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

Okay. Good afternoon, everybody. I think we're ready for the next presentation. My name is Emmet Kelly. I am the Head of the telecoms research team based in London in the UK. And I'd like to say a big hello to everybody joining us in New York this morning, in the United States, North America, and also to some of our colleagues here in Europe as well. So I'm here this morning. And before I kick off, I would like to read out a disclaimer, please. So please note that this webcast is for Morgan Stanley's clients and appropriate Morgan Stanley employees only. This webcast is not from members of the press. If you are a member of the press, please disconnect and reach out separately. For important disclosures, please see the Morgan Stanley Research disclaimer website at morganstanley.com/researchdisclosures. If you have any questions, please reach out to your Morgan Stanley sales representative. So with that formality out of the way, I'd like to move on to our next presentation this morning. And I am delighted to introduce Cellnex this morning. And before I open up the Q&A, I'd just like to say a few words about Cellnex for those of you that are not familiar with the company. So Cellnex is a Spanish towers and infrastructure company. The company is listed in Madrid in Spain. The company is headquartered in Barcelona in the Northeast of Spain in Catalonia. Cellnex is one of the most exciting growth stories we have in Europe, not just in the TMT sector, but across the euro stocks indices. Looking back over the last few years, Cellnex's market cap has increased from EUR 3 billion in 2015 to over EUR 26 billion at present. The company, as I mentioned, is based in Spain, but it does have operations across 9 European geographies. The company has got revenues of EUR 2.2 billion, I estimate, in 2012 with EBITDA of EUR 1.6 billion. I know some of you, especially in New York, will be very aware and know the American tower industry very well. You've clearly got 3 American tower companies, AMT, SBA Communications and Crown Castle. I think it's fair to say that Cellnex is the European equivalent. We can almost call it European tower. So on that note, and on the back of that introduction, I'm delighted to welcome my co-presenter this afternoon, who is Oscar Pallarols, who's the Global Commercial Director at Cellnex. And he's joining us on video this morning from Barcelona. So very good afternoon to you, Oscar, and thank you very much for joining us.

Thank you. Thank you, and a good afternoon. Good afternoon to all the audience. So nice to be here, a pleasure. And let me know that -- let me tell you, Emmet, that you make a perfect presentation of our company. So fully, fully agree on your introduction.

Good. Well, thank you, Oscar. And I'll just kick off with the Q&A, if I may. I think we have roughly 25 minutes. So I have roughly 8 or 9 questions. So hopefully, we can get through these as quickly as we can. As you know, the subject of the conference today is life after COVID. So we'll try and kind of stick to that theme as closely as possible, but clearly, there's also a bigger picture to tell as well. So the first thing I'd just like to ask you about, Oscar, is just 2020. It's been a very, very eventful year for Cellnex with expansion into a number of new geographic markets. And there's also been a very active year on the financial market for Cellnex as well. Can you maybe talk a little bit about some of the key milestones for Cellnex through 2020, please?

Yes. It's been it's been a good year for the company, although the dramatic situation we are all living with the COVID situation, but at the end, we've got new countries. We are mostly -- we are concentrated, focused on Europe. We are still thinking there is lot of opportunity in Europe. And over this 2020, we came in different countries, for instance, like Portugal, and in the time of about 4 months, we've got already 2 anchor tenants in Portugal. So we acquired 2 different asset portfolio from different MNOs and integrated into -- in our sites into that country. Recently, we came into Poland. That is a new, 3 or 4 weeks ago. So it seems, for us, the opportunity is still large, important in Europe. And we are mostly focused in the European context. So it's been a really good year. And you also mentioned the financial market. We made a capital increase on summer with a very good reaction from the market of EUR 4 billion. So we've got, let's say, the firepower to continue with this expansion in that sense.

Super. Okay. Thank you, Oscar. Sticking with the 2020 theme, clearly, 2020 has been defined by the COVID crisis. And I guess, what's interesting from my perspective as a telecom analyst, a number of industries have seen volumes crash quite hard, whether it's the airlines, whether it's hotel, leisure and entertainment. But the sector I follow, which is telecoms, has seen very big increases in volumes. And that's really not surprising. We're connecting right now through a video call linking with New York. We've got a lot of people working from home, some homes with 2 people working from home. I had 3 kids that were e-schooling for quite some time back in March, April and June. And I have to confess, it was a bit of a living nightmare. And I'm delighted they are back at school now, but they were e-schooling for quite some time. And then of course, we've had entertainment needs in the evenings as well because of lockdown. People weren't able to go out. So we've had exploding volumes. What have these exploding volumes meant for Cellnex? And what sort of trends have you seen on the back of the volume growth in the telco industry?

