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

Good morning, everyone. My name is Juan Gaitan, Cellnex Director of Investor Relations, and I would like to thank you all for joining us today for our Q3 2022 results conference call. As always, I'm joined by our CEO, Tobias Martinez; our CFO, Jos� Manuel Aisa; and our Deputy CEO, Alex Mestre, who will lead today's session. As you have already seen in our presentation released this morning, we have made the most of the opportunity presented by our quarterly results to provide a strategic update. We will now share that my conclusions reached after this strategic review process, and then we will open the line for your questions. [Operator Instructions] And without further ado, over to you, Tobias.

Good morning, everyone. Thank you, Gaitan. Thank you so much for your time today. Let me please start this session highlighting that Cellnex acknowledges that the current environment creates a new factors to be taken into consideration in our decision-making process that we listen to the market and that we have always been rigorous in our decisions. Therefore, we would like to share today the next chapter of our equity story, which will be focused on execution and clear capital allocation framework with an unconditional commitment to investment grade. This chapter will show the following characteristics: a commitment to our financial guidance, a clear capital allocation framework with a more conservative financial risk profile, an increased focus on organic growth, both from activities that require limited CapEx as well as new greenfield growth opportunities with our clients, focus on free cash flow generation within the context of securing investment grade as the overarching priority. Any excess cash will be deployed in a manner consistent with maximizing long-term shareholder value. Our continued progress on the crystallization of efficiencies and synergies to make sure that our OpEx and lease base grows below inflation. The integration and consolidation of existing platforms as well as the maximization of the long-term relationship with our clients, an organization fit for the future, fostering a culture of innovation, talent rotation and streamline processes. And last but not least, we are presenting today a solid set of results. The period has been marked by a consistent operational and commercial execution with revenues increasing 46% compared to the same period last year. Our adjusted EBITDA, 45% and our recurring leverage free cash flow, 46%. I will now hand over to our CFO, Jose Manuel Aisa, who will provide more details on our new capital allocation framework.

Thank you, Tobias. As Tobias has already mentioned, the main highlight of this strategic update is our commitment to reaching investment-grade status. We have made unconditional commitment to maintain adjusted lever consistently below 7x with objective to become investment grade by S&P as well as to maintain our investment-grade status by Fitch. This priority will determine the amount of resources we can deploy in the future for alternative uses in a manner consistent with maximizing long-term shareholder value, shareholder distributions in the form of dividends or buybacks. And of course, greenfield projects with our clients under a strict return and payback criteria. Finally, I would like to remind you a very few important characteristics of our debt and cash flow generation profile. First of all, defining free cash flow as recurrent levered free cash flow minus BTS CapEx, minus expansion CapEx. We are expecting to become free cash flow positive from 2024. Our free cash flow generation will then accelerate as we reach the end of our current build-to-suit programs. This strong free cash flow generation will support our rapid delevering in the coming years. At Cellnex, we constantly monitor market conditions to decide the most appropriate way to tackle near-term refinancing needs, although we can always use already available undrawn credit lines. Going forward, generating cash flow will substantially exceed debt maturities. And our commitment to investment grade should allow Cellnex to access a deeper market at compelling terms. Since you already have the full presentation, I will not go through the details of the period. We remain now as you complete disposal to answer any questions you may have. So let's please open the line for the Q&A session.

Thank you, Jose Manuel. The first question comes from Sam McHugh.

I'm not going to ask you about capital allocation. I think it's super clear. Two questions, though. On lease costs, this year, you're saying they'll be below EUR 800 million. I wonder if that is just related to kind of phasing of payments on Hutch U.K. like you just not have many Hutch U.K. payments because that's a bit below consensus expectations. That's number one. And the second question is on Portugal. I noticed that the NOS BTS program hasn't actually started yet, is there any delay there? On the other side, the co-location growth is excellent. Are we seeing any contribution from Digi already? Or is the Digi contribution still yet to come?

Thank you. Thank you, Sam. On the first one, the original expected contribution from Hutch U.K. in the leases was not meaningful. So I guess that what we are seeing this quarter is basically the result of our efficiencies. I mean, all in all, you know that we have been sharing some figures with you for the full year 2022 and something that we are reiterating is that or at least clarifying this quarter is that for full year 2022 we will be paying leases below EUR 800 million.

So we want to clarify the expected impact of U.K. Hutch on the leases, it's for 6 months, it was EUR 11 million.

That's correct.

This is the impact. So obviously, I think that this is a part of the better performance, but the performance is significantly driven by the good management of the company in terms of inflation, cash advance and acquisition of lands. So in this case, the perimeter of consolidation of Hutch U.K. does not take into account a high lease component.

