Telecom Italia SpA
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Telecom Italia SpA
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Ladies and gentlemen, good morning and welcome to Telecom Italia Q3 '22 Results Conference Call.
Manuela Carra, Head of Investor Relations, will introduce the event.
Ladies and gentlemen, good morning and welcome to our Q3 2022 results presentation. I'm here with our CEO, Pietro Labriola; our CFO, Adrian Calaza; and the rest of our management team. Pietro will provide an overview of last quarter main achievements and Adrian will illustrate our financial results. Our Q&A session will follow.
Pointing out to you our safe harbor disclaimer on Page 2. Let me hand it over to Pietro. Pietro, the floor is yours.
Thank you, Manuela, and good morning, everyone. I'm glad because today, we have the chance to talk about business after weeks during which everybody's attention has been caught by information and misinformation appearing daily in the press. It's now time to let numbers and facts talk.
Back in August, during the call on second quarter results, I explained the main challenges that we need to address as a management team. I said that the first one is to ensure business continuity. It means that we must put the operation under control and improve the business trends. I also said that we will need to do this operating in a macroenvironment that is much tougher than expected, where high inflation poses new challenges. I think Q3 result showed that we are on the right path and for some metrics even ahead of our target.
Here, I'll just give you some highlights, and we will deep dive into each topic later in the presentation. Trends are clearly improving year over year. Trends are clearly improving year-over-year in Q3. Group revenues are back to growth. Service revenue are further accelerating with more than half of the improvement versus Q2 coming from domestic business. Group EBITDA after lease is also going better despite domestic OpEx increase due to tough comparison on personnel in Q3 last year. Adrian will elaborate on this later, showing you that this is a specific quarter discontinuity, while the fourth quarter will be again on track.
If we zoom on domestic, in the fixed market, we have a better service revenue year-over-year trend, higher ARPU, and we're able to slow down the [ washing machine ], achieving consequently, the lowest churn in the last 5 years. In mobile, we have seen a huge improvement in human net adds with a negative balance reduced to 1/6 versus Q2, better mobile number portability balance where we are again the best-performing MNO and with churn at a new record low. We are highly focused on the execution of the transformation plan where we target profit and loss cost cuts of 20% of our addressable base plus extra efforts at cash level, OpEx, and CapEx for a total of EUR 1.5 billion savings in 2024.
Out of the 6% targeted OpEx reduction versus 2021, in the first 9 months, we have already achieved around EUR 270 million OpEx savings. This represents 90% of 2022 target, a reassuring result indicating that we're managing the company more and more with the cash driven logic, working on inefficiencies and attributing the right priorities. Moreover, we have already secured around 50% of the 2023 profit and loss OpEx reduction target, also thanks to the expansion contract we signed with unions for 2022, 2024.
On energy costs, a [ trend ] topic of this reporting season, which is creating a lot of concern for most European telcos, I want to give you reassuring messages. Our cost for 2022 are almost all hedged with fixed prices set before the energy crisis started. Therefore, we are in line with our budget. Please note that the increase is driven not so much by the surge in prices, rather by higher consumption, considering that we are expanding our network and data center infrastructure, and that this summer was very hot, and we had to use more power to cool down the data centers. Energy costs for next year are hedged for approximately 75%, including the pass-through on colocation, considering that the consumption driven by all of the equipment colocated in our central offices is eventually borne by them. On top, we have launched several initiatives to keep 2023 overall consumption flat year over year, thanks to around 6%, 7% gigawatt saving that will compensate for growing data center and network consumption.
My final remark is on the liquidity position. In Q3, we paid the last tranche of the Italian 5G spectrum, but we have also secured EUR 2 billion SACE financing and cash in EUR 1.3 billion through the Inwit disposal. Overall, our liquidity position is sound and upcoming maturities are fully covered until the end of 2024. Also, we see no major impact for interest rates increase as the majority of long-term debt is at fixed rates.
Our business today is more stable, predictable, and healthy than it was at the beginning of the year. Our ambition now is to take it back to growth in 2023. This is also due to better conditions in 4 markets we operate in, and this is what you can see in the following slide. Despite tough macroeconomic environment, we are confirming that, finally, the market is becoming more rational as we predicted at the beginning of the year. And we are now seeing several positive signs in all segments. We are not magicians, and our behavior was an accelerator for these results.
In the consumer market, operators are increasing prices both on fixed and mobile also in order to pass inflation to final customers. The migration to FTTH is happening. However, FTTC is still a reliable technology growing year-over-year and remaining at a market share on new adds around 55%. Let's remember that more than 57% of our FTTx lines go beyond 100 megabit per second.
Mobile number portability market is cooling down, so the [ washing machine ] is now less relevant, again, as we predicted at the beginning of the year. In the corporate market, cloud migration is accelerating both on private and public administration segment. At the same time, connectivity is still broadly stable year-over-year. In this segment, we are growing more than the market.
In the wholesale market, fiber adoption is still growing healthy, both in FTTC and in FTTH, despite at a slower pace versus previous quarters. In Brazil, market consolidation is in progress, and we are seeing a more rational competitive environment. The ICMS tax reduction is fueling customers' spending power and creating additional demand.
Next slide. On the following slide, for the first time, we provide an update on the 4 entities outlined at the Capital Market Day. We'll give you full disclosure of KPIs and financial metrics in February when we will present full year results and the 2023-2025 plan.
Let's start from TIM Consumer. The turnaround is ongoing. We see improving trends both in fixed and mobile. As commented before, the market is cooling down. This is something we have stimulated in the last quarters as it enabled us to retain high ARPU customers. We will further support this trend with the introduction of price indexation for new contracts from the year end. We have selectively priced up our customer base with very low incremental churn, while the revenue uplift will be sizable. So we expect more to come of such actions in the coming months. Other positive notes are the increase of our market share in FTTH, which has gone from 4th to 1st position in few quarters and the stickiness of TIM Vision customer base despite the exclusivity on football has gone.
TIM Enterprise is developing according to expectation, which means it is growing steadily and faster than the market. We continue to see strong demand for ICT services with a growing pipeline across the board. Needless to say, the Recovery Plan tenders we secured this year and National Strategic Hub are growth engines and may even deliver unexpected upside in coming years. Also, new contract of TIM Enterprise will be CPI-linked.
