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

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the INWIT Second Quarter 2026 Results Conference Call. [Operator Instructions] At this time, I would like to turn the conference over to Mr. Luigi Minerva, Strategy, M&A and Investor Relations Director of INWIT. Please go ahead, sir.

Thank you, operator. Good morning, everyone, and thank you for joining us. With me today, I have Diego Galli, INWIT's General Manager; and Emilia Trudu, Chief Financial Officer. Before we begin, please allow me to draw your attention to the safe harbor statement on Page 2. Following a brief presentation of the second quarter 2026 results, we will open the floor to questions. Over to you, Diego.

Thank you, Luigi, and good morning, everyone. Q2 2026 results are very much consistent with our confirmed full year 2026 guidance, which reflects the current market context. The telco sector in Italy continues to go through a challenging phase with low returns and minimum investments. Moving to the MSA dispute, we disagree with the recent interim decisions, and we filed appeal against both ruling. We continue to believe that the MSA early termination notices are instrumental and fall outside the legal framework of the MSAs, which are valid until 2038. INWIT runs very efficiently the best quality and largely unique network in Italy. There are no rational alternatives to INWIT's network from a strategic, operational and financial perspective. INWIT remains committed to invest while collaborating with its clients to identify shared value for value solutions on a fair and rational basis. Moving to Q2 results. New sites in new PoPs reflect the current market context, while the pace of real estate transactions remains sustained. As we anticipated, revenues on a reported basis are declining year-on-year by around 1%. Revenues are negatively impacted by the absence of uncommitted revenues linked to discretionary projects. If we were to remove such discretionary project-based revenues from Q2 2025 numbers, Q2 2026 revenues would show normalized annual growth above 3%. EBITDA after leases margins at around 72% are in line with the 2026 full year guidance. Following the dividend payments in May, our leverage ratio is now 5.7x and will decline to the midpoint of our 5 to 6x leverage corridor by year-end. At the current share price, INWIT offers a dividend yield of around 8.6%, reflecting the undervaluation of our stock. I hand it over to Emilia now for a review of KPIs and financials.

Thank you, Diego, and good morning, everyone. Operational KPIs reflect the current challenging market context. The deployment of 50 new towers in this quarter represents a slight improvement over Q1 and keeps us on track to reach our target of around 200 new towers in 2026. 380 new PoPs were added in the quarter, confirming a growing tenancy ratio now at 2.4. We are aiming for more than 1,500 new PoPs in 2026, targeting a year-over-year continuous growth in tenancy ratio. Additionally, 400 completed real estate transactions confirm our strong track record, aiming for approximately 1,600 transactions in 2026. Year-to-date, we have built 65 new dedicated DAS with projects in larger-than-average location size in Q2. With regards to the next-generation EU program, Italia 5G, we completed the coverage across more than 500 square kilometers of the countrywide areas, actively bridging the digital device gap that affects those areas. We are making progress on Rome 5G smart city project, bringing 5G connectivity on the metro and digitalization to 100 public squares. The normalized 2025 total revenues base takes into account the lack of project-based noncommitted revenue components, which we have developed over time with operators capturing their discretionary spending. Such discretionary budgets have been put on hold at this stage given the current context of subdued operator investments and stagnant commercial relationships. Adjusting for this one-off step downs, we delivered approximately 3% normalized revenues growth in Q2 2026, driven by the following components: inflation linked based on a 2025 average index of 1.4%, anchor commitment in terms of new towers, new PoPs and thus deployment in line with MSA commitments. Steady growth across other MNOs and IoT, Smart Infra growth, particularly in indoor DAS across premium locations and projects in the Smart City vertical. Normalized growth is structural, and we expect the business to go back to growth in 2027, in line with the midterm baseline outlook. Moving to our financial highlights for the quarter. Q2 revenues reached EUR 267 million, up 1% quarter-on-quarter and down 1% year-on-year, representing over 3% normalized revenue growth year-on-year, as we just discussed. Revenues components included for towers and revenues up 2.8%, supported by inflation and MSA commitment. Conversely, OLOs and Smart Infra revenues were down as a result of the lack of project-based revenues such as work and service, installation upgrades and DAS, more than offsetting the underlying growing number of PoPs and DAS locations covered. On profitability, EBITDA was up 0.5% quarter-on-quarter and down 2% year-on-year to EUR 240.7 million with an EBITDA margin of over 90%. EBITDA after leases stood at approximately EUR 191 million, up 0.5% quarter-on-quarter and down 2.8% year-on-year with a 71.5% margin, reflecting the structural operational efficiency of our business model, which allows us to support substantial investments. And as a reminder, we closed 2025 with a return on capital employed of 8.4%. The quarterly recurring free cash flow reflects the expected phasing of financial charges and remains consistent with 2026 full year guidance. In H1, recurring free cash flow reached EUR 300 million, down 5% year-on-year with 63% cash conversion. This was driven by structurally low recurring CapEx, efficient taxes, thanks to the goodwill tax scheme, slightly positive net working capital and financial charges profile that reflect phasing of interest payments. Below the recurring free cash flow line, CapEx were just above EUR 70 million in Q2 and EUR 160 million in H1, consistent with guidance. We closed H1 with free cash flow to equity of about EUR 140 million. Leverage ratio reached 5.7 following the dividend payment in May. We expect it to go back to 5.5 by year-end, in line with our guidance. We have an efficient debt profile out of which 80% is fixed, 20% floating. The current average cost of debt is below 3%, and the average bond maturity is above 4 years. I now hand it back to Diego for the guidance and the closing section. Thank you.