That's correct. So clearly Hutch U.K. plays a role, but I would say that in general, our impression is that it's mostly the result of our efficiencies put out in place. Now on Portugal, we are not really seeing a delay in the build-to-suit CapEx at least compared to our expectations. This will ramp up in due course. As you very well mentioned, the organic growth that we are seeing this quarter generated in Portugal is mostly related to Digi. That's correct. Thank you, Sam. Now the next question comes from Andrew Lee.

I am going to ask capital deployment, if you don't mind, 2 questions. Firstly, just on the timing or your anticipated timing of getting to investment grade. I think you've mentioned 2025. But I guess a few investors pointed out, does that look a bit kind of conservative. I wonder if you could talk through the kind of timing of reaching investment grade. And just when you get there, if M&A is still not compelling, is it more likely dividend or buyback that you'd be thinking about? And then second question was on just organic capital deployment from here. I wonder if you could just lay out what your priorities on that front? You laid out the spread you're looking for, but just where do you think the focus is going to be on organic capital deployment over the next couple of years?

Thank you a lot for your question. I will take the first one. Regarding the answer to your question is between 12 and 24 months. This is the information that you can see in the research update that this morning S&P has released to the market. And you can see there that there are very clear time framework for Cellnex to get this -- to somehow to be finally upgraded into investment grade. I don't think that the company can do it. If you look at in graph 7 and you know perfectly well that we are a prudent company. We are reaching that 7x net EBITDA at the end of this 24 months. But again, we are being prudent and also S&P introduced on language saying that this could happen even before the 24 months. The second question, Alex?

Yes. So in relation to the priorities in the adjacent assets, basically, I think there is 1 page on the presentation, which is Page 11, where we are identifying the 3 main assets where we believe we should be devoting discussions with our clients. And those are specifically the fiber-to-the-tower, the RAN Sharing and Data Centers. So the fiber-to-the-tower is something that, as we, I think, have mentioned in the past, there is around 50% of our sites that we believe will require in the future fiber. Today, we are having roughly mid north of 25% of the site with fiber. And wireless fiber is going to be necessary, specifically because 5G. 5G, as you know, is demanding a lot of bandwidth to be distributed by each one of the sites and to bring that bandwidth into each one of the towers will need fiber. Radio links are sometimes not sufficient. So that will be priority number one, and we believe that this is a type of a project that will probably last until '25, '27 -- 2027 to have that rollout of fiber. Then there are the other 2 types of assets that we believe will take a bit longer to start deploying more massively, which is the active sharing. So mutualizing active agreement on one side. and the other one is data center, which is very much linked also to the 5G infrastructure. So that's how we see. It's quite simple. It's not very sophisticated. And we believe that there is a clear path in discussions with our clients in this domain. The business case is always our like. So visibility of cash flows, having a noncore, et cetera, et cetera. So in that sense, it's more of the same.

That's really helpful. Can I just ask a quick follow-up on the fiber-to-the-tower. So you gave a kind of end point when fiber-to-the-tower will be deployed. When does it really kick off because we obviously had Bouygues contract, but not much else since. So when do you think we're going to start to hit kind of full flow of those contracts being signed up?

Yes. So in the case of Bouygues, yes, this is massive because it's the totality of the network of Bouygues. But we have already started in Spain, for instance, with Telefonica. I think recently, we have announced that we are around 2,000 towers, let's say, fiber acquisition in that case has been, but we are preparing those assets to be ready to also have more tenants as we do with the towers. So this is something that we'll go step by step. There are some clients that may think that this is part of their wholesale business. So there is an area there where we need to have, let's say, a different discussion with each one of the clients. But at the end, the towers will require fiber and that fiber will be -- because we deploy it or because we commercialize it being the fiber maybe not ours, but the fiber is going to be built in any case.

Now the next question comes from Akhil Dattani.

Can I start with capital allocation, please. I guess I was just keen to understand -- we've had the Vantage Towers process in the last week or so conclude. I wonder if you could comment on whether you were involved in that process or not? And I guess part of the reason for asking this is just to understand, had -- you have been involved in that and how do you have completed a deal? Would that have been consistent with this pivot in strategy or would that have led to another route? So just so we can sort of understand the sort of thinking and the evolution to getting to where you've got to. So that's the first piece. And then the second bit is just some very small questions around the quarter. So if I look at this quarter, Italy seems to have been very strong quarter-on-quarter. There's a very strong uptick. So I wonder if you could maybe just give us a bit of color on what's driven that Italian growth improvement this quarter? And then the other one is just on price increases. Obviously, we're almost at the end of the year. I don't know how easy or difficult this is to do. But I wonder if you could give us some flavor of now where we are, what that sort of means to your blended price hike into next year?

Sorry, Akhil. Would you mind repeating your third question? Apologies.