NetCo is moving forward with FiberCop plan execution. FTTH rollout is on track. On the wholesale front, we have new wholesale tariffs are under public consultation that take into proper account the inflationary environment, finally reducing the gap versus other European markets and incentivizing faster migration towards fiber.
TIM Brasil growth has further accelerated. Q3 was the first full quarter of integration of Oi, while in Q2, we had only 2 months. Both service revenue and EBITDA increased more than 24% year-over-year in local currency. This business is definitely performing up to expectations.
Before we move on, some additional consideration. It seems that my tenure TIM started a long time ago. However, I was appointed CEO in January, and it has been just 4 months since we presented our new plan, Delayering TIM. During this period, we have been working hard to execute our long-term strategy. In recent weeks, it has become clear that the timeline of this project has been impacted by the unexpected evolution of the macro and political environment, but the strategic option that we outlined at the Capital Market Day back in July are underway and remain our north pole. The long-term strategy is confirmed. We continue to work hard to fully implement it.
More specifically, on TIM NetCo, as you know, we extended the deadline of the MOU to the end of November. However, exclusivity has not been renewed as we want to have the flexibility to conduct parallel negotiation from now on, should the opportunity arise. On TIM Enterprise, the process to set up the legal entity has been approved. We are fully committed to go ahead with these 2 projects.
Let's now zoom in each of the 4 entities. At the Capital Market Day, we were very transparent in saying that TIM Consumer is a turnaround case that presents the biggest managerial [ industrial ] challenge we are facing. However, we also express our conviction that this business has significant potential and are confident that we will succeed in making it industrially sound. Of course, the journey to fix the core, transforming our consumer and SMB business into an agile, efficient, and commercial flexible premium operation has just started. Let me say that we are pleased with the achievement so far.
On the top right corner of the slide, we show that TIM Consumer overall is a business with total revenues still declining high-single digit year-over-year and service revenue down 7.4% year-over-year and 9 months. However, if we see a better trajectory in Q3 and improving operational trends, both in fixed and mobile. Q3 [indiscernible] negative net adds have almost halved compared to previous 3 quarters with a further deceleration in September. Churn is down to the last year level. In mobile, churn is at a new record low. Mobile number portability trend is steadily improving and line losses are down 80% quarter-over-quarter and 75% year-over-year.
We have kicked off a lot of initiatives from new communication to radically different incentive schemes from higher focus on digital channels to a more daring approach to how we extract value from the customer base. In a nutshell, what we have done in this month is to steer the business from volume to value. All the actions you see on this slide are current with this approach.
I will comment only few. We are enhancing TIM's premium brand and market positioning. The communication campaign we did in recent months has been very successful to revamp the brand. We have also launched the first ever 10 gigabit per second offer available in the Italian market while switching off the less popular offers. Selectively pricing up our customer base is proving to be an healthy practice. Limited churn on one hand, sizable upside on the other, with a run rate of EUR 50 million incremental revenues combining mobile and fixed.
Considering the untapped potential still lying in our customer base, do expect to see us more active on this front in coming quarters. So far, we have addressed less than 20% of our customers. Competitors have also been quite active in back-book repricing and recently also on front-book prices. In a nutshell, the market is moving slowly but steadily towards higher rationality. The volume-to-value approach is paying off also in our content business where TIM Vision customers have increased year-over-year, and the number of paying customers for football is 44% higher now than it was 1 year ago despite we have given away exclusivity. Concurrency has been removed from November 1, and hopefully, this will translate also into an higher market in terms of viewers that will be beneficial also for us.
The introduction by year-end of inflation-linked contracts for the [ new retail ] customer is another building block of our strategy, passing inflation through to customers is common practice for virtually all industry. Honestly, we see no reason why we should behave differently.
Let me make a final remark here. Our telco industry has the same VAT of the luxury sector, while this is not the case for utility services that are treated as primary goods. In Brazil, this is something that has changed recently, for example, and we hope to see the same changes here in Italy.
In the 9 months, TIM Enterprise total revenues are up almost 6% year-over-year and service revenue almost 9% year-over-year, with the mix where the moderate decline in connectivity is more than compensated by cloud, IoT, and security. The combined weight of ICT business has increased 5 percentage points from 51% to 56%. Overall, we confirm and reinforce the messages of the Capital Market Day. The business is growing faster than the market with cloud being the main driver. Connectivity is down year-over-year, but we have contracts already signed that are incorporating a double-digit growth in this line. Over 60% of revenues till 2025 are already secured and will further improve. Visibility on growth trajectory is very high, considering EUR 1.1 billion cumulative value from the National Strategic Hub and EUR 0.2 billion from the Connected Schools/Healthcare tenders we have been awarded.
Furthermore, we have over EUR 1 billion of public administration contracts in activation and a pipeline of ongoing negotiations may deliver up to EUR 0.6 billion additional revenues. A significant part of the growth is coming from top 35 customers, an indication that TIM Enterprise is indeed a [ national reference ] player in the Italian market, uniquely positioned as an infrastructure-based [ ICT ] player capable to exploit the telecom and IT convergence. That is why we did not suffer the drawbacks that other European telcos have reported recently. We see multiple potential upsides to upselling and cross-selling, for example, on the public administration that we start the migration to cloud in Q1 2023.
My final remark is that also TIM Enterprise new contract will be CPI-linked. At the Capital Market Day, we presented a timeframe articulated in 3 major steps from foundation until the end of this year, followed by 18, 24 months for the evolution in a standalone company with own infrastructure and ICT capabilities, and then an acceleration phase leading to EUR 5 billion revenues by 2030. The initial phase is on track to create a separate legal entity with an integrated operating model and clear interfaces versus the broader TIM group.
Slide 9. In the 9 months, NetCo total revenues are down 4.8% year-over-year and service revenue 3.8% year-over-year. Let's put this performance into context. In the year-over-year comparison, there's 3.2 percentage point drag on total revenue and 1.7 percentage point drag on service revenue due to nonrepeatable transaction in first half last year. Q3 trends are significantly better. More, in general, at the Capital Market Day, we said that NetCo's total revenues were expected to slightly reduce in the midterm and then recover as a mix of the loss of volumes and the evolution of regulated prices that would incorporate a link to inflation.
