contribution of t he already executed price hikes for the second half?
Okay, let's start from the second about the concession fee. If there are margin for some negotiation or settlement, we are here, we did whatever we have to do. We are confident that we are on the right side. If nothing happened, we'll wait for the final sentence, on which we are quite optimistic about what's happened about the money that we received from the bank? Adrian?
Yes. On the monetization of the concession fee credit. Domenico, it's clear that if we have a negative sentence or any kind of ruling, that means that the credit is not more executable. Of course, we will need to return the money to the banks. Until then, especially in the case that if the sentence is favorable, as we expect, that is already settlement. The only case is if the sentence is negative or if the credit is not more executable. On the equity free cash flow side, and I think it was your first question, in fact, it is structural. Remember that our guidance for this year was €0.5 billion. The guidance for next year in terms of equity free cash flow is €0.9 billion and the guidance for the third year is €1.1 billion. If I'm not wrong, it definitely is structural.
Remember that still in 2025 we are absorbing many extraordinary effects in terms of working capital. The articolo quarto effects, even the last payment of the first agreement, the one of 2021. That's why probably in 2025 it's not at the same level of next year. Again, I want to reiterate, the company is performing very well also in terms of cash flow. It definitely is structural.
Yes, but Domenico, to be clear, because I know that during the call you try to evaluate also our voice to understand if we are completely assertive on the things or if we have any doubt. You asked a question that is related to a remote scenario about the concession fee. I clearly stated that we are quite optimistic. If you want that we define all the possible scenario, it doesn't mean that we believe that that other one will be the scenario. To be very, very clear about the equity free cash flow, as Adrian mentioned, our company is in a path where we'll be back to be a normal company generating cash and distributing dividend. We got that commitment already in the guidance about the result for this year. We keep the guidance, but we told that we are optimistic that we can do something better.
This is not the guidance. Why? Because the market does not allow us to do any kind of mistake about the price up. The value of the price up overall in the year is in the shape of €100 million. It's clear. You know, you are much better than me to do math. If we did some price up in the first quarter, some price up in the second quarter, the impact on the second quarter by definition will be higher than the impact in the first and the second quarter.
Thank you.
The next question is from Fabio Pavan at Mediobanca. Please unmute yourself and ask your question.
Yes. Hi, good morning. Thank you for taking my two questions. The first one is a follow-up on Poste. Provided you will share with us some first column synergies in Q4, I was wondering if you have dedicated teams already at work in terms of exploring potential synergies. The other question is referring to sector consolidation. We have learned in this reporting season that things are apparently moving in some Southern Europe countries. Do you think in Italy we may also have something moving in the coming months? I'm referring to both consumer and network operators. Thank you very much.
Thank you. Fabio. About Poste, as I mentioned during the speech, we are working to finalize in all the details the agreement with Poste for the MVNO that is a kind of commercial agreement and that has nothing to do in theory with the fact that they are a shareholder. Second, we are finalizing agreement to develop our customer platform strategy. Poste is one of the main players in Italy on energy, and we are trying to explore the possibility to move on with them with energy at the beginning of the autumn, so during the fall. These are the things we are working on before moving on any other aspect. We will wait also for the clearance for the antitrust that was already positive. Now there's a formal step through the national watchdog. After that, we can sit and we can evaluate further synergy that can be developed.
It's clear that we have in mind what could be the opportunity. Again, we will disclose ahead in the year about that. Today we want to focus the company, the team, and everybody in delivering the number that we gave to the market, and to surprise everybody with some better results about the sector consolidation. It's very useful, your question, because finally we are plenty of articles talking about Spain and France. What we were mentioning four years ago in 2020, that this market at European level was needed, a market consolidation, is no more, let me say, a dream. It's something that is becoming reality. For sure, if something happened in France and in Spain, they are not a second-tier country in Europe. They will pave the path to have also a better evaluation also in Italy.
