Cellnex Telecom SA

MAD:CLNX

Earnings Call Transcript 2023-Q2

[Juan Gaitan, Director of Investor Relations]

Good afternoon, 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 Q2 2023 Results Conference Call. In this occasion, I'm joined by our CEO, Marco Patuano; our CFO, Jose Manuel Aisa who will lead today's session. We'll now share the main highlights of the period, how we are progressing on the targets of the next chapter of our equity story, and then we will open the line for your questions. [Operator Instructions]

And without further ado, over to you, Marco.

[Marco Patuano, Chief Executive Officer]

Thank you. Thank you, Juan and good afternoon, everyone. Thank you so much for being with us today. As you know, this is my first earning call as a CEO of Cellnex. I'm very happy to be with you today. In reality, I'm a bit old of this industry so I know many of you. So thank you for having me back. I look forward to interact with you, meeting you, building the usual strong relation doing what I believe it's going to be a very exciting journey here in Cellnex.

So let me start by reiterating the strategic priorities that Cellnex made very clear in stating its next chapter, chapter which are not going to change under my mandate because of the board unconditional commitments to them even, but even more importantly, because I truly believe that this is the path we must follow in the current environment in order to continue to create value. Just as a reminder, we are confirming all our short and medium-term financial target, we will aim our efforts at reducing our debt with intention to become investment grade by Standard & Poor's by the end of 2024 at the latest.

We will continue focusing on the maximization of cash flow through organic growth and efficiencies and we will carry on with the ongoing assessment of strategic options for our portfolio of asset in order to crystallize the value and secure the path to investment grade. The moment we will reach the status and we will start generating cash flow above our CapEx commitments when we become free cash flow positive to be clear, we will balance the allocation on the capital between organic growth projects subject to the usual strict return criteria and the new distribution policy in order to maximize the value for our shareholders.

So let's now focus on the business performance of this quarter. We're once again providing solid numbers showing that the whole organization is aligned and fully committed to the execution of our strategy. First of all, the period has been marked by an excellent commercial performance, consistent operational execution, PoPs increasing 7.1% compared to the last year in revenues, excluding pass through increasing 17%, adjusted EBITDA and recurring levered free cash flow, 16% growth or free cash flow reaching minus €130 million which is more than €600 million increase and it is expected to breakeven by the end of this year.

In half one, we have also closed the first tranche of site remedies in France and on the second tranche, we are progressing well and we are on track. We are also announcing two new organic growth projects with [indiscernible] clients in France.

The first one is with SFR. And it consists an investment of around €275 million over a period of six years for the construction of new site and much more importantly, for the colocation of new PoPs on existing sites. That organic growth had to be created in this context will generate more anchor tenant revenues.

The second project consists an extension of our fiber-to-the-tower agreement with Bouygues Telecom. The project scope has been increased with an additional €275 million investment over six years for incremental EBITDA upon the completion of the works. We are therefore strengthening our relationship with our [indiscernible] clients in France and meeting our clients increased connectivity needs at a very attractive valuation without impacting our delevering targets due to this target profile of these investments.

Finally, we are also announcing our intention to organize a Capital Market Day in early 2024. In this occasion, we will provide you an update on our industrial proposition. I mean we will see how do we see the co-location going forward, the prospects for more BTS, the tower adjacent asset opportunity and what else we can do from the lease management perspective.

We do a deep focus on value drivers, different building blocks of our organic growth and how they contribute to our financial. We will set up a new efficiency plan after the deep dive analysis that we're undertaking and there will be an updated financial outlook. Last, an update of our financial strategy. Balance sheet management, capital allocation priorities and criteria, shareholder remuneration policy that I'm sure you're always all interested in.

Now, Jose Manuel Aisa, our CFO will provide you more details on the period. So, Jose Manuel, floor is yours.