If you [ have ] that, the overall market has slightly decreased year-to-date in terms of total assets line, there is no surprise in the number we report today. The trajectory is in line with our expectations. Of course, the news here is the new approach in wholesale regulated prices for the next year. Copper prices to increase, those for full fiber connection to decrease.
Let me repeat what I said at the beginning of the presentation. In the proposed strategy, we basically see 2 things: a strong incentive to accelerate the migration to FTTH, a reduction of the gap between the current tariffs for copper services versus other major European markets. Through the proposed prices, to be confirmed by AGCom, on Local Loop Unbundling, Italy will finally realign with France and U.K. considering the automatic CPI-linked mechanism, but will still be behind Germany. On Sub Loop Unbundling, the gap will reduce, but will still be behind these markets. In any case, in the existing plan, it wasn't included. More importantly, and this is my main message on this topic, we do hope that the market will react rationally, taking this as an opportunity for repricing also in the retail market.
On Slide 10. In the 9 months, TIM Brasil's total and service revenues increased well above 18% year-over-year. Being the first quarter benefiting of 3 months of Oi integration, in Q3 growth further accelerated in mobile. Also fixed saw an improving revenue trend. Actually, all profit and loss lines were up year-over-year. KPIs show strong trends across the board. Mobile ARPU is flat and churn is down more than 2 percentage points versus Q2, while in fixed TIM Brasil reported 6% year-over-year ARPU and 5% year-over-year customer base growth. These are several drivers of this performance.
To name just a few, I'll remind the ongoing migration of Oi's 16 million mobile customers, which is proceeding according to expectations. The rationality of the market without players pricing up and the ICMS tax reduction, most of which will be passed to the customer, all of that creating additional demand. On top, TIM Brasil 5G coverage arrived in all state capitals with a number of antennas that is higher than its peers combined. This creates new commercial opportunities and enables to speed up 4G offloading, thus increasing the overall quality of service.
Slide 11. Just a quick recap on our ambition in terms of the transformation plan. The end game is to rethink the entire operating model to achieve a more sustainable cost structure with around EUR 1.5 billion cash cost saving in 2024. The mix will be around EUR 1 billion of profit and loss addressable cost reduction that represents the 20% target we have already provided to you in May. Around EUR 250 million of extra cash cost savings mainly related to leases. Lastly, around EUR 300 million of CapEx savings already starting from 2023 that will help us to mainly absorb the increase in gross CapEx [ we are getting ] from NRRP initiatives.
The target for 2022 is to save EUR 100 million of labor costs and EUR 200 million of external OpEx for a total of EUR 300 million, or 6% of 2021 addressable baseline. In the 9 months, we added 100% of the labor cost saving and 85% of other OpEx, so we are at 90% of the full year target. For 2023, around 50% of profit and loss -- profit and loss OpEx reduction target is secured, also thanks to the expansion contract.
As you can appreciate, we are working on many things in order to regain efficiency from real estate to customer care to channel mix, just to name a few. Let me now hand over to Adrian who will guide you through our financial results. Adrian, please?
Thank you, Pietro, and good morning, everyone. Slide 13. If we look at our key financials in Q3, we reported improving trends versus Q2, continuing the positive evolution registered in the previous quarter. Group service revenues year-on-year trend was positive at 3% from 1% year-on-year in Q2. In the 9 months, group service revenues stood at plus 0.5% year-on-year. Group EBITDA was down at minus 6.5% year-on-year from 8.5% in Q2.
We worked hard during the first 9 months of the year in order to improve our results compared to our projections, and we succeeded despite the present tough macroenvironment. Equity free cash flow was slightly negative in the quarter, partially driven by the [ national ] trend. I want to highlight that the year-on-year comparison is negatively affected by a positive one-off effect in 2021 in the financial charges. Equity free cash flow in the 9 months was positive at EUR 261 million, with operating free cash flow net of license fully covering financial expenses.
Net debt after lease increased in the quarter mainly due to the EUR 1.7 billion cash out for the last installment of the 5G license in Italy that was not entirely compensated by the cash in from the disposal of the stake in Inwit.
Let's now have a look at quarterly trends in the next slide. As you can see, group service revenues grew 3% year-on-year with an improving trend versus Q2, thanks to a higher contribution of Brazil after Oi integration, but also better trend at domestic level that improved further after Q2 at minus 3.5% year-on-year versus minus 4.8% year-on-year in the previous quarter. Group EBITDA after lease was down 11.2% year-on-year with domestic minus 18%, in line with Q2. Net of last year nonrepeatable items, the decline for the quarter in domestic EBITDA would have been high single digit.
CapEx were slightly down this quarter year-on-year, notwithstanding the push on growth investment mainly in FTTH, with 400,000 households passed in the quarter, in line with the previous quarters. In the 9 months, group CapEx are up 5%.
Moving to fixed in the next slide. Fixed service revenues were down minus 3.9% year-on-year, improving sequentially versus minus 5.0% in Q2, with around half of the contribution to decline explained by retail and around 1 percentage point each by international and national wholesale, with later improving its trends after a tough first half impacted by nonrepeatable transactions. Retail was just a touch lighter year-on-year versus Q2, but with resilient ARPU level and improving KPIs on net adds. Indeed, ARPU was up 6.2%, driven by broadband and content revenues and by ICT that keeps increasing double digit.
In terms of market, we are continuing to see 2022 stabilizing up to 2020 and 2021 growth fueled by vouchers and COVID, supporting line, broadband net additions, and equipments. For these reasons, retail KPIs are weaker, but with an improving trend quarter-on-quarter with the highlight being the continuous improvement of the churn level trend, now below 3% combined with a historic low level of delinquency. At the same time, equipment was significantly down year-on-year this quarter, but in line with Q1 and Q2 trends. I'll remind you that this is neutral in terms of cash.