Thank you, Emilia. We reiterate our 2026 targets and medium-term baseline outlook, reflecting the current market environment. Even in the unrealistic scenario in which the market remains stuck over the medium term, we would still be able to have a decent organic growth at around 3% for revenue and 4% for EBITDAaL, an attractive stable dividend and a solid balance sheet. The baseline outlook does not include the following potential upside, normalization of the industry dynamics, densification outdoor and indoor, opportunities to expand across digital infrastructure. At the same time, the baseline outlook does not include the downside risk of MSA's actual termination as we don't believe this is a likely or realistic outcome. Moving to the next slide, let me reiterate a few important consideration on the MSA prices and terms. All our prices are in line with the market. They are even more attractive because the MSA fee also includes unique rights to the benefit of the anchors. Once more, a benchmark of the MSA anchor tenants fees shows that they are competitive and well below the European average. The average total fee for Point of Presence is around EUR 20,000. This is a combination of sales and leaseback, new towers and new PoPs. We estimate that broadly half of the fee is related to the financial component of this hosting fee. On both components, MSAs provide convenient and competitive terms. Clearly, they are intrinsically linked to the structure of the sales and leaseback transaction as industry standard. We paid around EUR 500,000 per tower with a transaction that included a large financial component with an EBITDA per tower of around EUR 25,000. Our payback period on the MSA and leaseback transaction is around 20 years, consistent with the necessary long duration of the MSA contracts. You know the next slide very well. Our network of about 26,000 sites is the result of 40 years of work from TIM, Vodafone and INWIT, where we could take the benefit of first-mover advantage to build top quality sites in the best available locations. Our network is the result of the consolidation of multiple networks, best quality locations connected with fiber, almost 20% land-owned, optimized lease cost, best tenancy ratio. About 75% of our network is made of unique locations. INWIT is a strategic infrastructure critical to the national security and economy. Our network is available to our anchors on an all-or-nothing basis. Data traffic keeps growing. 2025 download traffic grew by 19% and upload traffic grew by 35%. We believe that the market needs further 10,000 towers in the next few years to cope with additional capacity in urban areas, coverage in suburban and rail and road corridors. The ongoing spectrum renewal process can unlock a new cycle of investments. We would welcome proposals to link the spectrum renewal to current orders with future CapEx commitments to support network quality improvement and the country digitalization. However, plans to improve quality are not compatible with the termination of renewed contracts. Level of service could not be maintained while repatriating the best network. Duplication will last decades, will delay densification and cost billions. In the current industry structure where there is a separation between tower cos and service companies, we think that the spectrum renewal framework should discourage duplication of infrastructure and support stability and predictability. About MSA dispute, the interim recent decisions were not in our favor. Ruling did not recognize the requirement based on the assessment of the financial strength of the company. Also, there was a view of change of control, which we disagree with. We appealed the decisions, and we remain convinced about the strength of our argument. In particular, change of control did happen in August 2022 when the shareholder agreement between Telecom Italia and Vodafone Group was terminated. Any different interpretation would have triggered a mandatory tender offer, which did not happen. In terms of timing, we expect the appeals to be concluded by November 2026, while the ordinary process will last for several years. Anyway, we remain convinced that the situation should be addressed through fair and reasonable discussions between INWIT and its clients to identify shared value for value solutions. Q2 results are consistent with 2026 guidance. We reiterate both 2026 and midterm guidance. INWIT has the best assets. There is no rational case for duplicating the existing high-quality infrastructure. TIM and Vodafone monetize their assets and INWIT paid in excess of EUR 10 billion in exchange for long-term contracts and proportional fees. INWIT business model and operational efficiency consistently bring a material benefit to its clients and the industry. In Italy, there is a dramatic need for investments in densification in order to increase the performance and resilience of the network and INWIT is the best option. And we remain committed to invest while collaborating with our customers to identify shared value for value solution on fair and rational basis. With this, we thank you for your attention, and we will now open the floor to Q&A.

