Infrastrutture Wireless Italiane S.p.A. (INW) Earnings Call Transcript & Summary

Good morning, and welcome to INWIT Second Quarter '20 Financial Results Conference Call. Emanuela Martinelli, Head of Finance and Investor Relations, will introduce the event.

Ladies and gentlemen, good morning. Welcome to the second quarter 2020 results presentation, and thank you for attending our conference call. Our CEO, Mr. Giovanni Ferigo; and our CFO, Mr. Diego Galli, will provide you an update for our business and operating activities and will go in details to our second quarter operating and financial performance. As usual, the presentation will be followed a Q&A session. [Operator Instructions] Now you can take note of our disclaimer policy. They should now be visible in Slide #2. Let me highlight that the reported data refer to the financial statement at June 30, 2020. Now I leave the floor to Mr. Giovanni Ferigo, who will guide you through the presentation. Giovanni, over to you.

Thank you, Emanuela. Good morning, everybody. I'm pleased to share with you the results of the first quarter of the new INWIT with the full consolidation of Vodafone Towers. Let's start on Slide 4, which includes the main figures of the new INWIT but clearly show the change of perimeter. As already stated in the past, the former 2 companies were pretty similar, one to the other. And you may appreciate from this slide that the new INWIT has now doubled its size. Revenues is up to EUR 184 million, showing 83% increase year-over-year and 92% if comparing recurring revenues. We believe that the ground lease is an essential part of our business. Therefore, we consider the additional alternative performance indicator, the EBITDAaL that represent the EBITDA minus the ground lease cost, basically coming back to EBITDA pre-IFRS 16. The EBITDAaL shows a sound of 102% growth year-over-year or 118% growth if comparing the recurring EBITDAaL. Moving over the recurring free cash flow, we reached EUR 80 million, increasing by 32.5% year-over-year. If normalized by the payment of the taxes timing, the increase is 60%. Finally, the tenancy ratio is at 1.83, that turns out from 1.96 of INWIT stand-alone and 1.68 of Vodafone Tower. So lower than in the past, but still at the best practice level of the industry. Going to Slide #5, please. As a result of the merger, INWIT doubled the number of sites and now manages more than 22,000 sites and more than 40,000 tenants, being the leading TowerCo in Italy with market share higher than 50%. INWIT has the best asset quality coming from the heritage of industry developments, whereby TIM was incumbent and Vodafone, the fierce challenger in the market. And they both designed a network selecting the best location, thanks to the first-mover advantage and build the best network in the country. The merger with Vodafone Tower is the completion of a sharing journey between TIM and Vodafone that -- which started 10 years ago, a journey between 2 natural partners, twin companies with same scale and obsession of network quality. The tenancy ratio is 1.83, that is significantly higher than competitors. The ratio as well as the revenues per site are lower than before as they are impacted by the relatively lower hospitalities on the Vodafone Towers. I think it's interesting to note that INWIT was more focused of increasing hospitalities, while Vodafone was more focused on optimizing costs. Now the new INWIT has the opportunity to implement both approaches to optimize the return from both sites. In the period, we built 70 new sites. Also, we renegotiated 283 contracts as part of a broader program, with a dedicated team led by the same person that -- who led the rental optimization program in Vodafone Tower and now is in INWIT, reporting directly to me. Moving to Slide #6. You may see the 2 components of our 40,500 tenancies. The first component is related to our 2 anchor tenants, TIM and Vodafone. All previously existing hosting contracts on macro sites outside the previous MSAs have been included in the new MSAs. This is a very important issue. So there is a total of 32,000 PoP under the new MSAs, which compares with the previous 11,000 in the INWIT stand-alone. The contract have 8 years' terms, renewable for further periods of 8 years with an all-or-nothing mechanism. The MSAs are 100% CPI-linked with floor at 0%, thus naturally hedged against deflation. Second important component is related to the rule of neutral host. We serve all the key players in the Italian market with 8,500 hospitalities, that is significantly higher than INWIT stand-alone and represent about 21% of the total number of PoPs. In the period, we added 250 new tenants from fixed wireless access and MNOs operators, which represent an organic growth of about 3% versus 4Q 2019. Volumes in the quarter are driven by the increasing demand for fixed wireless access, which kept on growing the recent quarters. It's important technology that contributes significantly to bring high-speed Internet, in particular, in the rural areas. We will talk later about the expectation for a ramp of the new hospitality from both anchor tenants and other operators based on a robust order book and delivery plans. Now going to Slide 7. I would like to recap our progress on new business development. First, related to small cell, DAS. In H1, we built 300 remote units, reaching 3,700 builds units, which takes to a 32% growth year-over-year. We claim to be market leader in remote units, securing attractive location in advance of commercialization. The understanding of the business by the location owners can lead to catch enlarged number of location and bring to the high number of DAS needed to support the 4G network and to densify the 5G one. Secondly, related to the backhauling, we built additional 250 links, reaching more than 1,000, exactly 1,150, which takes to 64% growth year-over-year. This is consistent with our aim to be one-stop shop for our clients in their 5G rollout. Now I hand over to Diego to comment on the following slides. Please, Diego.