Moving to mobile on Slide 16. Mobile service revenues were down 2.2%, improving significantly compared to minus 4.1% in the previous quarter. Retail reported a negative revenues contribution coming from lower customer base that, in any case, improved quarter-on-quarter. This has been partially compensated by the positive contribution coming from wholesale revenues for higher roamers and MVNO revenues.
In terms of market dynamics, MNP decreased again with the churn at a new record low, notwithstanding with some selective price increases done in the recent months. We are reiterating this approach as a good practice also to counterbalance the recent inflationary pressure and as Pietro commented, additional actions are likely to come in the coming months.
Next slide. On Slide 17, we have details on OpEx that were slightly up year-on-year for Q3 affected by some discontinuities on labor costs. More specifically, variable costs were down year-on-year, mainly for lower equipment, partially compensated by higher COGS related to ICT growth. Commercial costs decreased 3% in the quarter. Higher commissioning content and VAS costs have been more than offset by lower bad debt, customer management, and advertising. Industrial costs were up year-on-year due to higher energy cost in line with our budget, as we will show you in the next slide, and provisioning costs not fully counterbalanced by lower network maintenance costs. G&A was also slightly higher year-on-year due to ICT revenues growth.
Finally, labor cost was up 17% year-on-year this quarter, mainly for tough comps due to the release of provisions last year related to one-off bonuses not distributed and lower solidarity days in Q3 this year versus last year. This trend in labor cost was already expected in our forecast. And indeed, if you look at the 9 months, the trend shows a healthy minus 1% in labor costs. I'll also remind you that on labor, we are well covered also for the coming 2 years because we have signed last year a 3 years agreement with unions, including a pre-agreed 1.5% increase per year.
Next slide. I already anticipated that energy is currently under control. Obviously, we are exposed to the same challenges the whole industry is facing. But so far, we have been able to manage the risk quite effectively. I just want to remind you that this year energy cost will be in line with our budget defined before the war and subsequent to energy crisis started.
I also want to add some color on what we are doing for 2023 on top of the 75% hedging, if we include the pass-through on colocation. For next year, our goal is to keep overall consumption flat year-on-year thanks to the 6% or 7% gigawatt hour savings that will compensate for growing data center infrastructure and network expansion, both fixed and mobile. Areas of savings will span from fixed infrastructure that will benefit from the commissioning to mobile network with selective real-time switch off of unused frequencies on 3G sites, from data centers where we will introduce new [ storage ] technologies that will enable us to buy energy during the night and utilize it during the day, and to offices where we continue to rationalize spaces and we'll continue to heavily adopt working from home.
Now on Slide 19, you have details on TIM Brasil. The company reported another strong quarter, and you can find many details in the company's disclosure done on Tuesday. But it is important to highlight the main achievements of this quarter. The top line expanded 24% year-on-year in the quarter with EBITDA growing at 24% as well after the consolidation of Oi numbers at the beginning of May. Furthermore, the company continues to post significant levels of cash flows with EBITDA CapEx on revenues at around 30% for the quarter.
As you can see from the numbers, TIM Brasil is now fully benefiting from Oi mobile integration and posted a strong organic performance focused on customers' value strategy that continues to pay off. The last 9 months have been transformational for Brazil with important achievements, and we believe the company will continue to deliver high levels of profitability, creating value for its shareholders.
Next slide. Net debt after lease increased by EUR 2.5 billion from year-end 2021, EUR 3.3 billion on IFRS view, mainly due to the payment of the 5G licenses in Italy this quarter and for the acquisition of Oi mobile and 5G license in Brazil in the previous ones, effects already anticipated on our plan as presented in March. As anticipated, equity free cash flow was slightly negative in the quarter, but still positive in the first 9 months of the year.
You may have noticed that the company decided the revocation of the goodwill tax realignment. As you know, legislation changes [ of maturity ] worsened the investment profitability of the tax realignment. And on top of it, we have performed a new round of analysis given the significant increase in interest rates, and the results proved the scheme not to be viable any longer. Therefore, we have decided to revoke as many other companies.
On the timing of this decision, please note that the rules for the revocation were disclosed only at the end of September when a specific decree was finally published. The provisions there included rule that the substitute tax already paid can be offset against any other tax payable with no cap limit. This implies that between the credit for the payments carried out and the cancellation of the payments still due, the overall effect is an improvement in the cash flow of the company of around EUR 700 million in 2022 and 2023, an important amount given the present levels of interest rates. On the other hand, of course, we have completely written off the deferred tax asset, and this has had a negative impact on our net income of approximately EUR 2 billion that has also allowed us to cancel the tax suspension constraint on all of our reserves.
In Slide 21, you can find a summary of our debt maturities and the breakdown between fixed and variable rates. Three main messages here: one, our liquidity position is strong and will cover upcoming maturities until the end of 2024. I also want to assure you that we are working on further actions to enhance it. You will have more information on this point in the third quarter. Two, average maturity of our debt is long at almost 6 years. And three, around 65% of our medium and long-term debt is at fixed rate following the cash in of EUR 2 billion from SACE that is at a variable rate, giving us the opportunity to keep our average cost of debt at a healthy 3.7% despite the significant increase in interest rates and spreads.
With this, I will hand over to Pietro for his final remarks.
Thanks, Adrian. Now the closing remarks. TIM continuity plan is proceeding. We promise to do better than forecasted, and we are keeping this promise despite a tougher macroeconomic environment. You can see improvement on all metrics and with positive outlook, both on financials and on KPIs. Guidance is now comfortably in sight, and I leave the math to you to implicitly compute our Q4 trends.
In terms of market dynamics, signs of rationality are consolidating, and we think there will be more to come in the future. We continue with our strategy from Volume to Value that remains strongly in place. I'm happy to see that at the same time, we are seeing the operational rebound accelerating.
On the delayering plan, implementation is ongoing, and we will release our pro forma balance sheet at our full year 2022 results. The memorandum of understanding on NetCo have been extended to November 30, with now no exclusivity obligation. On TIM Enterprise, the legal entity setup process already approved.
With this, we have completed our presentation. Let me now hand it over to the operator for the Q&A session. Thanks.
[Operator Instructions] First question comes from Mr. Giorgio Tavolini of Intermonte.