Yes, sure. I was -- so the third question was just on the price escalators into next year. You've obviously helped us in the past, giving us a breakdown of fixed versus variable. And I was just wondering now we're in November, whether you're able to give us some sense on what the blended price escalator is into next year? I know it's difficult because there are so many contracts. But just so we have some sense of what the blended average price escalator is, if that's possible?

Yes, absolutely. Apologies for that. I think that for next year, you are not going to see massive changes compared to the contribution in 2022. You know that now we are living in a very high pressure environment. And well, also, you know that the vast majority of our contracts with anchor tenants, they have a cap and in the current environment, all of these caps apply. So I guess, for 2023, you should be expecting a positive impact from the inflation in our top line of around 3%, 3.1%. But no more than that because I guess, again, that is the sort of applying our caps, which is a performance very similar to the contribution that we are seeing now in 2022. On Italy, very quickly before -- yes, on Italy, it's mostly the contribution again from utilities. If you look at the P&L provided for Italy, you will see that the utilities line has increased, and also that has an impact on the revenues. So that is the impact of the -- mostly of the pass-through, okay? It is true that organically, we continue to perform very well. We continue to make progress on build-to-suit, organic growth generation. But we are also seeing this quarter a quite significant contribution from the utilities, electricity pass-throughs. On Vantage, I will leave the team.

Well, just to tell you that we are always obliged to look at any opportunity we may have. But our criteria and discipline is always above of these potential opportunities. So nothing else, I mean past is past, if I may say, in a way.

And there is another question, Akhil?

Well, the only question was I just wanted to understand, had you have done -- I mean it's more of a general question, which is how do you have done a deal like that? Obviously, there was speculation on deals. And I appreciate you don't want to get into the details. But just to understand, would that still -- if you were to do a deal like that, do those sorts of deals have the ability to be consistent with your new framework? Or is this implicitly saying those sorts of deals are just not likely anymore?

Okay, I think that is very difficult to answer the question, and there are many elements that have to be considered. The key point for Cellnex is to improve the business risk profile in the long term. And this has been what we have done in the past. So now we have a new capital -- we have been listening to you. We have been listening in the market. The market has been clear. We need to have a new capital allocation framework. We need to be more, if you want, taking into account how we are in terms of deals of our bonds, in terms of inflation, in terms of many elements that have changed from before. So if there were to be an opportunity that matches all every single point, that matches that we're going to become investment grade because we improve. The business risk profile is good because somehow give us inflation driven, also because the financing is in good terms also and if -- as we are seeing in the presentation, we could do it. But there are priorities, and the priorities that we are seeing to you is first investment grade. It is first to get the 24 -- we're talking 12, 24 months outcome. Then the other priority is to be with our clients and also to implement in due course, our remuneration policy to our shareholders. This is our commitment and Cellnex has listened to you. And obviously, we have adapted to the new circumstances.

But just to maybe to reinforce that we have to double check that we are not missing something. You know what they mean. So I think it's our duty as well to assess properly as we did in the past, and that's it. And I think anything else from our side. It's not just about an industrial or a potential interest or just a few financial impact. It's -- everything matters. And as Jose Manuel said earlier, it's 360 degrees assessment. And at the end of the day, well, we were not in a position to go ahead. That's it. No regrets. No.

Next question comes from Jakob Bluestone.

I had a question regarding your BTS phasing, which we can see on Slide 6. And I appreciate I could just get a ruler and try to measure it. But could you maybe give a little bit of guidance on what sort of BTS we should expect in '23 and '24. It does look more front loaded than what we can sort of calculate from the spreadsheet. So it does look like the peak is obviously now in '24. I think previously, it was '23. So any color you can give on the size of the BTS for the next couple of years would be helpful. And then just secondly, just to clarify, I mean, in your previous call, you talked about debt buybacks as one of the possible sources of use of cash. Is it fair to assume that that's now off the agenda?

Thank you, Jakob. I will take maybe the first one. Well, I guess that we have been transitioning in terms of how we've been guided the market in terms of modeling build-to-suit. Every time up we have announced on a money transaction that has build-to-suit [indiscernible]. I guess that our initial reaction was to say, okay, this is going to be back-end loaded. That was our original expectations. And also during model instructions with analysts, with investors, I guess that what we have been saying is, look, just to make it easy, please assume this CapEx to be unitedly spread. And then maybe the third element, the most recent [ element ] is what we are seeing today. You might have seen that '22 and also our expectation for '23 is that we will be making a substantial progress on build-to-suit. So we see a certain acceleration. And that is what we are trying to reflect on this slide. So '23, '24 maybe you might be expecting more CapEx -- more build-to-suit CapEx compared to the alternative, which is maybe a linear modeling. But again, I mean, this is just timing. Also you know that out of the many, many build-to-suit programs that we have in place, a good portion of them, they need to finish by 2025. So it is just also that not all of them finish by 2030. The first one that we signed need to be completed earlier and then maybe between '25 and '30, what you should be expecting is a sort of a long tail because until 2025, we need to complete a good portion of our digital commitments.