Good morning. We are on Slide 8, where we show the revenue numbers. So the first quarter revenues accounts for EUR 184.4 million, which means 92% year-on-year growth on a recurring revenue basis. This number shows an organic plus 0.5% growth quarter-on-quarter. And on a year-on-year basis, it is around 1% based on the pro forma P&L used for the prospectus. We may -- we can analyze the revenues, looking at the 3 different components. The first component is related to the revenues from the MSA with TIM and Vodafone. This component is up to EUR 161.3 million and is shows an increase up to 147%, reflecting the change of perimeter but also the shift of revenues from other operators to MSA, which now accounts for 87.5% of total revenue. For the same reason from this quarter, the revenues related to other operators only includes revenues from hospitalities arising from operators different from TIM and Vodafone. The amount is EUR 21.1 million in the quarter. Thirdly, revenues from new services amounted to EUR 2.1 million. Before the merger, in this revenue line, we included also the revenue from TIM hospitalities on new sites built after 2015. With the merger, also these hospitalities have been included in the MSA. Therefore, on this line, only the revenues from small cell, DAS and backhauling are included. In our view, these numbers show the potential that we see and that we have to grow revenue from new services through new locations, shortening the time from build to invoicing and increasing tenancies. We have a limited details on the year-on-year growth by segment. Clearly, this will be the focus going forward. Indicatively, we may say that the main source of growth was coming from third parties, including fixed wireless access. In terms of guidance for the year-end, we expect revenues in the range of EUR 660 million to EUR 665 million on reported basis, meaning that in this number, the first quarter of Vodafone Tower is not included. The first quarter of Vodafone Tower is only included in our pro forma revenue that is expected in the area of EUR 750 million. I would like to move now to Slide 9, where we can see the profitability indicators. EBITDA grew by 93% year-on-year, and EBITDAaL grew by more than 100% year-on-year. I think what is important to highlight in this slide is the EBITDA margin that is up to 93%, and the EBITDAaL margin that is up 64%. This number is comparable with the pre-IFRS 16 EBITDA margin that for INWIT stand-alone was around 57%. In our view, this level of margin reflects the efficient management of lease cost made by INWIT and even more by Vodafone Towers. Despite this level of profitability, we still believe that there are opportunity in the optimization of rental cost. And as Giovanni said, we have a dedicated function on it. In the period, we have finalized 283 renegotiation of rental contracts. In terms of guidance, we expect year-end EBITDAaL in the range of EUR 410 million, EUR 415 million. As we said, we see EBITDAaL as the key profitability indicator for the business in the industry. And this is the reason why we gave -- and we're giving guidance on it. If we refer to the traditional EBITDA, we may indicate as well that the year-end is expected in the area of EUR 595 million to EUR 600 million on reported basis. On this page, I would like also to comment on the D&A, depreciation and amortization, that is at EUR 99 million, reflecting the impact of EUR 25 million amortization from intangible assets. During the purchase price allocation process that has been finalized, EUR 810 million have been allocated to intangible assets. And as I said, this generates in the quarter EUR 25 million amortization, but let me remind that clearly, there is no cash impact. So moving to cash and moving to Slide 10, where we can see the recurring free cash flow at EUR 79.5 million. This shows an increase year-on-year of 32%. In the quarter, there was a payment of pro rata tax and this creates a discontinuity compared to last year when the pro rata tax was paid in Q3. When removing this impact, the normalized recurring free cash flow would show a 70% year-on-year growth. Again, what is in my view important to highlight on this slide is the level of cash conversion that shows 43% of revenues. On these slides, I would like also to take the opportunity to talk about the goodwill tax scheme. The company Board of Director has approved the access to the goodwill amortization scheme for a target value of EUR 2 billion, considering the range of plus/minus 20%. The final number will be decided after the financial year results and in -- the Board that will approve the accounts for the full year. The submission is -- the deadline is June 2021. But let me explain a little bit better how does the scheme works, assuming this target of EUR 2 billion. The scheme requires an up-front payment of 16%. This would mean EUR 320 million. The scheme then allows the amortization of the goodwill of EUR 2 billion, meaning EUR 400 million each. The tax benefit would be 28.4% of the EUR 400 million, meaning around EUR 110 million cash benefit per year. Therefore, we do expect an internal rate of return higher than 22% and an NPV of EUR 150 million. I would move now to Page 11, where we can see the balance sheet. And in the balance sheet, you can see the goodwill of EUR 6.1 billion and the impact of the purchase price allocation, which allocated, as we said, EUR 810 million to intangible assets. Also, EUR 263 million were allocated to tangible assets. The total net debt at the end of the period stands at EUR 3.976 billion. And this is composed by EUR 2.8 billion pure financial debt and EUR 1.1 billion related to the IFRS 16 contribution. The net debt on EBITDA ratio is 5.8%, considering the annualized reported EBITDA of Q2 2020. Before leaving the floor again to Giovanni, I would like also to talk about the successful access to the capital market. As beginning of July, we launched our inaugural bond of EUR 1 billion with a maturity of 2026 at a coupon rate of 1.875%. And we achieved an oversubscription that was over 4x and a very diversified, and the bond -- the demand was really high. So we are very pleased from the result of the inaugural bond issuance, and that has also allowed us to extend the overall maturity of our debt to 4.5 years. I would hand over now to Giovanni.