Just 2 questions from my side, if I may, regarding the revocation of the tax scheme and the EUR 700 million extra income from the reversal of the substitute taxes. I was wondering if you see any scope to restate [ savings shares ] dividend for the current year and for last year based on the new level of distributable reserve that you see at the TIM parent company.
The second one is regarding leverage. Based on your current outlook, if you can elaborate on your expectation for year-end net debt?
And the third one is on Brazil. I was wondering what level of synergies with Oi do you expect to materialize on your equity free cash flow from Brazil in the current plan. So just to recap, the [ savings shares ] dividend, group leverage at the year-end, and Brazilian synergies.
Giorgio, I leave the stage to Adrian. But in case, just a joke, also the operations are going very well and the numbers are showing that we are on the right path. Now I'll leave Adrian the stage to answer.
Regarding the first question, clearly, yes, this is a side effect in the decision of the revocation of the deferred tax asset at the end. Legislation has changed. The context has changed. Today, if we compare this considered investment in terms of payback period is well below some other CapEx that we need to do, for example, in our business, in our network, and different things. So that was mainly the decision for the revocation. Clearly, it has a positive effect in 2022 and 2023 in terms of cash flow. It's clear we disclosed it is probably a bit more -- a little bit more of EUR 700 million.
But then, yes, it has also the side effect of unlocking the reserves that were blocked for tax purposes. Then how this can be considered in the future regarding the savings shares, this is probably a decision that the Board will take in March with the year-end financial statement. Anyway, it's important always to remember that in the absence of positive net income, there are no privileges from the savings shares over the ordinary shares. But then, yes, your assumption is correct. We are locking also the reserves, and we will decide in March when we will discuss the 2022 financial statements.
On the leverage side, we've been doing much better than the expectations. Even now, our initial expectations in March in terms of equity free cash flow, clearly, 2022 was very particular year because there were many extraordinary effects, such as the licenses in Brazil, the big payment for the license here in Italy, the closing of the deal with Oi. So that's the main effect of the increase of the debt since the 1st of January. Going forward, the fourth quarter, particularly, we have good expectations. If I need to mention something, I think that the EUR 20 billion area is for year-end, it's something that we can forecast. Then we'll see because this being a reported number, it's always open to the exchange rate oscillations. But anyway, we are somehow optimistic about the evolution in the fourth quarter of the cash flow.
And the last one, yes, Brazil, I think that what Pietro commented a lot in terms of the operational side of Brazil. But at the end, we always mentioned that the Oi deal was an infrastructure deal basically. And synergies will come especially from that side. But at the same time, we are already seeing what up more -- much more efficient market can bring to the operators. Today, Brazil is 3 players market on the mobile. It's a market that has been very positive in terms of revenues evolution.
But at the same time, it's a market where operators want to invest because the evolution, the return on investment is clear. So that was our case, at the time, we decided to go for this -- to lead this deal for assets. And the -- we think that the synergies are already clear and we'll be much clear when the company start with the decommissioning of the additional sites.
But anyway, today, if you consider the equity free cash flow after lease, so the most static measure in terms of cash flow, on revenues, TIM Brasil is delivering at 16%. And this is kind of a metric. If they managed to perform what it is in the plan, this will be even higher. So again, we think that the synergies are very clear in that side.
I don't know, Giorgio, if that answers...
It's very clear, Adrian.
Next question comes from Mr. David Wright of Bank of America.
Just on the presentation and your comments on inflation, linking consumer enterprise contracts, I think on Slide 7, it says contracts inflation linked by '22 with effects in '24. Could you just explain that to us, when does the actual inflation kick a drop into the actual revenue -- the actual price itself. I'm just a bit confused by the end of '22 and effects in '24. Could you just explain the implementation of the contracts?
David, to be clear, what will happen by the end of this year, we will apply in the contract of the new customer the inclusion of a specific clause to recover the inflation. It will happen both on consumer and on enterprise segment. What we'll do on the existing customer base is that we will price up on the consumer during the year, based also on the duration of the contract, because changes in the close mainly on the fixed, for example, could mean a possibility by the customer to cancel the contract. I don't have to remember to you that mobile is based on prepaid, where you have no commitment in terms of time frame of the contract. And so Andrea is already working on a progressively price up of the customer base based on a CVM approach and you have seen that we are able to price up reducing the level of drawback in terms of churn.
When we discuss about fixed on the consumer, the customer have usually 1 year contract obligation. If you change some specific clause they have a right for cancellation. So the idea is that we put the close, starting from the end of 2022 by the end of 2022 because if you do that at the beginning of 2023, what will happen is that, you have to change based on the inflation of 2023. And we know that we hope that the inflation in Europe, it will be not something like South America. On the remaining customer base, Andrea is already planning to price up the customer base based on targeting -- in a targeted way to avoid an issue. But price is important, is also to remember that we are not moving only on the inflation.
We are moving toward a more rational market. I don't have to remember that the price of TIM in August 2021 for the fixed was EUR 19.90 for the FTTH with also the content. Now we have increased the price to EUR 29.90, and we are no more advertising this offer. We are advertising the 10 gigabit offer, because we want to stress that as a market leader, we are driving a process to increase the level of price. And also with this increase, Italy continue to be one of the country with the lowest price for fixed and mobile. Our move is a move that is important because set the market trend. And if you remember, David, we were discussing a few months ago, not 2 years ago, about the fact that could be true that the market in Italy could follow a more rational approach, and it is happening, okay?
On the enterprise segment, what will happen is that, again, in the new contract, let's remember that on the Enterprise segment, usually, we sign contracts for 3, 5 or 7 years. So it's quite normal that now we will include in this kind of contract inflation. On the customer base, we'll follow 2 different approach, public administration and private, because the public administration, there are some public bid on which we have less leverage, and we are discussing to include in the new bidding, the inclusion of the inflation rate. On the private, it will be a leverage to try to increase our portfolio of services, what I mean. Sometimes for us, it's much better to convince our customer and TIM Enterprise to avoid the increase on the connectivity in terms of inflation and by further new services that are really important for our strategy on TIM Enterprise. I have that I was clear, David. If not, please.
Next question comes from Mr. Fabio Pavan of Mediobanca.