[Operator Instructions] The first question comes from Roshan Ranjit with Deutsche Bank.

I've got 2 questions, please. Firstly, Diego, thanks for the detail on the appeals process. One question I had was I thought it was quite interesting, the language that was used from the judge as part of the TI hearing versus the Fastweb hearing where it seems they gave a bit more color perhaps going into the details of the merits of their stance on the merits of the case. Can you explain why they were able to provide more color on the TI situation versus the Fastweb situation, please? And secondly, you mentioned the spectrum framework auction. Any details there because I think we should be hearing in the next day or 2 and the trade-off between renewals versus investments. Have you been involved in any discussions there with [ DAS comp ]?

Yes. Clearly, on the TI and Fastweb ruling, actually, we disagree on both. Basically the merit of the -- the content is basically very similar. The TI tone was more on the urgency and Fastweb was on the merit on the change of control. Honestly, from no specific reasons for behind that transparent and clear to us. Anyway, yes, in our view, there is some consistency. And as we know, the injunction process is a process basically which follows a brief approach from a single judge. We just appealed yesterday and the day before yesterday, and we remain convinced that the change of control did happen in 2022, and there is no space for a different interpretation because among others, as we said, a different interpretation would have triggered a mandatory tender offer. On the spectrum, yes, the process is ongoing since a while, will continue. Clearly, we are a relevant part of the industry, and we are involved. Our position has been and is positive supporting all approaches which are supporting and facilitating investments, new investment cycle in Italy. At the same time, we think that is important that the framework is supporting the overall industry and so telco infra companies -- of the entire value chain.

Great. And when should we hear on the framework? I thought it was kind of end of July. So it should be this week, we should be hearing on the details?

Yes. There should be -- the expectation is about the consultation document to come out in a few days or a few hours, let me say. Consultation documents will be available for the government to take a decision and the consultation will be open for 60 days.

The next question comes from Fabio Pavan with Mediobanca.

First one is a follow-up on AGCOM. Provided we should have consultation document in a few hours or days, then it will be up to the government to decide how to, let's say, to replace this renewal. Do you think this is something that could be solved before year-end? And do you think a decision on spectrum renewal could come also if the uncertainty on the MSAs persist? Second question is quite simple. I was just wondering if in these days or weeks, you are engaging in some form of discussions with your anchors.

Fabio, on the timing, as we said, consultation out in a few days. Consultation will be open for 60 days, then eventually will be to the government to decide if there is a scenario where there is a decision by year-end. Clearly, the industry has been underinvested for years. So -- and all the players need visibility and predictability. So the sooner the better in terms of supporting the industry and the new cycle, the new cycle of investments. With regards to the -- can I say, the intersection with the MSA, honestly, I think that the new investment cycle is not consistent with the current situation. And I think that any plan to improve quality and support the country digitalization is not consistent. It's not compatible with the current situation on MSA with the termination of INWIT contracts, which are fundamentally with infrastructure is fundamental to support in the most efficient way, not only the maintenance of current service level, but the improvement. On the engagement with the anchors, we have the process open with Telecom Italia on the, let me say, assisted procedure with law or legally assisted procedure. And while with Fastweb, there is no procedure. This was rejected, our proposal was rejected by Fastweb a few months ago, and that's where we are.

The next question comes from Paul Sidney with Berenberg.