Regarding the second question, and if I have followed you well. In Slide #5, Jakob, you will find the criteria, I mean, there are 2 clean parts, a commitment to investment grade and then obviously, we would like to explore greenfield projects and for sure to see the dividends and buybacks, how to implement them once we achieve the investment grade. So this is everything. I mean there is no other elements on the agenda. I think that your question was about buying our own debt. It seems that we are more focused on getting investment grade just with the projections that we have shown you and you will find some further language in the S&P documentation that says that Cellnex can become investment grade in up to 24 months, maybe even before, but it is not through the acquisition of debt. It is maybe for the good performance of the company that we have always shown to the market and we will continue to deliver.

If I can just ask a follow-up just on the BTS. I think you -- 1.5 years ago, you guided for around EUR 900 million of BTS in '25. Is that still kind of the ballpark or from your comments about front-loading, maybe '23, '24 BTS is higher and '25 is below EUR 900 million. Is that the right way to think about it?

That's still value, Jakob. Next question comes from Jerry Dellis.

Yes. I have 2 questions, please. One, referring back to Slide 11, please, and the adjacent service opportunities that you've outlined here. Would you be able to talk to us, please, about how capital intensive some of these opportunities might turn out to be? And to what extent is related CapEx on these sorts of projects already accommodated within the cash flow projections on Slide 6? And then my second question is, I suppose that one of the obvious ways of driving efficiency through the existing platform is in relation to lease up. Your tenancy ratios outside of Spain and Italy, currently averaging about 1.3x. Are you able to talk to us about what assumptions you're making in relation to getting those tenancy ratios up over the forecast period?

Thank you, Jerry. Alex, do you want to take?

Yes. Happy to take the first one, Jeremy. So in relation to the type of assets that we are here picturing, all of them are going to be always into the same as we said towards like profile of the business case. So the -- what is being required will be commensurate with the case and very much in line on the capacity and fire power that is generated as we go in the future as pictured it on Page #7. So that's the commitment that we are taking today. And in any event, the capacity of firepower will not be, let's say, going above what we are setting in Page #7.

Jerry, do you mind repeating your second question, please?

Yes, it was just in relation to tenancy ratio projections outside of Spain and Italy, I think your tenancy ratio today is about 1.3x. Getting that up is a way of driving operating leverage, are you interested in what you think might be achievable in relation to getting the tenancy ratios higher?

No, I guess that -- I mean, clearly, because of the nature of how we are implementing these -- our platforms in markets, typically initial tenancy ratios tend to be very low. I would say that maybe the average initial tenancy ratio are of our most recent transactions, maybe it's 1.1%. Also bear in mind that there is a dilutive effect in the context of our build-to-suit program. So even if we inherit an initial platform and we may progress increasing the tenancy ratio on these existing towers, every time that we build a new tower, typically that tower comes with a tenancy rate of 1%. So I guess that maybe temporary, it will be difficult to see tenancy ratio increase because, again, tenancy ratio increase on the existing platform will be diluted by the contribution from build-to-suit. But going forward, I don't think that we are seeing any of our markets structurally difference from what you are seeing in maybe most mature markets, as you mentioned, Spain on Italy. So it will be a matter of, again, integrating initial platform, making progress on the build-to-suit. There is a process that will take maybe, I would say, depending on the duration of the build-to-suit program between 5 and 7 -- 7, 8 in some cases, 10 years. But after that, you should be expecting co-location rates very similar to what we are generating in our most mature markets.

Next question comes from Ottavio Adorisio. Ottavio, I don't know if you can hear us? If not, then we will go to -- the next question will then come. Yes. Yes.

Sorry, I was on mute. So yes, 3 questions on my side. The first one, it's on the new emphasis you have on the credit side and that's positive. That has been a pretty good impact on your yield. So therefore, the question is on your debt refinancing strategy. In the chart, you show that you will be able to cover maturity between 24% and 26%, thanks to the credit facilities you have. So the question is, consider where the yields are now after the announcement, how is your debt refinancing strategy will look like over the next 2 or 3 years? Are you happy to basically be reliant on credit facilities? Or given where the yields are, you're happy now to go to the credit market. And on the credit facilities, could you tell us any restrictions in particular, if it's possible for the bank to withdraw these facilities. Second one, it's on expansion CapEx. Now when I look at the Slide 6, it looks that the expansion CapEx is guided to be stable to low increase for the next 10 years. Now considering expansion CapEx is projected to be a recurrent item, I was wondering if it not be the case that should be included in the definition of recurrent leverage free cash flow. And the third one is on inflation. You provide in the slides a pretty good granularity about high inflation is going to impact your revenues going into 2023. But you only give a number how it's going to impact OpEx and the number is around 2%. So the question is, could you give a bit more granularity among all the different -- at least the main components of your OpEx and leases? How this will project to increase going into the next year?