I always declare that Italy is a country on which in the consumer segment to exploit better results, a consolidation is needed. I repeat, we can have two kinds of consolidation, an M&A consolidation or a network consolidation. Because also at network consolidation you can have important synergy that can allow us to speed up our path towards further improvement of our guidance.
Thank you.
The next question is from James Ratzer at New Street. Please unmute yourself and ask your question.
Yes, good morning, Pietro and Adrian, thank you for taking the question. I had two questions, please. The first one is that the E.U. recently launched a consultation on AI g igafactories, which obviously got a lot of participants interested. I was wondering, did Telecom Italia participate in this consultation? What's your view of it? Do you see a further opportunity here for you to be i nvesting in AI gigafactories, and how might this impact your growth in future? If on the other hand you're l ess interested in investing directly, might this bring additional competition into your cloud business in future?
Secondly, I was wondering if you. Could you give us any further updates on your views on the likelihood of getting the €2.9 billion potential earnouts from a potential FiberC orp, Open Fiber combination? If you had any updates you could share on likelihoods of receiving anything from that, that would be very helpful. Thank you.
Thank you, James. Before talking about AI gigafactory, I think that you miss a new trend in Europe that is caused also by the new geopolitical environment between Europe and U.S., that is the sovereignty of cloud and security. Before moving to the AI gigafactory, one of the things that are happening today is that there's attention not only in Italy, but throughout all Europe by all the government to understand how to keep under control in a safer environment the data of the strategic companies. I have to remember that the PSN is the most successful case in Europe of sovereign cloud. What it means is that the cryptography key of the cloud, where are stored and where are used the data of the public administration, is in the hand of an Italian entity, so they are not under the sovereignty of other government out of Italy.
I think that this is a point that you have to stress and analyze because it is not like the AI gigafactory, something that will be future ahead. I mean, when we talk about AI gigafactory, we are talking about the day after tomorrow, but we have a today and a tomorrow that is made by cloud sovereignty and security. I have to remember to everybody that all this wonderful supercomputing will put out of date all the algorithm by 2030 of cryptography. It means that all the large company have to move towards quantum security. Do you know who is the market leader in Italy about that? TIM Enterprise. I have to answer also to your question. Yes, we are part of the project for the AI gigafactory. I don't want to distract the attention of everybody for the day after tomorrow. We have to check what is today.
Just to complete about that, everybody is talking about edge computing. Do you know which is the widest edge computing network in Italy today? TIM. If you sum all the pieces, we have eight tier four data centers and we are the only one with that kind of infrastructure. If someone wants to replicate, they have to spend between €1 billion and €2 billion of CapEx to build that. We are the only player with sovereign cloud solution today. If someone wants to replicate, it's more than welcome. It's a matter of CapEx and know-how, the third and time the third. Today we are building the widest edge computing infrastructure. We are investing on that already in the plan, €100 million. Please, everybody is more than welcome to do the same. Finally, this ecosystem will need a low latency network, and we have a 5G low latency network.
What does that mean? If you create a table, putting for each of these elements who are the players, perhaps in the column you will find some other brand, but you will not find anyone that is able to stay in each of these components. I think that is an important element that we'll disclose better in the details in the second half of the year when we will organize the team Enterprise Day. The answer to your question, I'm sorry if I take more time, is yes, we are part of the Ajax gigafactory. If I ask also to you, can someone show me the business case of the AI today? The business cases that I saw are working in the U.S. and in the U.K. Why? Because they are today based on economy and efficiency in the redundancy of people.
We are ready to proceed and to invest on whatever gives us the right return on the investment. About the earnouts, the 2.9, I must be transparent on the energy. In theory, it is becoming. We will have a low probability. What is important to disclose is that in the last discussion that we had, that in Italy are happening about energy, it seems that finally the data center will be considered a specific category of energy consumer, and so they could have a specific regime with a lower cost that is not reflected today in our number. While about the network, we set the window, we are trying to understand what will happen. The frequency of the articles in the press about the discussion between Open Fiber and FiberCop lets us think that things are moving ahead and something will happen.