[Jose Manuel Aisa, Chief Financial Officer]

Thank you very much, Marco. Since you already have the full presentation, I will just provide a few additional remarks on the period. Our capital allocation priorities and our financial strategy. The quarter has seen again, an excellent commercial performance with organic PoPs growing at 7.1% compared to the same period last year. This is mainly due to the progress made on our Build-to-Suit products in France, Poland, the UK and Italy. With 3% growth attributable to BTS. And the PoP is generated mainly in Portugal and Italy while the rest of our markets are also showing a steady performance.

PoP growth linked to new co-locations have reached a very strong 4.1% this period. Excluding the impact from pass-throughs, revenues have increased 17% compared to the same period last year, EBITDA, 16% and record level free cash flow, 16%. Please bear in mind that this performance corresponds to H1 and when looking at Q2 only, our EBITDA has grown faster than our revenues compared to Q2 last year. In this context, just a quick comment on the deep dive analysis that Cellnex is currently undertaking of its cost structure and the conclusions we will present in our upcoming Capital Markets Day.

Now moving to our free cash flow. We define recurring levered free cash flow minus expansion CapEx minus Build-to-Suit CapEx plus cash received from remedies. It has reached minus €130 million, more than €600 million increase compared to the same period last year. This is an important improvement and it is expected to break – get break even by the end of this year. Going forward, our free cash flow generation will further accelerate as we reach the end of our Build-to-Suit programs. And this will underpin our rapid deleveraging and will give us the financial flexibility to continue growing organically with our clients and to establish an attractive shareholder remuneration policy.

In terms of balance sheet management, Cellnex is constantly monitoring market conditions and assessing the benefits of different debt instruments in order to achieve an optimal capital structure and choose the most appropriate option to tackle near-term refinancing needs. As such, we are actively working to boost debt maturities forward considering a number of options which we hope we can present to you very soon.

As Marco has already mentioned, we have made the conditional commitment to maintain adjusted lever consistently below 7x EBITDA with objective to regain investment grade by S&P as well as to maintain our Investment Grade status by Fitch. This commitment and its subsequent delivery should allow Cellnex to access a deeper debt market at compelling terms while we are assessing the strategic options for our portfolio of assets to continue crystallizing value and secure this deleveraging process.

And with this, we remain now at your disposal to answer any questions.

[Juan Gaitan, Director of Investor Relations]

Thank you, Marco. Thank you, Jose Manuel. Next question comes from Andrew Lee from Goldman Sachs. Please Andrew, go ahead.

[Andrew Lee, Goldman Sachs]

Good afternoon everyone. Thanks for taking questions. And the results themselves are pretty straightforward and a great expansion of co-tenancy growth. So I just wanted to ask a few questions around that outlook and very wary that you may not be able to answer some or all of them. So I'm just going to put them out there and just see what you say. So just firstly, you highlighted cost optimization and efficiency plan. I just wanted to clarify, particularly for investors in U.S. towers that have noticed a gap in efficiency between U.S. telcos and European telcos but that cost optimization work that you're doing would be incremental to what you're doing already, i.e., the €90 to €100 million savings plan.

So second question was on asset sales. There was some speculation yesterday on Danish and Swedish asset sales, and obviously I'm not going to ask not so specifically about that, but one of the things it mentioned was a minority sale. I wonder if you could give us any early insights into your proclivity for minority sales versus full asset sales. And that would be really helpful. And then just finally, just a clarification. I think, Marco, you mentioned that you wouldn't consider shareholder returns before turning free cash flow positive. Is that correct and if it is correct, what definition do you mean on free cash flow there? Thank you.

[Marco Patuano, Chief Executive Officer]

Yes. So the three question, cost optimization. I think that if you look at any tower operator, cost structure is fairly straightforward and the largest cost driver is on lease. So, there is no magic in order to make or to perform a stronger lease efficiency. There are two levers. One is renegotiation and the other is land aggregation. We're going to perform both. We are working on this, very actively working. We have some new possibilities that we are evaluating. So for sure, this is one lever. The second lever, we are working on all the cost structure.