I'll try to lead to move to 3 questions. First one is a follow-up on the market evolution. So let's say on the business. How the other part [indiscernible], do you think there was follow on the intention to link contract inflation. Just to mention one. Second point...
Fabio, sorry to interrupt you. Can you go more slowly because you are unable to catch you?
Okay. Let's start from scratch. On the operation from the business, how other players are behaving in this market? Do you think they will follow your move on in CPI link? Do you think they are becoming more rational as well also in the low-end part of the market mainly? On mobile, I think is something is already moving. Second question, if I may, is on the enterprise business on the cloud. There has been a very good acceleration and is becoming relevant for enterprise. So my question is, are we talking about new clients or replacing for our new business offer to existing client base? And then the third one, again for you, Pietro, 5G becoming clear part of the strategy in Brazil, as also shown by your presentation, it seems so far you are not mentioning 5G and when talking about Italy, in my understanding, this could fit very well with a volume value strategy with your strategy. So why is that still too early? Is something that you may elaborate in the future?
Okay, Fabio. For sure, I cannot put myself in the shoes of the other player. But I think that more or less everybody will follow because the inflation, the pressure on the cost base that we have is common to everybody. So it's quite difficult to continue to compete in the market without that. And mainly on the fixed, our proposal to put inflation on the wholesale price will be another, let me say, pressure towards everybody, also with TIM, because in replicability, we use our wholesale price to increase price.
So if everybody stay rational, everybody will do that. Why I trust the fact that it will be rational because if you see what's happened in the last 3 months in terms of new offer, everybody increased price. Just to give you an idea and I don't want to scare anyone. We did a stupid calculation based on the official number that were released by DoCoMo by the other -- all the players. If you look at the trend of the revenues of all the industry, the sum of the part, the trend of CapEx in terms of level of CapEx and the trend of EBITDA, the risk is that in 2024, the Italian telco industry would be EBITDA minus CapEx negative if they continue with this trend.
So due to the fact that none of our companies is a charity institution, everybody must be back to rationality. But again, this is exactly what I was stating there some months ago, and this is what's happening. I cannot assure that it will continue like that, but at least there are real signs of rationality.
Moving to the enterprise, your second question, what's happened is that, as I always stated, we have already 20% of our customer base that buy from us all the services, connectivity, cloud and cybersecurity. What is happening is that, the cloud is something that we are adding in our portfolio. And we think that our main leverage is the fact that we will offer to all our customers a turnkey solution. If you buy separately, connectivity, cloud and cybersecurity and you buy from 3 different players, you will keep the headache to understand where the problem is. While if you choose us, you can do that. In any case, one of the trigger for this acceleration is the public administration. I think that the move towards the National Strategic Hub is becoming a clear indication to the public administration to move towards this more future-proof technology. And for us, it will be an important element in terms of growth. We are not showing already all these elements, but I think that we'll have a good surprise in the next 2, 3 years.
And if I may, sorry about the enterprise, when we presented at the Capital Market Day, our number, one of the main question was, how can you perform better than the market? Today, we are performing better than the market. We are growing at a pace rate that is higher than the market. Are you able to sustain the decrease of connectivity that is happening in Europe? In some way, whatever is to be lost was already lost. It doesn't mean that connectivity will be flatter, but it will happen that we will be able compared to other player in Europe to keep the level of connectivity at a more sustainable trend. And what we are doing is, we are moving all the licenses to the cloud. Let's remember, Elio and the team don't have to be to work as an evangelist explaining why the cloud is important. All the main hyperscaler, Microsoft, Oracle, so on and so forth, are moving all their solution from on-premise to cloud. So we have to go there and be ready when they will explain to all these big customers, they have to move in the cloud that we will be there with our connectivity, our security system, but with our cloud.
This question, 5G, if I may, 5 years ago, Italy was telling that we are the first country to move towards the 5G. The choice was increased at maximum level, the level of frequency cost, and let's see, if the player will have enough money to invest, because it's very difficult today to define how we can materialize advantages from 5G. Today, on the consumer side, 5G is a technology, more efficient than 4G, but is not a lever to increase the level of revenues on the consumer. Brazil did a complete different choice in terms of industrial policy. The price for frequencies was very cheap, was among the lowest in the world. But with the commitment, I was there to negotiate with the Brazilian government this issue, this element, a commitment to build a 5G network. So compared to Italy, what's happened? Low cost of frequencies, but a strong commitment to build a 5G network on the Release 16 that is the standalone one that is much more performance than the traditional one.
So now what's happened is that, we will start to work on the 5G. But it's important to remember, we have to work mainly on the segment of Elio on the enterprise one because 5G is a technology that is very important for the B2B2C business model. For the B2C, we have to find a way to monetize better 5G. So now we are not in hurry to invest and build that as fast as possible a 5G network, and we have to evaluate also to build a new network could be driven also by some network sharing agreement. Italy is not a country that can sustain 5 different mobile networks. This is a further statement that allow me to say that, I think that in Italy, in the following years, there will be in any case of market repair that could be, at network level, in terms of network sharing or at company level.
I hope that, Fabio, I was clear enough.
Next question comes from Mr. Luigi Minerva of HSBC.
Thanks for taking my 2 questions. The first one is on the single network. I'm sorry if I diverted the attention from the good results to talk about the soap opera. But I wanted to ask essentially the government -- the new government seems to have different views about how to achieve the single network. So how do we reconcile what the government seems to be willing to achieve with your Plan A? And perhaps related to this, I get -- I noticed the update on the MOU and the lack of exclusivity to CDP. But I'm wondering whether this lack of exclusivity just theoretical aspect because eventually, any deal on the NetCo would have to be approved by the government as part of the Golden Power and clearly the government and CDP are aligned?
The second question is on towers, and it's more a strategic one on ownership, because obviously the management team now finds itself in a situation where there is no longer control on towers in Italy. And I'm wondering, what does it, what do you think about this, whether you are comfortable not owning the towers? And particularly, if you think about the MSA that regulate the relationship between PI and INWIT, whether you are satisfied with the current MSA or you see a room for improvement given that the environment has changed with higher inflation?