Thank you, Diego. In this second part of the presentation, we want to take a look forward to and mention some growth engines. Let's start from the DAS. This is a business in which we do believe strongly. And from these pictures, you can appreciate some of our last realization in specific cluster such as hospitals, universities, company headquarters, museum and so on. Among the new projects, I'd like to mention the 2 important examples. The LUISS university in Rome and the luxury Hotel Lungarno Collection in Milan of the Ferragamo family. The business is not yet at scale, but we see increasing interest, and we are investing on valuable locations as we believe in the potential of the business, particularly as part of the digitalization of the country. We have strengthened the organization, and we have now a sales force in place to follow immediately after deployment of our targeted locations. Moving to Slide 13. Let's turn now to the short-term plans of our new tenants. Clearly, in the last few quarters, there has been a transition, and we experienced a limited level of activity. We are now ready to ramp up the volume with the step-up in the level of activity. In the quarter, TIM and Vodafone made significant progress on the definition of the common grid. The design of the common grid supporting the 5G rollout is a complex process, which involves detailed network planning by cluster to achieve 5G coverage quality, compliance with license obligation and efficiency. So this is an important step for us as it enables the increase of tenants on our grid as part of the operator network densification. This process is going to bring the start of synergies and will continue in the following quarters as expected by the business plan. Linked to this, there is other component of our cooperational plans that is related to antitrust remedies. As show at the bottom of the page, the Transparency Register will be set up in October -- on the 5th of October and will receive the sites available for other operators on municipalities with more than 35,000 inhabitants. The antitrust procedure envisage that: one, every month, INWIT make available the list of sites; two, the time frame to choose the site is 1 month and the new entrant MNOs, Iliad and Fastweb will have the prevention right toward the other operator at friend -- fair, reasonable and not discriminatory conditions. Therefore, if no request from them arrives, the sites will be allocated to the fist operator requiring availability on the same site. This is part of European antitrust remedies, whereas 4,000 sites will be made available on 8 years, of which 3,000 on the first 4 years and 900 by September 2021. This means 75 tenants, possible tenant sites per month. This will grant us the increasing volumes on important and more remunerative location. Finally, as you can see in the middle of the page, on municipalities with less than 35,000 inhabitants, we matched the order book with the availability of the sites. There is a strong order book and a significant number of new tenants will come in the next quarter. We will deliver a ramp-up in volume in Q3 following the ramp-up in revenues in 4 -- in Q4. We expect to deliver additional 1,000 tenants by the end of this year, 2020. Going to Slide #14. Finally, let me spend a few words on some strategic priorities, which will be discussed more into detail as part of the business plan update in November. Presently, INWIT is working on the different plans: the build of one, single, integrated team; the strengthening of the vendors ecosystem; and the digitalization of our system and processes. Innovation is and will be a more -- a key aspect of our business. We are focused on exploring and assessing following projects: edge collecting, data hosting; drones, reload and data processing on the tower; smart city solution; green solution. Another important focus is development of our sustainability framework. At the moment, we have set up an ESG board committee in agreement with the United Nations Sustainable Development Goals objectives; country's 5G enabler; electricity reduction; diversity and inclusion. Diego, please, over to you for the important closing remarks.