In the Italian language, we say tanto tuono che piove. I will leave the translation to someone that is better than me in English. James, I hope that I answered both your questions. If you need more detail, please.
Great. Thank you very much.
The next question is from Giorgio Tavolini at Intermonte. Please unmute yourself and ask your question.
Hi, good morning. Thanks for taking my three questions, please. The first one is on the domestic costs. I saw a 12% decline in the industrial OpEx in the first half, so I was wondering what is driving this reduction. The second question is if you can add more clarity regarding the hedging strategy on Rial that is mentioned in the slide. The third question is regarding the network consolidation you were referring to before.
I was wondering if you are still interested in exploring sharing opportunities to optimize the investment for 5G stand alone, especially in light of the upcoming spectrum live license renewals soon. Thank you.
Thank you, Giorgio. I will leave also to Adrian to elaborate more on that. If you look at our OpEx, or it's better cash cost based because we have to continue to talk about cash cost and not only about CapEx, because it's important for our cash generation. It's clear that the industrial, I mean all the network cost, is the main component of our cost base. The second is the labor cost. We go through all the different elements also considering the commissioning. With the transformation team, we are working on all of these items.
It's clear that about, for example, DMSA with FiberCorp, it's quite clear that my competitors started before the NAS with fixed dual X assets. Why? Because until we were the owner of the network, we were trying to create value also through the network. Now that we can trade off between a variable cost, that is the cost that we have with the fixed network, and the fixed wallet access. That is not a solution for everything, but it's a solution that can complement our strategy. We are exploiting that and we have lower cost. Now we are taking a look to all our network costs with more attention compared to the past because they are becoming external costs, and we are optimizing that base. It's clear that we'll continue to work on that. You can divide that kind of cost in two different typology. One that is volume driven.
If we have customer, we pay, if we don't have customer, we don't pay. In that area, there is also the possibility to work better between the different kind of technology. Choose the one that has a total cost of ownership that is lower than the other typology of cost. We have all the other cost, energy, colocation, and so on and so forth, on which we are optimizing our component. We look also to our mobile network cost because it's an area on which in a reasonable and professional way we will sit to understand which are the possibility to have further improvement of that. Also having in mind what can happen with the renewal of the frequencies is something that we have to take under evaluation with a lot of attention.
Let's consider that at E.U. level, E.U. gave a guidance to all the country to ask or to allow a renewal of the frequencies for zero or very low cost in exchange of a commitment in terms of investment to increase the coverage of the 5G standalone. This is something that we support and we are working on. I gave some highlight, I leave it to Adrian to elaborate more on the aging, and if you want to add something about the cost.
Yeah, no, nothing to compliment on the cost. I think that Pietro mentioned everything on the hedging of the Brazilian real and George, you know that we've been working since 2022 on this side and we covered the flows that were coming from Brazil normally with some financial instrument and it worked very well to do. As a matter of fact, we have 75% of the full year cash flow of TIM Brasil already hedged today. Clearly this instrument is in the money, as you may have seen. It's also worth to mention that in the first quarter the exchange rate was mostly aligned with our projection. The spike started in April with the tariffs supplied by the U.S. We won't expect any kind of impact on the equity free cash flow coming from Brazil. As a matter of fact, the company is performing even better than what we expected.
For 2025 cover, we are working today for the future and we're working for 2026, 2027. You know that we have a long position on BRL and a short in U.S. dollars because part of our costs, especially those of Noovel, are related to U.S. dollar denominated contracts and that accounts for something around $100 million per year. What we are doing is to flow reais to U.S. dollars since today, if you see, the issue of the exchange rate is not the direct exchange of the BRL Euro, but it's more a matter between the Euro and the dollar. We will flow reais to U.S. dollar and we will cover the OpEx denominated in U.S. dollars of Noovel. It works both sides.
