Cellnex Telecom, S.A. (CLNX) Earnings Call Transcript & Summary

Good morning, everyone, in the U.S. and good afternoon to everyone in Europe. My name is Andrew Lee. I head up the telco team at Goldman. And it gives us great pleasure to start off the European telco part of our fireside chat program at Communacopia with Cellnex and specifically, Tobias Martinez, the CEO of Cellnex. Tobias, thanks very much for joining us.

Thanks, Andrew, and good morning, everyone, from Europe from Barcelona.

So the plan of the next 40-or-so minutes will be -- I'm going to go through some questions starting with some inorganic questions because we're going to try and not to tease you on that one and then move on to some organic growth questions as well. [Operator Instructions]

Let's get on with things. So Tobias, again, thanks for joining us. It's a few weeks since you raised EUR 4 billion in equity. That was higher than expected. And I wondered if you could just start the conversation rolling by just talking about why you decided to go for such a large raise in one go.

Well, in fact -- thank you, Andrew. In fact, we are doing the same we did in the last year but just in one go. If you look at the firepower, the ability to execute M&A transactions, we were talking about of a pipeline weighted of EUR 11 billion, roughly speaking, for a period of 12, 18 months from August. First of all, I have to say that we have very strong support of our existing shareholder base, which is fantastic. I have to say thank you very much for this support, for this clear message of confidence because the take-up has been almost or around 99%, which is, I think, very relevant. Again, if you look at the European market, even though Europe is not a single market, maybe we can talk about of 500,000 sites, including the new 5G sites acquired in the next coming years, which is huge. I mean, it's larger than the U.S.-based sites. But if you look at the outsourcing, market share is just about 30%, which is about 150,000. And therefore, we are facing in Europe a great opportunity of growth for the next year from now, I mean, no less than 5 to 7 years from now. And this is the reason why we want to grow. We want to keep going on the execution of our strategy but growing, keeping the same rating we have today, which is very important for the Board, which is very important for the management, which is important for the company. I mean, growing, let me say, in a healthy way. Today, we have had a very good view from Standard & Poor's, reconfirming the rating -- the corporate rating of Cellnex. I mean growing is very important in our business plan, but also according, let me say, with our financial discipline and with our financial commitment with the investors.

Thank you. That's a really helpful overview. We'll come on to the kind of opportunities out there in a moment. I just wanted to ask a couple of questions around your capacity for deals. So if we include credit facilities and cash on the balance sheet that you now have, how much firepower do you have to do deals? Is EUR 11 billion -- the deal pipeline that you laid out, is that the amount of firepower you have? Or do you think you could actually do more than that, given where your balance sheet is at the moment?

No. The firepower is about EUR 11 billion. This is confirmed by the credit ratings, which is very important and we already have EUR 4 billion of the recent capital increase with additional, if I am not wrong, EUR 2 billion in credit lines, plus EUR 1 billion in cash. It means roughly speaking, EUR 7 billion. It means that in the next coming months, we should issue additional new debt. But this would be according with the M&A execution. I mean, we are not in a rush to launch and to issue new debt. And this is the positioning in terms of liquidity, but in terms of firepower as well. So currently, we have in cash plus credit lines, roughly speaking, EUR 7 billion and the capacity to add additional EUR 4 billion through new debt.

Just on that specific point, how cheaply do you think you can issue new debt? Is the historical rate at which you've raised debt a good guide for what you can do over the coming months?

Well, we do expect at least the same cost in [ debt issued ]. I mean, why? Because the last S&P research is -- well, it's qualification of the business risk profile of Cellnex is improving to excellent, which is a fantastic view for the company because it's allowing us some headroom in order to go ahead with the execution plan of the company. I mean, being a business risk profile of having an excellent business profile, it's giving us a little bit of more than EUR 1 billion of additional headroom with the same balance sheet structure.

That's helpful. I wonder if you could just give us an update, that there were some comments on your analyst call post the EUR 4 billion raise of adjusted thinking on what your net debt-to-EBITDA ceiling could be. So it's currently 6.5x. And you mentioned, I think, that you could go to 7x. What are the -- what has to happen for you to be able to raise that net debt-to-EBITDA ceiling?