We are making our structure linear, especially at headquarter level. I know that cost of people is not the major driver of the optimization, but it drives a lot of complexities. So, we are going to become linear. Third, we're going – we launched an internal benchmarking process. So we are not always at the same level of efficiency all across our group and we are going to work on these. Fourth, we have a very strong IT program in order to improve our plan. So there is a lot of things that we can do. If we compare ourselves with our – with some of our peers, not always we are the most efficient of the group. So we have to understand how to become more efficient.

On asset sales, well, I don't want to speculate on rumors but let me say that we like the idea of accelerating the Investment Grade and not having it at the end of 2024 but having it before. So is it minority or is it full asset? This quarter demonstrated that being a pan-European group is a point of strength. We have growth coming from BTS from some countries and we have growth coming from co-location from other countries. So I think that trying to maintain a pan-European footprint is important.

Now two concepts. One, if you look at our delevering across the time, along the time, and you will see that in coming years, inflows, free cash flow inflows are going to be very robust. And so the possibility of having some financial partners that have a day when they enter and a day when they exit can be a good opportunity. But if a country is not going or has not the possibility to reach the scale that make our operation efficient, we will evaluate eventually even a full asset sale in case there is not an industrial strategy that makes sense. So we are let me say driven by an industrial consideration. We want to perform, we want to stay pan-European but we need the scale in order to be pan-European.

Free cash flow maybe that I wasn't clear, I think that first, we have to concentrate on being free cash flow positive and once we are solid with free cash flow positive, we will evaluate all the possibilities in order to give a return to the investors and to the shareholders without excluding any alternative.

[Juan Gaitan, Director of Investor Relations]

So the next question comes from Akhil Dattani from JPMorgan. Please Akhil go ahead.

[Akhil Dattani, JPMorgan]

Hi, good afternoon. Thanks for taking my questions. I've got a few, please. Firstly, Marco, you mentioned in your presentation that you're very much looking to support and endorse the strategy of the Board, which obviously is good to see. But I guess it would be interesting to understand, as you've had experience of Cellnex as a Chairman and obviously now as a CEO, how you think about routes to maybe enhance that strategy. I appreciate its early days, but any sort of early thoughts you have in terms of where you see the greatest opportunities, it would be interesting.

Second one is, I was interested by the two new organic growth transactions that you've talked to today and you've announced and was keen to understand how those negotiations have gone. And I guess specifically what I'm trying to understand is, as we move into what is now clearly a higher rate environment, how has that altered the way the negotiations with counterparties' work? And should we think about Cellnex now targeting higher IRRs than before to reflect your implicit high cost of capital?

And then the last one is just a very quick one just on consolidation. You've got a slide in your presentation talking about the way in which you think you're well defended against consolidation, but inevitably, we always get a lot of questions about this from investors. Just as a very simple point, I wanted to understand if we think about Spanish and UK mergers that are currently pending, if both of these were to go through, can you talk us through what the near-term financial impact, if any, might be assuming there are no remedies? If we take the most extreme scenario where there's no remedies, what would be the maximum financial impact? Thanks very much.

[Marco Patuano, Chief Executive Officer]

Thank you. Very interesting questions. So where are the greatest opportunities? If you look at us across the group, we are a fairly diversified group across the different countries. In some countries, we are a pure tower co, in some other countries, we are a mixed tower co where we make also fiber, and in other countries, we are active equipments like Poland. So the opportunity is, there are two opportunities. One is we have to increase our use of the invested capital and this give me also the possibility to join your question number 1 and your question two.

So we have deployed a lot of capital and a good part of our growth was CapEx driven. Going forward, we will maintain all our commitments. We still have significant commitments that will give us a tailwind in the growth, but we have to increase the efficient use of our capital already invested. So, this is on the revenue side. So, we have to work on new revenue sources, low capital intensity. The second is, as our colleague of Goldman Sachs asked before, the cost optimization comes from lease. Not in all the countries, we are efficient in lease.