We think it's a pretty smart movement and that covers what we are doing today, especially after the issuance that we did in July in our holding company down in Brazil. We will have enough funds to cover three years of these Noovel expenses in U.S. dollars. That's how it works. Of course, the worst moment to cover is when the COVID is in the higher level. We are sure that this works these days. We'll see what happens in the coming months. If the Euro dollar stabilizes or the Brazilian real appreciates again to the dollar, we can enter into further agreements. For today we think that we are covering the needs of 2026 and 2027.
Thank you.
The next question is from Andrea Devita at Bank Intesa. Please unmute yourself and ask your question. Mr. Devita, please unmute yourself and ask your question.
Can you hear me now?
Yes, yes.
Thank you for taking my question. Basically, it answers a previous question of my colleagues and has to do with your, let's say, broader approach towards wholesale fiber operators and FiberCop. It's one year since the network separation. We have EMSA and we have c ommitments d iscussion with the Italian antitrust and commitment. I would like to comment a bit on the past year in terms of the benefits that you experienced and the potential developments related to the current commitments you are presenting to the antitrust regarding the relationship with FiberCorp. If there is anything to be remarked about Open Fiber, for example, please mention it. Lastly, I would assume that there is no impact for you coming from this E.U. Commission investigation about potential misleading or incorrect or incomplete information by KKR on the deals. I understand this applies to deals with other variants or different cases. That's not the energy.
Andrea, about the last part of your question. We have no impact of what is happening at the E.U. antitrust level about KKR. About the commitment that was taken at the antitrust level, they have no impact on us in our profit and loss and in our plan, are mainly related to FiberCop. There's no particular impact on us. What is important is that if you remember, if we get the time machine and we are back in 2024 when we were releasing the network separation, there were a lot of doubts about the fact that we have no volume commitment, no peculiar commitment, differently from what's happened with the previous agreement with FiberCop. There were a lot of doubts on the market that we could be able to optimize. Some of you were thinking that it was a kind of sale and lease back.
One year later, I think that the numbers that we are showing and the explanation that we gave and that we are giving to everybody show that when we were talking that we're sure about the move and that we're doing the right move are demonstrated. Last but not least, I think that you read the performance of Orange in France on the wholesale -9%. Let's think about if we still were a vertically integrated player what we are talking today. Now we are talking about a company that is becoming a benchmark in Europe, that is back to generate cash flow, that is running toward the confirmation for the fourth year in a row of the guidance that never happened in the history of the company, that we are optimistic that we can do better, and we are plenty of opportunities that are not factorized today.
We want to keep the expectation low, but we are very optimistic that we can further improve the result of the company.
The next question is from Paul Sydney at Behrenger. Please unmute yourself and ask your question. Good morning.
Thank you for taking the questions. I had two, please. Firstly, on capital allocation, the strategic updates you set out your financial flexibility from the cumulative free cash flow you'll generate over the next three years with a return to shareholder remuneration starting from fiscal 2026 and setting out other potential uses of cash. I just wondered, six months on with leverage heading below 2x , could you set out any further thoughts you have and how you prioritize the use of cash looking forward, including potentially raising your stake in TIM Brasil over time.
Secondly, you mentioned in your p repared remarks around the Italian consumer being more willing to accept price increases with reassurances around quality and customer service, with those two elements becoming much more important. Are there any data points you can give us to demonstrate this, or is it just your observation based on the. Churn trend over Q2, and maybe just a little follow on from that. Is this trend the main reason why you expect your competitors in the consumer market to raise prices going forward? Thank you.
Before I leave to Andrea about the second question, I think that what's happened is that being a vertically integrated player, we were unable to do all the efficiencies that our competitor were used to do or buying from an external player the asset. This is giving us the opportunity to further accelerate the efficiency. The second, we started the price up move in 2022. Have to remember that in the first quarter call of 2022, when we were telling to everybody that our move was to increase price, everybody were thinking that no, it's impossible, no one was able to do that. We're doing that now. It's quite sure that our competitor, looking at our performance, have two possible trends. The first one, that is a no way of return because it will not give any kind of financial return, is to create a price war.