Thank you, Giovanni. Yes, this is sort of closing remarks after -- actually before reaching the 100 days of the new entity that actually was born less than 100 days ago. So a few remarks. The first one is reiterating and underlying the fact that we are the market leader at scale and with the best asset quality. We have a resilient business with Tier 1 anchor tenants and diversified client base as neutral host in the market. Thirdly, we show high margin and cash conversion. We're talking about 64% EBITDAaL margin, 43% cash conversion. Point number four, and probably the most important, key operational steps have been completed during the first quarter. And now we see, we confirm the strong order book, and we see the operational plans in place, the activities in place to deliver a significant number of new tenancies in half 2. We expect more than 1,000 new tenants in half 2. Also, we are creating value with the tax scheme and the goodwill deductibility. We're talking about EUR 150 million NPV project. Our focus is on execution. It is our own operational excellence in the short term, combined with building long-term sustainability. So let me reiterate the numbers we mentioned in terms of year-end guidance: revenues in the range between EUR 660 million and EUR 665 million, EBITDAaL between EUR 410 million and EUR 415 million, and recurring free cash flow between EUR 260 million and EUR 265 million. Let me also say that, as already mentioned, we will share the 3-year business plan on November 5. Thank you for your attention, and I think we may open now for Q&A.

[Operator Instructions] The first question is from Jakob Bluestone from Crédit Suisse.

I had 2 questions, please. Firstly, just on your guidance. The -- I mean you mentioned that you expect an acceleration coming through around the fourth quarter once the Transparency Register is kind of up and running. But if I look at your guidance for EBITDA, the EUR 470 million pro forma seems to imply about sort of 4% like-for-like growth, which is roughly what you were growing pre-merger. So first of all, is that correct? And so does that suggest that the revenue acceleration isn't sort of big enough to lead to a substantial EBITDA acceleration? Or should we be thinking about this guidance as perhaps being a little bit conservative? The second question I had was just about the reallocation of revenues from new services into the MSA. How big was the impact of that reallocation, please?

Yes, let me take the first one. Let me say that the acceleration of new tenants, the more than 1,000 in the second half, actually comes from 3 components. One is the -- related to the Transparency Register. Though, as we said, the Transparency Register will made available at the beginning of October. Since then, the operational processes we started -- will start. So the main components of the acceleration will be actually the common grid for Vodafone and TIM and the tenants for the other operators, including fixed wireless access. The point on your question in EBITDA is a little bit the timing and the process that takes from the realization and -- of the completion of the technical activities to the revenues and then to EBITDA. This process takes time, and that's why the translation in revenues takes a little bit of time. And we will see in Q4 an initial increase of revenues. Clearly, the visible and strong impact of the additional 1,000 will accumulate for sure at the beginning of the new fiscal year. So there is a timing effect. Okay. Sorry, on your second question was related to the reallocation of new services to the...