Well, the current business risk profile of the company allows the company at least to reach up to 7x net debt-to-EBITDA ratio. Obviously, this is not the target of the company for the future. But it's a competitive advantage currently in order to compete, in order to acquire new portfolio of towers [ to begin ]. I think we are in the right path. We are executing. And therefore, we have to reach a certain moment, that 7x net debt-to-EBITDA, we could do it, which is very important. We can do it. But you know that when we are reaching this peak of net debt-to-EBITDA, we are always trying to recharge our capacity to reset, if I may say, reset our balance sheet and come back to 3x to 4x in order to face a new wave of growth. So we are facing a new wave of growth. And we are having 100% of our capacity, which means EUR 11 billion of firepower. Again, we'll see what happen in the future. Andrew, I don't know what will be the target in a regular basis. It depends of the growth. It depends on the opportunity. But if the M&A opportunities are accretive up-to-date for the benefit of our existing shareholder base, why not to keep going, why not to maintain this level of leverage. But -- well, at the end of the day, when we will enter in a maturity stage of the company, for sure, we will be in a different net debt-to-EBITDA ratio.

Yes. Okay. So let's move on to kind of to the targets there and what you can do with this firepower. So we've mentioned the EUR 11 billion deal pipeline a couple of times already. I wonder if you could just talk us through what you include in that deal pipeline. How much would you expect of that EUR 11 billion to be used for the purchase of existing towers, i.e., M&A? And how much of that EUR 11 billion pipeline will be used for either build-to-suit, which you typically sign with deals and also fiber backhaul? How should we think about the mix of investment?

Yes. Now, the vast majority of this EUR 11 billion will be allocated to acquire wireless infrastructure. I mean maybe it's 80%, maybe would be 90%. I don't know exactly because at the end of the day, who knows. But we are talking about 80% to 90%. The rest of this 80% would be a mix of maybe 10% of optical fiber and 10% of build-to-suit. But build-to-suit is always attached with the M&A opportunity. We are not approaching -- we are not facing build-to-suit as a single project, as a stand-alone basis. I mean it makes sense when we are discussing the MLA or the MSA with an anchor tenant. If you look at the build-to-suit programs are always attached, not just with an SBA, we are always attached with an anchor tenant. It's very unlikely that we would execute the build-to-suit program with the third parties. It's not impossible, but maybe 90% again of our build-to-suit is always attached with our anchor tenants and with an M&A transaction.

Yes, that's clear. And so what we've seen is you've done way more build-to-suit over the last year in terms of the contracts signed in fiber backhaul. So far, you've won one deal signed on fiber backhaul with Bouygues. You've mentioned in the past that it takes a bit longer to negotiate and organize fiber backhaul agreements. So should we expect the mix of how you deploy capital to change over time, i.e. should we expect fiber backhaul to be a bigger chunk in your capital deployment going forward?

Well, when we talk about optical fiber, you're right. We are talking about just pure fiber to the antenna or the interconnectivity of the passive infrastructure. We are not talking about fiber to the home. We are including also backhauling. But I think it's important always to recall that we're talking a part of the optical fiber network related with the towers or the wireless infrastructure, which is very important because 5G will require optical fiber to the tower as a must. Second important thing, generally speaking, we are not approaching optical fiber projects in a stand-alone basis. I mean, we have to find 3 conditions -- we have to fill preconditions in order to assess an opportunity like we did in France with Bouygues Telecom. First of all, the opportunity has to come from an anchor tenant, not a third party, which means that we have to get a strong long-term relationship. We -- in those cases, we are running thousands of towers on behalf of our customers. Then, we have to understand that we are partnering and we are long-term partner of our anchor tenant. Then, make a lot of sense to talk about the fiber to the antenna because the fiber to the antenna will be a must for 5G. This is the first question. The opportunity has to come from an anchor tenant. The second one is about the business model of this optical fiber to the antenna. The business model has to be the same like a tower: having an anchor tenant for 20, 30 years; having an anchor tenant in order to secure 70%, 75%, 80% of the future revenues; and third, having full freedom in order to sell to third parties. And the third condition is about the size of the investment, the exposure of Cellnex in front of the optical fiber opportunities have to be commensurated -- I mean, have to be coherent. I mean, if you are investing EUR 3 billion or EUR 4 billion in one customer acquiring the wireless infrastructure, running the build-to-suit programs, running the central offices, the metropolitan offices when you can maybe pays EUR 1 billion investment on optical fiber. So because you -- your exposure on your core business is 4x on your exposure -- in front of your exposure on optical fiber, but not in the other way around. You understand what I mean? Not acquiring or investing EUR 1 billion in towers and then EUR 4 billions in optical fiber, not at all. This is not the main purpose of this company. We are in a position to help our customers to go beyond and faster, but keeping around of the wireless infrastructure. So the wireless infrastructure remains always our core asset class.