More than 10 years of price war have demonstrated that it's the only way to continue to burn cash and bringing the company to a Chapter 11 solution. The second one is to stay rational. If you are a listed company or have a shareholder of specific kind, be rational, increase price, increase the quality of the service, and in the meantime try to move toward the customer platform. This last point is something that sometimes also our competitors started before than us because we have to also be fair in the discussion. They are more in late compared to us in the price increase. Sorry, they are becoming very rational if you look after some last merge. I think that this is a trend with no possible return. Then I leave to Andrea to elaborate more on that.
Thank you, Peter. Thank you, Paul, for the question. As you know, we are quite passionate on this topic. We've been actually announcing and commenting on the price ups since the last four years. As a matter of fact, this is the fourth year in a row that we not only implement price ups, but we study and analyze the outcome very closely. We do have some statistical evidence because we measure the differential churn target by target, target segment by segment, when we do the price ups in the following month. We measured that in 2025. We have pretty solid evidence that the churn behavior of customer that are priced up on average is better than before and better than the business case that was based on the previous year. The second element is that, as Pietro commented, we look at segment with different level of, for instance, technology.
FTTH customers respond better than lower technology or previous technology customers to price up. People that have higher levels of service, for instance TIM Vision or convergence, respond better to price up. That is what we modeled, and that is why we are, let me say, actively explaining also in this conference call that this is the trend that we believe the market should follow in order to repair some of the dilution effect that is still coming from the price war from the past 10 years.
Let me answer your first question. In terms of capital allocation, we are executing our plan, and if we execute our plan also in 2026 and in 2027, we will have for sure a strong financial flexibility. In terms of how we will apply it, the shareholder remuneration is clear. We mentioned what the shareholder remuneration will be in 2026 and in 2027, and we will understand if there are opportunities that can add value to the company. That is our view. We need to execute a plan. Our target is to reach a 1.7x, 1.8x at least leverage in the coming years. Yes, we will have 0.4x EBITDA or 0.6x if there is a final definition of the concession fee for financial flexibility, but that will be analyzed in terms of opportunities.
On the specific point that you raise in terms of increasing our stake on TIM Brasil, I think that we are pretty happy with that question because we've been asked constantly since 2022 until 2023, and also this year, if we will be thinking of selling a resilient entity. Now you're asking us if we will be open to increase the position. Honestly, we think that our actual ownership of Brazil of 66% is the right weight in terms of participating in the cash flows of the company and in terms of exposure. We also believe that having minorities in TIM Brasil is the right protection in terms of how we handle the company or how the stakeholders in Brazil consider the company. For today, we are happy with the actual situation. We'll see what may happen in the future.
We are still very, and we will be also in the future, we're very happy with how the company is performing. You know that today it is still a very important source of cash flows for the group. We think that what we disclose in the plan is pretty clear in terms of capital allocation for the future.
That's very helpful. Thank you very much.
The last question is from Ottavio Adorisio at Bernstein. Please unmute yourself and ask your question.
Thank you for taking. Inevitably, it's a follow-up from previous ones. A couple questions for Adrian. The first is on factoring. Can you tell us how it's going to be accounted? It will be, I think, in working capital, but will be feeding in equity f ree cash flow or not, the one you said about the cost. I appreciate that the cost, it's less than plain Berlin like that. I guess you also have some f ee to pay to the banks c onsidering that it's relatively short-term financing, considering that you expect a resolution by the year end. I was wondering why you do that f actory now and not wait for a resolution or settlement. The second one is on the hedging. As it stands at the moment, you have a gain. Am I right to say that gain will be accounted in net interest or working capital and will f eed into equity free cash flow?