Jose Manuel, do you want to?

Yes. Ottavio, I will take the 3 of them. I'll start with the third one. Ottavio, the OpEx, as we are saying in this presentation, we are being able to absorb the OpEx -- sorry the inflation significantly, I mean, significantly. And we do expect that for full year '22, this absorption -- this mitigation, it will be even better off. So I think that the company is performing very well in terms of OpEx, very well. It is true that there is some items like the utilities, which are a pass-through, that obviously for us are a pass-through. So they are not taking here into account obviously because we have the same revenues. If the OpEx goes up, revenue goes up. Okay. This is 1 thing. Second one, within the other items, obviously, not all of them can be managed in the same way. That's obvious. However, if I were you from a just financial perspective, our commitment with you is clear, is that the total OpEx base without pass-throughs will grow significantly less than inflation. We have more headroom with leases? Yes. Do we have less headroom with personnel? Of course. That's normal. So we manage a total base of OpEx that in the long term and in the medium term, is giving us very, very prudent and reduced increases, if inflation is low and if inflation is high, which is the right -- the case right now. That's very important. So let's go to full year '22, just to confirm this element. I'm pretty sure it will happen. You will see that one of the key elements for the market, which was the behavior of our leases is going to be just great. So regarding the second question, which was expansion CapEx, 10%. Yes, in this graph -- in the graph number, Slide #6, we are factoring 10% of our revenues as expansion CapEx. This company has different alternatives. One of these that we were just talking was to do -- is to do cash advance programs. And this is just to follow the same conversation. The third question, and this requires CapEx. Also, we have other deployments that will require expansion CapEx. So the growth, also the recurring levered free cash flow which in the long term is driven by 5G rollout is driven by FTTT. And FTTT, obviously, somehow is a factor in the gray area or column called expansion cash out. And...

Yes, so to briefly complement. I'm sorry, Jose Manuel. No, I think, I also -- I mean, I totally get your point, Ottavio, it is that this has been a recurring item. And maybe that is also the reason why in this presentation, you might be seeing also the company transition towards free cash flow, including expansion CapEx rather than our previous definition of recurring levered free cash flow. So we take your point, and that is also the reason why we are also internally transitioning in terms from a reporting perspective. Sorry, Jose Manuel.

No, no, no. Not at all. And then the credit -- I mean, the credit question, there were 2 questions within your first question about credit. As we have already said, at the corporate level, we have no hedge, no place, no guarantee, no covenant. I mean, all our financial credit lines are long term, and we do have all the flexibility. We have been super consistent, Ottavio, we can withdraw these lines with no [ SKUs ]. So we can take it to the extreme. I think these lines are credit, but it's also an asset of the company. And it's an asset when we present to you the graph in Page #8, what we are writing here is that we could -- we might use and we can cover these maturities with credit facilities and cash flow generation. And obviously -- and answering the other question, we are presenting to you a company that is going to be investment grade in the next 12 to 24 months, and therefore, I'm pretty sure that the '24 refinancing will be done with a Cellnex that will be at that time investment grade. And then the bond market will be more friendly for us. And then other pockets of refinancing will be more friendly for us, for instance, to issue bonds in dollars and to swap back into euros, which is a market we opened last year and can give us longer tenors and a very commensurate, very prudent, very low coupons because there is arbitrage from time to time between dollars and euros. So what we try to represent here is, in these lines is, listen, in a stress case scenario do not worry, Cellnex is very well equipped to pay all our debt back. And on top of that, we should become investment grade in the next months and refinancing should be friendlier than today.

Thank you, Ottavio. Next question comes from Georgios Ierodiaconou. Apologies Georgios, if I'm pronouncing that not properly.

That was perfect, actually. Two questions from my side. The first one is around capital allocation on a gross basis. So what I'm trying to understand is clearly, there's a lot of other players in our industry from the private side that have a different return profile than you do. Are you having any thought of taking advantage of that and perhaps you spoke in the past about opening some of the country shareholdings for minority stakes in order to have some flexibility to maybe consolidate the few markets we haven't fully consolidated yet because that way, perhaps you'll be able to have some operational benefits while speaking to our investment-grade goal. And my second question is kind of a clarification on a question on ground lease. Firstly, just wanted to make sure the lower than 3% inflation you are showing I believe on Page 10, does that include the benefit of ground lease acquisitions? And then the second element of that is just to understand in this particular situation we are in now, I know you have expansion CapEx flat over the period, whether it's more attractive to go after ground lease acquisitions given higher inflation and higher yields against the prices may not have moved as much as inflation, little bit there.