Exactly. Yes.

Yes. So if we take as reference the first quarter, the same number was EUR 7.6 million. So we are talking about a reallocation of around EUR 6 million.

If I can maybe just ask a quick follow-up. Are there any sort of exceptional costs that you anticipate related to get these various measures you've taken in the second half? Is there anything exceptional on the OpEx side we should be looking for later this year?

No, no, no. No additional cost on OpEx. We do expect an increase on CapEx, but no additional exceptional cost, no.

Next question is from Roshan Ranjit from Deutsche Bank.

Two for me, please. Just kind of a quick follow-up on the previous point. When should we start to see the material benefits of rationalizing the 2 networks coming through at the EBITDA level? Because I think on a pro forma basis under IFRS 16, I think your guidance is at a flat kind of EBITDA growth year-on-year. So I'd be interested to know when you are going to start kind of rationalizing those 22,000 sites. And secondly, is it possible to get a bit more detail around the incremental 1,000 sites, and how that is potentially going to be split across the 2 MSAs and the other operators that you are working with?

Yes. Let me take the -- and say that the -- I mean the acceleration of delivery in half 2 will give us a very strong entry point in the new fiscal year. So we will see some acceleration of revenue in Q4. I mean just making the projection of the current year revenue, the guidance on revenue implies an acceleration. But we need to consider that out of new tenants, out of the 12 months rental, we will see the impact just for a few months in the quarter or a few weeks, actually, in the next -- in half 2. So -- but this will give us a very strong entry point in the new fiscal year, and this is going to be the pace, the level that will be maintained and also increased a little bit quarter-after-quarter. So there will be different layers. Each quarter, there will be a new layer of new tenants that will add up to the previous ones. So a completely differently picture to compare to today where we discount the fact that in the last 3 quarters, the level of growth was very limited. So now to move up the growth rate of 40,000 tenants with the additional volume will take a few quarters. But as I said, the first signs in Q4, significant entry point in the -- strong entry point in the new fiscal year. Sorry, the second question was related -- yes, the incremental sites. It's a mix. It's a mix of customers, of clients between Vodafone, TIM and other operators. This also a mix of fixed wireless access and mobile equipments. We see the demand for fixed wireless access high, is strong. And the speed, the time frame to deliver is faster. So there will be a significant component of fixed wireless access in this mix.

Okay. And just a follow-up. Now you -- apart from the remedies about the access to the 4,000 sites, are there any other restrictions set by either TIM or Vodafone as to the dismantling of the 22,000 sites? Are there any restrictions or any portions? Or is it open up for you guys to rationalize the network as you want?

Yes. No, that's a very important point from our side, and this is what we try to represent on Slide 13. Because in this quarter, the focus has been on removing any potential -- any operation -- or to perform all the operational activities that enables now to deliver additional tenants for the operators. So the -- what Giovanni said about the common grid, what Giovanni said about the site survey and the matching of sites availability with demand, this has been the focus on Q1, considering that we had a completely new grid in the sense that it's a merged grid, considering that the operators have been working hard to define their common grid and considering that we did have to set up new processes and systems. Now these processes have been substantially addressed, and that's why we are in the condition to say that we will deliver more than 1,000 new tenants in the next few months.

Okay. Just a bit to complete. As we show in the Slide 13, the activity from the engineering point of view and the rollout is enough complex because, let me say, when our -- one of our customer ask an hospitality, there is a technical feasibility time frame. Then there is field activities and siding within after to -- in our customer. And let me say, normally, there is an average time between the request of hospitality and the sign of the contract and the invoicing, let me say, phase of about 3 months, 3, 4 months, depending of the complexity of the, let me say -- and tenant that our customer ask to us to host in our tower. So keep in mind, this is not, let me say, instantaneous shop. There is engineering and the feasibility part. And there is the, let me say, our interaction with the municipalities. Okay, this -- another good news is that the new simplification law today will support us and accelerate the rollout, cutting a lot of lost time to -- in terms of permission. So keep in mind this one. That is between the average time between the, let me say, the request of hospitality and the invoicing, let me say, phase, it's 3, 4 months. So this is explained, I hope the Q4 starting interesting revenues in our side. Okay.