If that's the case, if the real stands at the current level, how big that gain will be before the year end or by the year end? The third one is for Pietro. Pietro, when talking about potential consolidations, you stress that there are two types about operators. Then you talk about potential network consolidations. If you can elaborate a little bit in terms of how that could take place, given the caveats that of course y ou have your towers, mostly t owers are managed by INWIT and the network by FiberCorp. Which sort of synergies should we expect? Similar synergies to merging two companies, or relatively smaller or significantly smaller? Thank you.
Let me start with the potential consolidation. To elaborate on that, usually when you look at the merge between two players in the mobile segment, a good part of the industrial synergy comes from a reduction of the network cost that is related to the higher level of efficiency if you put together the spectrum. From an engineering point of view, if you do the sum of two frequencies, it is not an addition one plus one two, but it's something amplified. One plus one is three. It will allow you to collect and gather more data with a lower cost.
It is clear that you have to start to think, is it in Italy fair enough to have 3G, 2G networks? I think that makes no more sense. We have several opportunities that are coming also from the discussion in the regulation that can be exploited. The rationale is, when you look at the traditional merge, you will have synergy that comes from the industrial component, that is the network one, plus other ones that are related to cost of labor, commercial cost, because you cannot talk of other things. These are the main parts. A good part is the industrial part. That means the network one that usually is worth 60%-70% of that kind of efficiency that you can reach. Not merging two companies, but putting together the operation of the two companies to reduce the cost.
Also, because differently from the past, today the antenna is not a competitive advantage. In the past, if I had an antenna in San Pietro, just to give you an idea, I would never share this antenna with someone else because it was a kind of monopolistic situation. Thirty years later, we have the coverage that is more or less the same among all the players. This is something on which we can work. If we can talk about the possibility to extend the FTTH standalone network, also in areas that have no return on investment, if you work on a standalone basis, this is a further opportunity. There are several things on which we are working to have also alternatives to the traditional merge activity. About the edging and the factoring, we leave to Adrian.
Yes, thank you. There are a few questions on the factoring side. Clearly, the accounting is still a financial liability. That's why it didn't impact it in the net financial position. We will have the credit and we'll have the financial liability. It's kind of prosolvento accounting, even if we've been cautious with this approach. This is already discussed also with Reuters. That's pretty much it. That's why there is no impact yet on the net financial position. That may come with the final sentence. On why now, you know, we booked the credit on the first quarter and we were ready to enter into this deal at the end. It's a source of financing and it's much cheaper financing than a normal one that we can think that we can find in the market.
If you consider that we will be paying something around 2.2%, 2.3% of the cost, we will have on the other side also the ongoing interest of the case. It's probably 150 basis points lower than the normal financing that we can have today. Since we have some maturities in the second half of the year, in September, we would pay €1 billion of the maturity of the second maturity of 2025. That's the reason why we are doing it now because it's much cheaper than other instruments. I think that there was a third question in terms of accounting of the hedge of Brazil. Clearly, the actual hedge that we have for 2025, it's a financial instrument and is accounting and others on the equity free cash flow. What arrives from Brazil, it's in the actual exchange rate.
The hedging instrument, if it is positive as it is today, that is in the money for the second, brings the positive on the others on the equity free cash flow going forward. What we are doing, it's a little bit more structured because you know that we should debt on our holding company in Brazil in local currency. We will in the future bring up dividends in U.S. dollars at a very favorable exchange rate. Nouvel sustains this cost in dollars on the P&L. It's a mix effect that you will find at OpEx and at financial expenses. Hope I covered all of your questions.
That's fine. Thank you, Adrian. Thank you, Pietro.
Ottavio. Sorry, I just have to say to all the team that they cannot go out for the holidays because reading the headline of your report in line results, but still work to do on growth and gearing. Hi, guys. You have to stay for August in the office to guarantee the result of the year. I'm joking, Ottavio, clearly. This was the last question. I want to thank you, everybody. We'll follow up in the afternoon with the virtual roadshow. I hope to hear you soon, also after the summer already. Thank you to everybody.
Thank you.
Ladies and gentlemen, the conference is over. Thank you.