Thank you, Georgios. I will try second and third and maybe Jose Manuel the first one. The -- on the second question, the answer is yes. So we are also including the benefit of land acquisitions and cash advances. But I would say that, that direct impact is not meaningful. What is really benefiting us in terms of managing our leases and avoiding a significant increases in the context of a high inflation environment is the straight renegotiation, the direct approach to a landlord and asking them to -- maybe to reduce the fees or to stop the application of the inflation escalator. So the answer is, yes, we included the benefit. But again, the majority of the efficiency, the majority of the benefit for Cellnex is coming from the straight renegotiation. And if I understand your third question properly, also the answer is yes. I mean, with lease at 10%, we are including anything that improves the recurring leveraged free cash flow. So that could be installation services, adaptation costs on a tower to host a new PoP because there is also an associated CapEx with that activity. And of course, any OpEx efficiency is -- or anything that improves our recurring leveraged free cash flow because it reduces our leases. There is also other activities that's included in our expansion CapEx.

Regarding the first question and correct me if I have not followed you well, when you are talking about the Slide #11 and we have to look at also Slide #7 at both. So you can see in Slide #7, that from '24 onwards, there is like a triangle which is wide. And this triangle wide is because the company delevers very quickly. And you can see that in 2034, there is no debt. Obviously, in 2029, Cellnex will be much better than BBB- by S&P and Fitch. We could be talking about the company, which is maybe A. So I do think that this is not what we are talking today to become single A. What we are talking today that we would like to become investment grade by S&P. And therefore, this wide area will be devoted to shareholder remuneration and will be devoted to help, to support, to work with our clients in terms of deploying the Slide #11. Everything has to be balanced. You cannot say now we stop this, we will start the other, no. What we have tried to do here is to give you a full ecosystem, which is coherent and is coherent with first of all, being investment grade. Then a strong commitment with free cash flow generation, therefore, deleverage and therefore, shareholder remuneration and clients' needs. So we try to put everything because we are an industrial company at the end of the day.

Very clear. If I can follow up just on the ground leases. I just wanted to just clarify my question. It's more whether there is a high incentive for you now to use ground leases given inflation, like whether it makes it the returns better to acquire the leases or to do these long-term contract extensions.

No, sorry, because initially, we didn't understand well. It's very important, your question and we just -- we are agnostic in terms of it is an acquisition or if it is a cash advance as we only pick up the best project, the project that give us better returns for you. So we do not close at all to both actions in the lease market. It is just driven by IRR concept, okay?

Next question comes from Nick Delfas.

Two questions. First of all, could you just size roughly the impact of floating interest rates for '23, assuming that rates stay around here versus '22. So how much extra interest here? I think you've got 23% of your debt with floating rates? And then the second question is around just sort of core industrial growth. Obviously, in the markets where you have a new entrant, Italy, Portugal, things go pretty well. But in terms of industrial growth from improving data usage, those numbers seem very, very low at the moment, maybe 1% or 2%. Some of that will be government mandated coverage. When do you think significantly higher tenancy growth might kick in because the mobile networks become full? In other words, if, let's say, that a lot of the towers are currently only 10% or 20% utilized, when do you think that the operators are going to have to have a really significantly higher rates of tenancy growth to increase the density of their networks?

Thank you, Nick. Alex, do you want to comment?

Sure. With the last one. So I think the point is well taken that at certain point, as all the projections of data usage are exploding, the MNOs will require you say more tenants or more tenancy ratio here, the densification is where it comes. So the level of data that one station can deliver is sometimes limited, could be limited by the spectrum availability or by the radiation limits. So -- and by the amount of users concurrently connected to that site. In order to sort it out and mitigate that issue, this is where the build-to-suit comes. So many of the build-to-suits that we are having is precisely for that. So I think that need to cover the massive data demand is not only being projected by a tenancy ratio increase, by more towers to be built and the ultimate element of that is the small sales. The sales will come later down the road when the macros are fully squeezed and there is no capacity to be more towers. But the build-to-suit is the alternative way in order to cope with the demand that MNOs are having besides going to tenancy ratio. So I think we need to look at a little bit more broadly than just tenancy ratio. So build-to-suit is also a result for that demand. Your first question?

Obviously, build-to-suit is a much higher capital and lower return on capital way of improving your financials than just getting an extra tenancy. So -- and one also, also see it in the tenancy growth. So really, the question is, at the moment, speaking to the operators, they seem to have a lot of capacity. When do you think they might start to really feel the squeeze in the 20%, 30% of towers that are very heavily -- they are in the dense areas of European countries?