Thank you, Luigi. Don't worry for the correction. I love Brazil. So you shouldn't call soap opera. You should call telenovela. But again, I'm joking also because we have to distress all this focus on something that is proceeding in a rational way. So what is happening? I really apologize, but I cannot answer in the name of the Italian government. I'm ambitious, I would like to be a Prime Minister, but today, I'm the CEO of a company listed to the stock exchange. So I can tell whatever happened inside my environment. So on this area, what is happening is that we prorogate the MOU with CDP. If you were in our shoes, titles of prorogation and exclusivity yes or exclusivity no. I'm creating issue to our company if I don't prorogate the exclusivity. I don't think so.
I don't think that no one of my shareholder will claim for the fact that they didn't leave 30 days of exclusivity to Cassa Depositi e Prestiti and the deal with Cassa Depositi e Prestiti in our view from a matter of mathematics continue to be the best choice in terms of industrial synergies. In the meantime, having no exclusivity in these 30 days, I agree with you, it's impossible that they send any kind of agreement in 30 days, but leave us also the opportunity to understand if there are other interest, what could be the interest, the possible value so on and so forth. So we are not changing our mind and our plan. The North Pole is to find an agreement at the value that could make sense for all my shareholders with Cassa Depositi e Prestiti. We have the prorogation until the 30 of November. And the non-exclusivity is not an issue or a change of our approach in this kind of negotiation.
When we talk about towers and 2 things, the first one, are we happy with the MSA? I'm not happy with any contract that we have in our company, but not because of that, but we have a lot of challenges. And as I told, every day to my team, we have to wake up in the morning thinking if we did the right things the night before. This is the only way to improve our number. And I think that with this culture, we are showing that we are on the right path to improve our number. If you want to discuss about the strategic view team, but also a lot of other players, perhaps didn't do the right choice several years ago. If we had the towers still today, you know what should be done, what we are doing now, delayering. The tower business is something that is different from the retail. I cannot at the same time put one person to manage an infrastructure business, a retail business and wholesale business and all these kind of things. And this is one of the reasons for which we move toward our plan of delayering, our complete different business model.
But again, we weren't the only one to do that. More or less all the telco did that. About the MSA, we have to sit every year to discuss with INWIT that today is also a partner. We don't have any kind of litigation. They are always open to discuss with us what they can do to improve our numbers. And this is the way which we proceed. I hope that there was enough clear reason.
Next question comes from Mr. Sam McHugh of BNP.
Just 2 questions, please. The first one on the Enterprise business, I think you talked about 9% service revenue growth year-to-date. And if you could just unpack that growth between how much is coming from acquisitions? How much is coming from core energy pass-through you mentioned? And then how much of it is internal revenue? So just charged to other parts of the group? And...
Sam, sorry, again, we had again some issue. Can you repeat, please? Because we were able to understand. Sorry.
Yes. I'll say slowly, I was probably [indiscernible]. On the slide, you talked about 9% service revenue growth in enterprise I just wanted to ask you how -- if you could think about how that growth was built up, what is the contribution from M&A? What is the contribution from the energy costs being pass-through in base centers? And how much of that growth is being driven by internal pass-through revenues to other parts of the PA Group, so if your consumer on NetCo utilizing some of the enterprise services. And then on energy costs, you talked about the 75% hedged for next year. I wonder if you could just give us a bit more color around kind of the pricing of those hedges kind of as you think about what the euro million up in energy costs for next year, like there could be any kind of color there would be really helpful.
So we will try to repeat what we understood because, sorry, the line was very bad. So you asked more details about on energy, try to understand, which is the value at which we are buying energy and we are forecasting to buy energy for 2023? Some more detail about the so-called pass-through towards the other player that is not an M&A. And then some more details about our trend on the revenues of TIM enterprise, where there is no M&A. Is this the question, sorry?
Yes. It pretty much kind of the revenue growth in enterprise, how much is energy pass-through, how much is that of M&A? I think you got that.
Okay. So I leave Adrian to talk about the energy, but what is important, I think you asked the right question, whether -- from other players that say that they have hedged much more than us, but it's not a matter of how much do you hedge. The main issue is at which price, for example, when we talk about 75%, 50% of the 75% is at a value that is close to EUR 120, EUR 110. So a real low price. Then there is a percentage that is 15%, that is a pass-through towards the other player because it's important to remember that we have the co-location toward the other OLO, other license operator and the consumption of energy of this part is at that has no impact on our EBITDA because it's completely passed through. But again, Adrian, I don't know if.
No, I think that's pretty much the -- in order to understand 2023 and what happened in 2022, the main thing is that these hedge positions were closed before the war started. So it was at the previous prices for energy of December, January and February, because as Pietro was mentioning, it's not being fully hedged the intention. The intention is to cover in terms of prices. So this is the situation for the 50% of hedge for next year in terms of energy cost. We have -- we've done an additional 10%, 12% of hedging these past weeks, where prices were going down. And then we have 15% of the energy consumption that is pursue for the other operators in terms of co-location that is a kind of natural hedge for this position. So what we are working on is in terms of be conscious of the cost of 2023, we will give much more information when we present the plan. But definitely, it's something that is under management.
Sam, and then I leave the stage to Elio to give some more colors about the trend of the revenues. But it's important to start to think that -- the business model of TIM Enterprise is completely different from the business model of the consumer. Now we have to wait to give you an idea about what we have already signed in terms of contract that will guarantee us a trend of revenues because this is something that we control in a maniacal way because it's the most important element of TIM Enterprise and the mix of the revenue and the control of the cost of each line of revenues is one of the main target that I gave to Elio. Elio, please?
Thank you, Pietro. Thanks for the question. So just to make a quick recap on revenues, so we are steadily growing revenues quarter-over-quarter when comparing to last year. I'll give you just a quick snapshot on the main numbers. So in quarter 1, we did the EUR 667 million versus EUR 625 million in quarter 2 EUR 702 million versus EUR 670 million and in quarter 3, EUR 681 million versus EUR 654 million. Now when you put together the 9 months, revenues are growing mainly by services, where the difference between 2022 and 2021 is EUR 137 million, only by services, mainly driven by cloud and cybersecurity, where we are accelerating most of the business. There is no M&A. This is an organic growth because we are concentrating all the efforts and all the energies on switching customers to cloud, as Pietro mentioned before. And on the energy for what it may concern enterprise, we registered only the incremental cost of EUR 50 million year-to-date, and this is mainly driven by gas in connection to the users of data centers. Hope that picture looks...