So we can increase our performance and we can increase our recurring free cash flow, both investing and renegotiating. There are adjacent opportunities. Yes, there are adjacent opportunities. In Poland, we are in the active equipment. I tell you the truth, we are conscious, we are cultivative. We will not jump in the dark in this. We will make adjacent business especially if it requires significant CapEx, if the return on the invested capital is okay.

So I don't consider higher IRR because of the increase of the interest rates only. Normally, we don't take the short-term interest rate as a reference. So, we invest in infrastructure. We have to look at the long-term interest rates in order to set up our IRR. But it's clear that if we enter in more risky business, we need to increase the expected IRR. And this is what we are going to do. So we are going to be very prudent in this.

You asked me about the negotiation level. What's the negotiation? This give us a very good link between your first question and this question. The agreement we signed with SFR is exactly, and I underlined that it's extremely important, possibility of having more point of presence in existing sites. So the possibility of increasing our tenancy ratio goes also hand in hand with agreements and with negotiation that we can do with our partner.

If you take France, we have already more than 25,000 sites. So when we discuss with our clients, first of all, we have to convince them that they have or they can evaluate the possibility instead of building a new tower to use an existing one which can be cheaper for them and it can be value accretive for us. BTS optimization is the word. BTS versus new PoP. We can do a lot in this. What do I think about the merger of operators? So we have to be clear on short-term effect and long-term effect.

The first thing that is important to us is that our clients are in good shape. To be a bit cynical, I want them to pay us. So they have to be in good shape to be. Even more cynical, I want them to invest more and so they have to be in good shape. In some markets, the over-competition is preventing a good level of investment. A good level of investment means the densification of the network. Densification of the network means more sites, more Small Cell, more DAS, more everything.

So short-term, every time there is a merger between or a potential merger between two MNOs, then what we have to be careful is not to have a – not be penalized on what we paid in the past in order to be there. So, it has to be a fair negotiation. We can accept marginal deviation, but we cannot accept monster deviation from what we agreed and what we paid in the past. But these can be agreed in the context of a merger. And I think that from more solid customers and more solid MNOs, more investment is good for us.

[Juan Gaitan, Director of Investor Relations]

Next question comes from Georgios Ierodiaconou from Citi. Please go ahead.

[Georgios Ierodiaconou, Citi]

Yes, good afternoon. Thank you for taking my questions. A couple of follow-ups please. The first one, Marco, you discussed value crystallization and the fact that you would like to have some partners for a certain period of time during the investment phase, I was just curious if you can also perhaps elaborate a bit more as to how you are thinking about the mix because clearly in some of the more mature markets with multiple anchor tenants, you can have a better crystallization of value, but maybe in some other markets, you may require more investments to gain scale and maybe acquire assets locally. So, curious between the mix of the two, what would be your preference?

The second is just a clarification on the comments you just made about the SFR agreement. I was wondering if you can disclose perhaps how many of the sites are new and therefore build-to-suit versus co-locations, if you have an idea, perhaps of the number of sites and also the mix between the two? That would be great. And then the final question is around the development we had recently in Italy with the spin-off of the network of one of the players, who's your main anchor tenant and an infrastructure fund looking to acquire it.

Is this the type of business that in the future you could consider to be a bit more active if the balance sheet allows you, conscious of the fact that in Poland you haven't gone fully that way but you are already on the active side. So, if you see this trend of telcos perhaps going a bit further in what they're willing to give up, if Cellnex will be there in these adjacencies, so whether that is a step too far for you. Thank you.

[Marco Patuano, Chief Executive Officer]

Thank you, Georgios. Tele crystallization. I think that every hypothesis has the perfect partner. There is not a perfect partner for everything, because as you perfectly underlined, there are different market conditions, so different needs, and so different partners. You were referring to solid, mature markets. What is the preferred partner in this case?