Well, it's difficult to answer because at the end, here is what the technology also allows us to do because it's about coverage. So the requirement of -- and that's the reason is build-to-suit not the only solution, is solution alongside with the increased tenancy ratio, it's both of them. What is happening on the top of that, and I think this is something that also we already commented in the past is that the new frequencies being available are higher and higher. So when you look at the spectrum auctions, the latest one, which is basically how 5G has started is, [indiscernible]. Now we are starting to see many countries starting to auction 26 gigahertz, the higher the frequency, the shortest the range. And this is also 1 way to cope with the massive demand. So having higher frequencies because you can meet more bandwidth, but then you have shorter range. So I think it's a combination of both. Yes, a build-to-suit requires more CapEx than just having a new tenant on a tower. But the engineering coverage requirements is what actually is leading to the topology of the network.

Okay. So regarding your first question, which was about the financial expense expected for '23 and the impact of floating rates. Just to give you a first answer, if we go to Slide 17 of the presentation, we can see that as of Q3 '22, the total net payment of interest has accounted for EUR 220 million. So far, so good. This EUR 220 million, obviously, for full year '22, we will be below EUR 300 million, okay? We will -- you will see in full year. So your question was about '23. We expect that for the same perimeter of consolidation, instead of being below EUR 300 million of net payment of interest for full year '23, we will be in EUR 300 million, EUR 320 million in that area. Circa EUR 320 million of total financial expense. We do not see a big impact yet because of our finance -- the floating part. It is true also that it's been very helpful. Some elements that we are -- we have also cash and the cash is also remunerated with more money. So when you talk about the floating part, please take into account that we do have cash in our balance sheet. So everything comes so far so good. And I think that we will be able to deploy the recurring leveraged free cash flow and the free cash flow on a free basis as we are saying to you, no problem at all.

Next question comes from Luigi Minerva.

Two questions. The first one is on portfolio management. Now if I look on Slide 5, your risk-adjusted returns target of 6% to 8% above the risk-free rate. I'm wondering if you contrast this target with your existing portfolio, are there any assets that are not delivering these targets. Perhaps I'm thinking those that have a very strong inflation cap. And if so, does this give you an opportunity to rethink about your existing portfolio and considering some disposals. And the second question is on the augmented TowerCo model, I noticed from Slide 11 that you -- it's not there and also you're kind of deemphasizing it. And again, I'm wondering whether the reason may be that you don't think that the augmented TowerCo model can deliver on those -- on that 6% to 8% risk-adjusted spread over risk-free rate?

Thank you, Luigi, and actually, thank you for pointing that out. I am to blame. I did that slide and augmented TowerCo should be there.

Well, in fact, it is just RAN sharing. When we talk about RAN sharing, we are talking about augmenting TowerCo concept.

But it is -- I mean, we are not changing our priority. The augmented TowerCo concept should be maybe more, more clear and we are making extremely good progress on the integration of our operations in Poland, where we are providing this service for [indiscernible] for the first time. We are having very active conversations in that country, in that market with a number of players. And also, as you know, we are trying to extrapolate our model across Europe. So maybe that will have a different maturity process because whereas mobile operators in Europe are more used to outsource towers and also they are also somewhat ready to outsource all their parts of the digital infrastructure value chain. Maybe the active equipment will crystallize a bit later, but we are extremely active trying to crystallize opportunities around the augmented TowerCo concept.

So if I may simplify maybe just a definition, augmented Tower Company is a tower company plus adjacent asset, as simple as that. So what we have on Page 11, I think it was, no. So those 3 elements are part of the augmented tower concern. In Poland, when we acquired Polkomtel, we have data centers. We have fiber and we have active equipment. So all this concept is what we put in addition to the traditional tower company as augmented to our company. So yes, it is on the slide, even though it's not specifically mentioned.

Regarding your question -- regarding your first question is, Luigi, so far, so good. I mean we have been able to get from our different investments, the returns that were expected or even more. One of the key elements or key driver has been that Cellnex is very well equipped to absorb the inflation impact on our OpEx ratio. That's important. We do have synergies. We have efficiencies, economies of scale. So this places us in our favor. And that's very important when talking about returns. And finally, I think you were suggesting disposals. We can be open to that, but there must be a meaning, there must be a justification, there must be something that change. So we have -- we are pragmatical. And so far, if we get all the deleverage profile as we want to get, maybe we do not need to sell any asset. If we were to need it, I'm pretty sure that we will do it. But so far, we are much more focused on performance, on operations, on keeping this inflation under control, on growing organically than in selling assets to be...

Next question comes from Fernando Cordero.