Next question comes from Mr. Simon Coles from Barclays.

My first one is just on small cells and sort of linked to the acceleration in the prior questions. You seem to be running at a similar pace to INWIT stand-alone, given it's still early days, that's fair enough. But I'm just wondering when can we expect that to ramp up because you obviously have some pretty impressive targets out there for the number of small cells you want to deploy and you have commitments from Vodafone and TI with it. Can we expect this to materially accelerate in 2021? Or is it a bit more of a midterm expectation? And then the second question is just a quick one. There were talks around potentially relaxing the electromagnetic radiation law. I know there's been talks about this for a long, long time. But with COVID, potentially that might give a catalyst to actually see some change. Is there any update on that discussion?

Okay. Let me say, first Of all, about small cell. Okay. Keep in mind that we are, let me say, paying a delay in 5G macro rollout by the mobile operators because the priority for mobile operators is to complete, as soon as possible, the 5G network. And then they will ask to us the outdoors more cell. And then I think that in 2021, we will start to see some interest in moving in this. We continue, and we strongly believe in the, let me say indoor coverage, dedicating in their coverage. Many location owner are asking to us to habilitate from an infrastructure point of view, the 5G, and so we are doing it. Then just to clarify, the simplification law don't -- is not about the electromagnetic law. It is about the artistic constraints, urbanistic constraints, civil constraints, municipalities' interpretation. It is about the, let me say, municipalities process to deliver to us the permission to build a new site or to upgrade sites to permit the hosting of new antennas. So let me say, this will help us to save time. Up today, we have to manage between 9 and 12 permissions to install a new tower. Now we cut the time about it. And so we accelerate our targets.

The next question comes from Mr. Ben Rickett from New Street Research.

Two quick questions on tenancy growth. Firstly, on the 4,000 committed OLO tenants, is it your expectation that you will be limited to for 4,000 OLO tenants? Or could the majority shareholders allow more than 4,000? And secondly, on additional TI and Vodafone tenancies, I think you're expecting several thousand PoPs to be migrated from existing third-party towers onto INWIT's grid. Can you update us on the total number of tenancies you expect to be migrated and the time frame for that? You're indicating it starts in Q4. It would be useful to know how long that process will take.

About the 4,000, okay, 4,000 is -- are the, let me say, the results of the antitrust authority in Europe that defined that in 8 years, INWIT must do available 4,000 sites in the cities with more than 35 (sic) [ 35,000 ] inhabitants to permit to the MNO to go on with their rollout. Another important issue of this remedy is that more than 50% must be concentrated in the 76 more important cities of Italy: Rome, Milan, Naples and so on. So this is a driver of this 4,000 in 8 years. We have to be compliant with 3,000 in 4 years. And for the first year, we have to be compliant for 900 of available sites. So these are the drivers of the, let me say, of the antitrust authority. But we can do more if we will have the possibility, if we will, let me say, are able to be available other sites, so why not? This is the antitrust driver, and we have to be compliant with them. Okay. For the second question, please, Diego.

Sorry, I may need your help to be precise on the question that if I remember well, it basically related to the, again, to the availability of sites for third parties and Vodafone and constraints coming from Vodafone and TIM.

Or more generally, the number of Vodafone and TIM tenancies you expect to migrate in the time frame for that migration.

Yes. So this is basically just the beginning. We do expect new tenants coming from Vodafone and TIM for different reasons. One is the build of the common grid, yes. The other one is the move of Vodafone and TIM tenancy from towers that today are outside INWIT grid to the INWIT grid. And the third one is also new sites related to network densification. This takes to a total number across the duration of the plan that takes to 10,500 new tenants across the duration -- along the duration of the plan. And the most of this will happen in the first 4 years of the plan. So we are talking about material numbers, and what we will see in the first 2 quarters is the beginning of this process that will take to the overall numbers I mentioned before.

That was really helpful. And a quick clarification on the first point. Can I just check that the majority shareholders, do they have a vote of a veto over any OLO tenancy beyond of the 4,000?