It's been clear that connectivity services have been crucial to keep level of activity in most of the sectors except for those which have been really impacted, like retail, restaurants and so on. But in any case, connectivity, it's been crucial. Our activity is being defined as essential service. That means that we've been able to keep that performance of the network with the different SLAs and, of course, a matter of service availability. So in that sense, I think all this industry, I would say, at least in Europe, it's been really top performing and devoted to keep the infrastructure up and running to make all these connections possible. We've seen nice trends in terms of data increase. So we talk about average, and I'm talking not only on the mobile piece, but also on the fiber piece, we are also managing fiber in some of our countries. I would say as a -- let's say, average in Europe that the traffic increase, it's been between the 50% and 70% compared to any situation before the COVID. That was something interesting because at the time the lockdown was announced, most of the countries took or make a little decrease for the next 2 weeks into the lockdown to immediately ramp up. So probably people was taking the culture to connect from home, maybe not the tools, maybe not the laptop, maybe. So that decrease happened in any country. And now we don't see this is going to be, at some point, the levels we had before. This will remain. And now when we look at the data traffic, there is no such difference between a working day, Monday to Friday, or a weekend. So I mean, people now, it's probably connected at home. They are working over the weekend. They are entertaining at night on the working days. So it's a more, let's say, regular data consumption any day in the week. So that's a trend. And that's been clearly separated with fiber and mobile access, mostly fiber in some countries, but not only. And this is a situation. We don't expect these numbers to decrease because it has set a kind of culture, habits to use these technologies, and this will remain for sure.

Super. Okay. Thanks, Oscar. When I look at this volume growth and I look at the backdrop of the company, as I mentioned at the beginning, you started your business in Spain as a spin-off from Abertis. You then expanded into Italy in 2015. You've done a number of transactions in France, the Netherlands, U.K. You mentioned that this year, you have entered Poland and you've also entered Portugal. Obviously, you've also entered the Irish market last year, which is obviously very close to my heart. Can you maybe say a few words about the PoPs growth that you have? So you had, I think, 5% PoPs growth when you announced your results last week. Can you maybe say where you're seeing particularly strong PoP growth? And maybe which markets we should be most excited about for the future?

Okay. We have -- yes, we have -- this is our average PoP growth. And for instance, starting with Ireland, as you said, although we are, let's say, small in Ireland, but in Ireland is a good example of a country which is making a good densification exercise. That means mostly for everyone to understand in the video, that means increasing the density of the cell towers to improve the coverage or sometimes the capacity. So maybe you can get the capacity but -- sorry, you can get the coverage, but you don't get capacity not because too many people is connected. So this is a clear example. Geographies where there is a very clear deployment of densification, which is increasing the number of sites or maybe the number of tenants into the existing ones. That's the concept. So Ireland, it's a good example of densification. And densification, it's not only talking about the urban. So most of the population is concentrated in the urban context, but also semi-urban and progressively in the rural world. So this is one example. Another example is, for instance, Italy. In Italy, we've got a really nice growth also. There were some reasons why, because at that time, when Iliad came into that market, they decided to leverage in the short-term on Wind Tre facilities. But later on, they decide to extend its position into the market by increasing or even developing themselves with the build-to-suit programs, those assets. So this is, generally speaking, a situation where the MNOs are getting positions in terms of capacity and coverage, and there is still a debate that we can discuss later about the ruralization, where there's very low population in terms of absolute numbers. But it's relevant just to provide connectivity anywhere in a territory, in a country.

And just sticking with that subject, maybe just for 1 second, Oscar. Can you maybe talk a little bit about France? Because I think this is a market that's seeing very good PoP growth driven by both Iliad. You've got Bouygues as well. And I believe the French regulator is quite keen for operators to expand their footprints in that market.

Yes. You said -- France is a very nice story in the Cellnex portfolio. I mean, this is a country where we came in, I think, it was 2.5 years ago, roughly, and we started with Bouygues. It was the kind of preliminary testing of the relationship with Bouygues. And that relationship growth immediately with a very full commitment from both parties. But last year, we had the chance to get second anchor tenant, which was Iliad, in a transaction that was involved in not only France but Switzerland and Italy. And this is a clear example that we are just keeping, let's say, 2 anchor portfolios in a very transparent way and keeping, let's say, the transparency amongst them and even share insights amongst them. So that's -- as a principle, this is the principle of our business. So having one asset and trying to get as much as PoPs, MNOs onboard for this idea that we are sharing, splitting any kind of cost and the cost of ownership. So France is a clear example with a very interesting build-to-suit programs, too. And we are balancing between what we say, the organic growth, increasing PoPs because we have the available assets and the platform already created. But on the other side, we are building the new ones just to cover those expectations from both anchors. So it's a nice story. And of course, I'm talking about 2, but there are 4 MNOs in France. So the other 2 can get also the benefit of these new deployments, just getting onboard on designs. So that's the approach.