And then in terms of that fiber backhaul opportunity, I think you've noted in the past that 80% of the Italian towers you run do not have fiber backhaul. Is that a good guide for the scope of opportunity across the rest of your tower base in -- the rest of the European tower base you're looking at?

Well, in Italy, for one customer, could be. But if the customer wants to roll out the optical fiber to the tower, we are not entering in competition with our customers. So we are executing these type of projects when the customer is asking for. In Spain, it's not the case because the vast -- one of the main part of our portfolio of tower, it's coming from Telefónica and Telefónica is delivering wholesale services to the tower, which is good, fantastic. But if some of our customers of our anchor tenants will ask for backhauling or fiber to the antenna, we are in a position to consider it. Same in Italy. Same we are doing in France or in Switzerland. It depends on -- of the customer. So if the customer asks Cellnex in order to assess seriously, we will do it. But if not, full respect, we are not duplicating the assets. I mean, we are not rolling out new optical fiber to the antenna and then competing with our existing customers in the existing assets.

Okay. One of the key questions that you've been asked all morning and that investors ask us frequently is on the competition for existing towers. And investors are clearly concerned either you won't win the deals or that you'll have to overpay for those deals. So I wondered if you could talk through the degree of competition that you're currently seeing in your negotiations for towers?

Yes. Well, obviously, after 5 years of delivering and succeeding, I think, in this European new market, obviously, the degree of competition, it's higher than just 12 or 18 months ago. But the reason why is because I think this industry, it's very attractive for financial sponsor, for other peers like Cellnex. And therefore, we are competing but we are competing with different type of opportunities, and let me elaborate a little bit more. In a nutshell, you will find -- you can find 2 different types of opportunities in the market. One is about minority asset -- or minority stakes disposals, which is not our target, which is very difficult for a strategic investor to look at minority stakes. Why? Because you cannot manage just in one hand the different portfolios in one country. You cannot extract the efficiencies, the synergies in terms of CapEx for the new build-to-suits, you cannot manage the ground lease contracts in order to reduce the existing cost, you cannot deliver fiber to the antenna because you are not owning the assets. So it is very, very difficult, and this is the reason why we are not devoting one single second minority stakes. We cannot. We cannot. Doesn't make sense. We are paying attention on majority stakes, which is the case of our last transactions because it's when we can maximize the monetization, we can maximize the value creation, when we can execute with no operational risk, thanks to our very high multiple in the stock and being in a position to work with our customers and to run the existing portfolio and to invest for the next 30 years, which is fantastic for our customers. No risk on renegotiations. We are looking in the future, working with our customers. I mean, we are investing billions and billions of euros in one customer, and we are not in a position to sell down immediately in the stock. So let me say, we are really, really partners of our customers. I'm always referring about anchor tenants. In the third parties, we are reaching also agreements in order to improve the tenancy ratio, to reduce the existing infrastructure because always it's cheaper than building in parallel an additional site just 10 meters nearby the existing infrastructure or 20 meters doesn't matter. I mean, today, it's not possible, it's not feasible to roll out duplicating the existing infrastructure. And obviously, financially speaking, it's a crazy decision. I mean, we are looking for -- well, we are seeing more cooperation even between -- among the different type of telecom operators, even on the active equipments, RAN sharing it's almost common practice today, but it's a common practice in the rural areas where the level of competition among them is lower than in the urban areas. It is, in a nutshell, obviously. But happy to manage also RAN sharing agreements. Obviously, it's not to -- we are renouncing of having 2 anchor -- 2 tenants per site, but maybe reaching 1.5, 1.6, 1.7 in a shorter period of time. It's at the end of the day, the same like 2 customers in 10 years from now. I mean, accelerating the tenancy ratio, it's always positive and it's creating value and reducing the risk. Well, this is also, again, in a nutshell, our view on the different type of projects we are facing in front of us. Some of them are not for us. So minority stakes doesn't make sense to spend any single second.