It's a partner with low cost of capital and with good interest of dividends and potentially a longer horizon. There are markets in which something will happen in the future. There has been speculation on the Nordic country. Well, the Nordic country is a place where something will happen in the coming years because Telia, Telenor, everybody is changing their approach to the market. So you need someone who is with a more entrepreneurial attitude. If there is more capital to put on the table, you need to have someone who can make a follow-on, it's the case. So there is not a single perfect partner. Every partner is good or bad depending on where you want to put the partner. Are we looking more to a situation where the market is very stable or a situation where the market is moving?

I tell you that we are agnostic. There are situations where the market where the value has not really became very explicit because it's still a work in progress. So where it is still a work in progress I think that we should leave on the table too much value in crystallizing the asset, the asset evaluation in the hand of the partner. A partner will say okay. I want to be part of this work in progress. And I think that we have all the expertise. And let me be a little bit proud of ourselves. Also, we have the money and I'm not sure that we need someone to make our job. So we are more than able to make our job. But there are situations where having a partner can be very helpful or the market is mature enough that we can open to someone.

I take the third because I leave the second to one who has the numbers, so he's the bean counter of the story. So I leave him to count the beans. So network separation, what I think – what – we are again in the story of the adjacent investment. So I give you two answers. First, are we okay or are we against network separation in Italy? We are neutral. At the end, the quality of the counterparty having a netco or having an integrated player in this specific circumstance doesn't change at all.

So we are fine and it will not – a problem will not come for us. Then, is it a territory where we can play? There should be value creation. So in outsourcing a network, I think that the value creation from the pure outsourcing of a network is relative. Yes, we can do it. Yes, we can have a good return on the invested capital because we ask something that could be, let me say, RAB-oriented. I go and I ask a minimum return on my invested capital and this can be a business model. But the real bingo comes if you can consolidate networks.

In the network consolidation, there is a lot of synergy. There is a good service that you can provide to the operators that are consolidating the network because their network will cost less. There will be a lower cost per giga and running a network and sell it to two MNOs can deliver extra boost in value. Is this a financial project? No. That's an industrial project. Consolidating networks is from the [engineeristic] perspective. It's not walking in the grass in a moonlight. It's tough. It's complicated. You need a lot of stars to be aligned. But if the stars align, of course, we will be a good astronomic. So, please.

[Jose Manuel Aisa, Chief Financial Officer]

The second question, Georgios, basically, we are talking about an investment of EUR 275 million in exchange for around 1,800 new PoPs, all of them at anchor tenant fees, and the split which is around all of these PoPs should be generated from around 1,000 new sites, and the rest is coming from an acceleration of the densification of the client.

[Marco Patuano, Chief Executive Officer]

Thank you. All-in-all, if you make some math, you see that it's a great deal. So I congratulate our guys on the commercial brands.

[Juan Gaitan, Director of Investor Relations]

Excellent. Next question comes from Ondrej Cabejsek at UBS. Please go ahead.

[Ondrej Cabejsek, UBS]

Hi. Thank you for the presentation and taking my question. I've got a couple as well, please. So just following up on the conversation between, scale and presence that you were mentioning in terms of importance of having a pan-European footprint, what is the kind of balance that you would assess in markets where you are present today, such as the Nordics that have been mentioned, but also, for example, Austria where clearly there is very little opportunity to consolidate and thus achieve scale because 100% of your competition is industrial and so forth.

So what is kind of the approach here? Is that being in a place just for the sake of being there or would in a situation like this, the ability to scale up or rather the inability in this case to scale up prevail? Then in terms of, you were talking about the optimization of leases going forward with rates continuing to creep up, I was just wondering if the ambition in this scenario would be to just kind of achieve the kind of guidance that you've given previously around €850 million for 2023 and then taking this number down to say €830 million roughly by 2025 or do you think that there is actually scope to do even more despite the interest rate curve probably creeping up a bit further?

And a third one if I may. In terms of operating leverage, so you have highlighted that obviously, even last quarter you said this was an exemption and 2Q should see or throughout the year, you should see operating leverage come through. So we are seeing this come through, but if you could explain to us the building blocks of that turnaround in terms of operating leverage and how you see this going forward please. Thank you very much.