Okay. Super. Moving on to one of the other big themes of COVID, and it's a theme that's definitely going to be explored post-COVID is the digital divide. This has become a very big theme in Europe. Now I'm lucky sitting here in Wimbledon in Southwest London. I've got very good mobile coverage, and I also have good fixed-line coverage. I know Oscar, you're sitting in Barcelona, obviously densely populated city. You've got good coverage. However, if I was, I'm going to say, living in the Western part of Surrey or living in certain parts of Kent or in Cambridge, I might struggle to connect to the web. And this has been a big problem for people throughout COVID. They weren't able to work from home, their kids weren't able to do e-schooling, and they weren't able to watch Netflix in the evening. It seems like this is going to be a theme that's going to be revisited in life post-COVID. Can you maybe say a few words about what the digital divide means for Cellnex? And how Cellnex is aiming to bridge this digital divide for its customers?

So you perfectly described this digital divide situation. So this is a situation that probably, from the market point of view, when we think about these areas, there is not enough population to promote this pure approach based on business and returns of any investment. So this is something that the administration is quite aware. You know that now in Europe with the European Commission and the recovery in Brazilian plants, they are looking to provide -- to give grants just to make all these rural deployments. Rural deployments will not -- will be only possible under a sharing approach. Otherwise, there's no way to manage those infrastructures with so low level of business. From our point of view, that's important because part of the increase of these build-to-suit programs are going, I wouldn't say they're pure rural, so very remote areas with very few population. But this is moving. I would say that we are moving from a population coverage paradigm to territory coverage paradigm somehow. And this is already happening. And broadband is becoming a kind of utility. I'm not saying like water, but this is happening because it's already considered this universal service. So here, opportunities, yes, also with the European funding, so create the consortium by country to extend a full share network for those locations. But also other things are happening into this industry. I mean, technology-wise, you can now provide 2 MNOs signal using the same box. I mean, the RAN sharing approaches, so technologies promoting also to share the elements and to make things more efficient and cost less. And of course, special policies that are happening country-by-country just to promote this, sometimes related to the auctions of the 5G spectrum that the MNOs are forced to commit covering specific areas, some others with specific plans to, let's say, to manage this market failure that exists. So for us, this is something which is one of our growth vector to deploy new sites in areas where we're not expected to be some years ago. And now it is a kind of universal service.

Okay. That makes sense. Thinking a little bit about some of the things you just said there. You mentioned build-to-suit. And when I look at some of the contracts that Cellnex has signed recently, you're buying towers of operators, but you're also agreeing to build new towers and new sites for operators. So I look at the Iliad's sold contract, which you mentioned in France, Italy, Switzerland. From memory, I think you were buying roughly 10,000 sites, and you agreed to build an additional 4,000 sites. That's just one example. Can you maybe talk a little bit about why operators want to do build-to-suit? And what contracts you have already won?

So build-to-suit is an interesting approach to that business from our side, and we've got open doors from the MNOs mostly because our approach -- Cellnex approach is not only financial, I mean splitting costs and sharing costs amongst the different tenants, but also an industrial one. And into this industrial component, taking the responsibility to make the deployments that they expect for the expansion of their network, it's crucial. So committing on those deployments -- those build-to-suit programs into their global M&A transactions, this is part of the, let's say, of our regular practice. Yes, we started. We started it in France and then it's been extended other countries. One example which is very nice is that we came into Poland mostly because of our customer. So Iliad was to acquire Play and Iliad suggested, "Okay, why don't we do the carve-out of the infra, and you will be there. And as I have aggressive and very optimistic plans in Poland. I would like you also to extend that network." And that's why the build-to-suite program appeared. So this is important. Of course, at the time that you have a build-to-suit program, you get at least of your anchor, but you extend your platform to sell other PoPs to the other MNOs. So the importance here mostly is to have a build-to-suit plans that they don't cannibalize in between them, whether they can be complementary. At the time that this happens, much more synergies are, let's say, push attracted into the market, globally speaking. And this is part of this industrial approach.