Just 2 questions from me, sort of big picture questions. You built 50 towers in the quarter. I'm guessing that's more than your competitors. I was just wondering, do you have a structural advantage over your competitors in the Italian market in terms of building new sites? And second question, we know that Italy needs 10,000 new towers, but there's obviously consolidation that's being speculated. But in my mind, why would mobile operators want to reduce the number of sites? So do you see actually consolidation as a potential problem in terms of reducing the number of towers that are needed? Or is it all part of this need for the 10,000 new towers irrespective of consolidation?

Paul, on the competitive advantage from an investor point of view, I would say that INWIT has been in the last years, the company building the highest number of sites and actually in the market. Iliad has been building some towers, but excluding Iliad, we have been the only ones building the towers. And we have consistently built the end-to-end, let me call, operational machine from search to location search to permit to construction to maintenance, and we think we have the most efficient and effective operational machine in the country. Let me say that also from a contractual point of view, we have a preferred supplier relationship with TIM and Vodafone, whereby we have the right of first offer and last call on all new towers. So we think that we have both an industrial and a contractual strong position. With regards to consolidation, it may drive on the short term some loss of point of presence but overall, it could be also the way to drive the market to be more sustainable and support the investments to improve the quality and to ensure the operators to have better investment. So the overall context would be more supportive of investments. And additional towers are structurally needed because as we said, the data traffic has constantly increased. Artificial intelligence adds an additional layer on top. And this is -- 5G is dramatically behind in Italy. Italy is behind Europe and Europe is behind the world, yes. Additional point of presence are needed both for capacity reasons in urban areas and the coverage in suburban and as we said, on transport corridors. So again, concluding, consolidation may drive some reduction in the short term. But overall, we have a positive view for the medium, long term.

That's great. Can I just have a quick follow-up. Does the Italian government recognize that there is the need for towers, the 10 towers number. What's the view of the Italian government?

I think that there is an overall recognition that the industry has been under strong pressure in terms of returns, and that's not sustainable and that has reduced investments in the last years, and there is a significant need to speed up the investments again to accelerate on 5G deployment for the benefit of social communities as well as companies and the economy. About the numbers, there may be different views, but I think that the order of magnitude is -- how can I say, there is a consensus about the order of magnitude to densify the network and to cope, as I said, for -- to cope with the additional capacity and coverage, which is needed.

The next question comes from Rohit Modi with Citi.

I have 2, please. One is a follow-up basically on engagement with anchors. I believe, and please correct me if I'm wrong, that you need to finalize your migration plan by 31st of March '27 as per the MSA if things remain as it is now. Now whether you engage with them on migration after the appeal decision or you will wait for it? And if you win the appeal decision, you need to discuss the migration plan that can be postponed until you get the decision from the original case? And second question is basically on the quality of your PoPs, particularly in the OLO segment. PoP growth has in the OLO segment has been consistent, but we see the revenue growth has -- revenue has declined over 1H. And if I look at your slide on Slide 17, if you look at the chart, which is there's a growth in OLO from '25 to '26. I'm just wondering if do you expect the higher growth coming in OLO in the second half or if there is kind of discretionary revenue impact that's coming in there?

Let me start from the second question on OLOs, and let me comment that in general, the market is quite soft. Honestly also the lack of visibility on the frequency renewal process and as we said, in general, the low returns on investments are making the market overall soft. Specifically with OLOs, we are doing good progress with our OLO customers. And the financial trend is impacted from the fact that last year, we had some special projects on discretionary spend, which this year has not been repeated. So basically related to specific work orders, specific project-based activities, which are depending on customers' availability, customer budgets are not recurring every year. There were last year, but not in this quarter. With regards to the engagement and let me -- the repatriation plan, the MSA says that the repatriation plan, so the plan whereby anchors have to give back and free up the towers giving it back to INWIT. So the repatriation plan should be completed by a period which should not be shorter than 3 years. So completion in a period not shorter than 3 years. That is the MSA framework. Honestly, we keep on being convinced that the current contract lasts until 2038. We know that the legal process will continue. The ordinary process will last 4 years. But anyway, we are open to be engaged and to engage with the operators if they want to start sharing the repatriation plan.

Sorry, just clarification. You need to agree on a migration plan by 31st of March '27, right? That's the case or you don't have to on the part of contract?

Yes. The repatriation plan has to be agreed between parties 1 year before the termination of the contract.