Three questions from my side. The first one is on organic growth profile and the focus on organic growth that you have the picture in your -- in the strategic guidelines and particularly on Slide 9, you are guiding to an organic growth of between 10% to 12% of EBITDA and recurring free cash flow. In that sense, I just would like to understand which are the underlying assumptions, particularly on inflation. And particularly in the contribution of new growth projects, particularly greenfields, on top of the currently announced build-to-suit programs that are already in your plan. And the second question is regarding -- it's partially a follow-up on one on the investment criteria for new projects. You are now moving from an absolute internal rate of return target to a relative one based on the spread based on the risk-free rate. Just we need to understand, first, the risk-free rate that you would be assuming if the country's risk-free rate is not a European, that it's not. And the second 1 is, sorry, at which extent of returns continue to be a leverage -- sorry, levered and not unlevered. And the final question is just, let's say, a detail on the third quarter earnings. I'm a little bit surprised on the material jump in number of PoPs in Spain in the third quarter, almost 2.2% quarter-on-quarter, particularly after seeing in the second quarter a drop in number of PoPs. Is there any reason for that?

Thank you, Fernando. I will take 1 and 3, and I will leave maybe to Jose Manuel for the second. No -- on Spain, organic performance, no particular reason. I mean, it is a positive surprise. It is true that also we are coming from maybe to a couple of very quiet quarters' performance. So yes, a bit of a catch-up. We don't really know to which extent it is going to represent a pattern going forward. So yes, I mean, no particular reason. I guess that we are coming from a very quiet situation. So this is welcome, and let's see what happens in the coming quarters. On Slide 9, you mentioned, I guess that the main intention behind this slide is to provide an indication of how to model organic growth for Cellnex. It's maybe more -- it has a didactic intention rather than to provide an accurate guidance. Here, what we are trying to illustrate after different building blocks in terms of inflation contribution on the top line, contribution from secondary PoPs, contribution from build-to-suit. Also, our intention to keep OpEx and leases under control in a very high inflation environment and then how everything combine should be translated into organic revenue growth, adjusted EBITDA and recurring leveraged free cash flow, okay? So again, it's more of a reminder of things to be taken into consideration in terms of a model in Cellnex without the contribution from change of perimeter.

And regarding your second -- it was first question I remember. But in terms of Slide #5, and when we talk about risk-free rate, we are signaling the interest rate swap 10 years, a 10-year interest rate swap. This interest rate swap, it is also the key element when we issue a 10-year bond, for instance, is the reference for bondholders. And obviously, we should use that reference as a long-term investor to do the assessment of the feasibility of these projects. So it's everything must be coherent. And here, we are referring to interest rate swap 10-year.

Thank you, Fernando. And the final question comes from Fabio Pavan.

First of all, many thanks for having shared with us such a detailed presentation. I guess, it was very helpful. Two questions. One on the sector evolution. You said you don't see M&A -- significant M&A as likely. I was wondering if we may consider as an option of some bolt-on acquisitions. And second part of the question is, how do you think the other players [indiscernible] do you think the sector will continue to consolidate in Europe? And the second question refers to the business. Do you have any sense that European telecom operators are finally accelerating and implementing their 5G strategy? Or do you think when looking to the coming quarter, inflationary pressures may result in MNOs postponing investment in this part of their business?

Thank you, Fabio. Maybe Jose Manuel, do you want to comment on the first one?

Yes. Well, the first one is, Fabio, is what we were saying before. I mean, it's Slide #7. We have to combine Slide 11 and 7 together. And the priorities are so clear. So first of all, to become investment grade, and then there is -- well, there is somehow, I mean, significant capacity for the company that must be shared between shareholder remuneration and also as you are saying, bolt-on acquisitions or talking to our clients and investing with them. Look, what we have learned is that from signing to closing in this industry, it takes up to 2 years. You have seen the U.K. Hutch, so that's good for us because the company in 2, 3 quarters has changed significantly in terms of cash flows and has changed significantly in terms of net debt EBITDA evolution. So we must be -- we must take a balanced view of the different factors. We cannot rule out it. But Slide 7 has clear red lines.

Yes, Fabio, in relation to your question, well, it is true, 5G is still lagging behind versus what we were all initially expecting. And what I think there are probably 2 reasons. One is in relation to not being able from our clients to actually port the cost of the 5G deployment into a higher ARPU. And this is 1 of the elements that is making our clients to really think on which is the best efficient way to deploy 5G and the other reason is that among 5G, we have other type of activities going on in our towers, which is like vendor swap. So there is an activity in relation to that, which is quite heavy in some countries, which is also affecting the deployment of 5G. However, so far, no plan has been canceled from our clients. It's just a matter of calendarization of the projects.

Excellent. We have now reached the end of the session. Thank you so much again for your time, for your questions, for your attention, and have a great weekend. Thank you. Bye-bye.