And just to clarify another point, in this number of TIM Enterprise, we consolidated all the different companies, so [indiscernible] so on and so forth. So this is a trend that is towards over the market. So compared to some number in the past when we are looking at [indiscernible] on a standalone basis, where the revenues of [indiscernible] were composed from a component towards the external market as something towards the captive market. Here, all the captive market doesn't exist anymore because there is a consolidation. So it sort growth outside the company. I hope that we answered to Sam. I want to come back just -- thank you, Sam.
I want to come back just for a second to the question of David, because I understood better from my colleagues, the question related to the contract. What's happened is that once we sign a contract in December, CP linked, we have to wait 1 year and after the 1 year, we can adjust based on the inflation. We cannot change the day after. Why we want to do everything by the end of 2022 because the reference point is also the inflation that we had during 2022. And we reduced the impact because the inflation will go down. While on the customer base, we will recover the inflation through the price up. The further question could be, so you will have only a marginal part of the customer base in this way. It's important to remember that we have also a lot of customer in our customer base that usually buy also new services. So what we'll do? Every time we'll sell a new service on the customer base will exploit the opportunity to change the closes without give them the possibility to cancel the existing contract. I hope that now it's more clear. But if not, David, you can meet in Barcelona, and I'll be able to give more color.
Next question comes from Mr. James Ratzer of New Street Research.
I have 2 questions, please. So the first one, Pietro, could you just please give us an update if there is one to be given on the enterprise sales in quite a few stories in the press around that. So I'd just love to hear the latest on that situation. Secondly, I think EBITDA consensus for this year for domestic EBITDA is at EUR 3.54 billion. That would imply fourth quarter EBITDA of only EUR 700 million. I mean, is that too low? I mean that would imply almost 70% decline in the fourth quarter, yet I think you were mentioning the clean underlying decline in the third quarter is only about when you adjust for some of the employee account too. So does that not look a little bit conservative at the moment? And then finally, just love to go back to the fixed trends around ARPU because although you talk about value over volume, it does look if I strip out ICT business with your wireline fixed ARPU is still coming down around 10% year-on-year. So does seem to still be ongoing pricing pressure on the wireline side. So it be great to hear what's driving that and how that trend could evolve over the next few quarters?
Thank you, James. About Enterprise, if you remember, when we -- the 7 of July, we talk about our delayering plan. We spoke about the important milestone to start to transform the internal business unit in a firm -- in a company. And this is what was approved by the Board yesterday. That is for sure the free step of further process because we always mention that we want to keep the optionality to sell a minority stake. And remember, a minority stake because we strongly believe that TIM Enterprise, it's a real good business if we need it. Based also on the experience, we think that the eventual negotiation of a sale of a minority stake cannot be treated as I use the world of [indiscernible]. So popular or the word of [indiscernible] telenovela and we have to disclose on the press or work on legs. So what we want to state is that, we are working on our Capital Market Day plan that had clear milestone and the process to transform the different business units in a separate company and to be treat and work to have the optionality to sell a minority stake of TIM Enterprise. Again, a minority one. And this is what we are doing.
Related to the second question, you help me a lot. So I don't have to declare anything due to fact that we don't foresee any kind of issue in terms of business trends for the fourth quarter, your math is better than mine. So you did the right calculation, okay? So and this is what we told also in the last call to the market. We are optimistic and always if I follow your math, it's quite possible that also 2023, 2024, if you do the calculation about our guidance and the result of the 2022 could have some improved, but this is not the guidance. We will release our guidance in February to the market.
You asked also a question about the cost of labor?
ARPU?
So I know about the ARPU. It's clear that our strategy from volume to value have to work also on a time line because, for example, now we released a new offer of 10 gig at close to EUR 40, so program. But about the calculation, you have to remember that -- and I think that this is something that I tried to explain also in the call of March 2022.
In the past, our offer on the ultra-broadband was made by 2 components, a kind of installation fee contribution and the monthly fee. This is something that doesn't appear on the bill of our customer, on the bill of our customer. And on our cash trend, we have reached customers EUR 29.90 per month. But the win which was built the offer was a contribution upfront that was close to EUR 80, EUR 100 -- sorry, EUR 200 and price per month of EUR 24.
Due to the fact that we didn't -- we discontinued in some way this procedure because -- and we are reducing everything to an installation fee that is much lower, what is happening that this is impacting the trend of the ARPU. What will happen is that by math, starting from the third quarter 2023, when we start to have the end of the free software that was built in this way, you will start to see an increase of the ARPU by math. I'm always transparent because I don't want to give any kind of surprise to the market.
So I'm telling you already what you will experience in the third quarter 2023. I understand that it's not easy to explain this detail. And in any case, we are more than open with our IR to give you the details and to show in some chart all these elements.
Okay. That's great. I will follow-up with that. Again, I mean more you can disclose on that in future quarters, I think, would be helpful.
Next question comes from Mr. Carl Murdock-Smith of Berenberg.
I just wanted to ask on restructuring costs. Over the first 9 months, I think you've spent over GBP 0.5 billion – EUR 0.5 billion on restructuring costs. Can you just provide a bit more detail on those maths and guidance in terms of what level of restructuring costs should we expect going forward?
I'll leave Adrian to give some more details. But the main element is related to the cost of labor because if you remember, when we send the contract -- sorry, the content, the agreement with the unions we pushed an acceleration about every retirement of 5 or 7 year. The number that you see are not cash items but again, it allows us, and this is the amount of money that we are putting in the plan to facilitate the process of very retirement of our colleagues for the next years. Adrian?
Again, that's pretty much it. It's the cost of the restructuring for the exit of this year and next year. It's basically a non-cash item, and this will allow us to reduce in the future by 40% the cost of these exits. So this is the agreement that we signed in August that was very positive even in this context. And it's similar to what we did last year, but in this case, with probably a higher return.
That was our last question. The conference is now over. Thank you for calling.