[Marco Patuano, Chief Executive Officer]

Okay. So you made two great examples in pan-European partnerships because you took two markets that represent really the extremes of the potential thoughts. Nordics is a place where everybody, every expert of the sector tells you that something will happen, but we don't know exactly in which order and when. Therefore, you need a partner, as I told you before, entrepreneurial, with deep pockets, with good lateral thinking, expert of the sector. So you need someone who really wants to play the game together with us.

Don't get me wrong, we are on the driving seat, but it's important to have a sparring partner to think – in order to think together. Austria is exactly the opposite. It's a blocked situation. So in Austria, there are some big blocks. Some of them moved a few time ago, some of them are not expected to move. So how to get scale there? Will you get scale there if you find a way to unblock these scenario? Otherwise, the risk is that you remain subscaled and remain in subscale that you cannot get synergies.

You know better than me that synergies are in-country synergy. The cross-country synergies are very modest. So you need to have in-country synergies. So you made two very good examples because the two examples drive you to what I was telling you before. There is not one fits all. Every country you have to see to analyze and you have to make strategic thinking before taking the chequebook and understanding who has the right pen to sign the cheque.

Your second question was about leases. So can we do more? This is exactly what we are working on in this moment and this will be one of the driver of our plan and that we are going to present later on this year. My gut feeling is probably yes, if we are able to activate the proper levers that requires deep work, we have created an internal working group that is a multi-country working group that is working on this. We have the best practice in Italy and we have some several countries that can do significantly better, but we need to improve our performance. The last, I ask you, pardon it was a little bit bad, the reception. I think you were talking about operating leverage.

[Jose Manuel Aisa, Chief Financial Officer]

Yes. Maybe just one clarification on the second one. Just to clarify numbers, Ondrej. So our 2023 guidance includes €850 million of leases and then our 2025 guidance, close to €900 million, just to clarify the figures on our end. And maybe, Ondrej, maybe we will need to ask you again about your third question, because we're not sure we got it. Apologies for that.

[Ondrej Cabejsek, UBS]

Sure. Apologies. So in terms of the operating leverage, I was just curious if you could remind us, because obviously you had a situation in 1Q where there was negative operating leverage on the level of EBITDA but you flagged that this would kind of change in the coming quarters. If you could explain to us please, how exactly that played out and what do you expect for the rest of the year, perhaps? Thank you.

[Jose Manuel Aisa, Chief Financial Officer]

Absolutely and thank you. It is true, it is true that in Q1, maybe operating leverage was not so evident because you could see that our revenues grew faster than our EBITDA. That situation, if you look – if you focus on Q2 only figures, the situation has reversed. So in this occasion, EBITDA has grown faster than revenues and we believe that, that is the sort of a performance that you should be expecting in the coming quarters.

[Ondrej Cabejsek, UBS]

Appreciate it. Thank you very much.

[Jose Manuel Aisa, Chief Financial Officer]

Thank you so much.

[Juan Gaitan, Director of Investor Relations]

Next question comes from Luigi Minerva from HSBC.

[Luigi Minerva, HSBC]

Yes. Good afternoon. Thanks for taking my questions. I was wondering if we can go a step back, Marco, and perhaps you can tell us, how you approached your first 100 days as a CEO of Cellnex? How are you organizing your time, your priorities, and perhaps you can mention three strengths and three weaknesses that so far you have seen in the company? And then perhaps a couple of more practical questions. Now the second one is about your – as you approach portfolio management and potentially consider disposals, I'm wondering whether there is a sort of a valuation set of rules that the team has in mind. For example, that you wouldn't sell assets below Cellnex's current trading multiples. And thirdly, in the path to get to Investment Grade, I wanted to ask if spreading the build-to-suit investment program over a longer of time is also an option that you are considering. Thank you.

[Marco Patuano, Chief Executive Officer]

So the first 100 days have been a sort of an incredible European rush. The first thing I did, I visited all the single countries. I spoke with, I had a dedicated due diligence. Alex was with me, the Head of Human Resources was with me. Most of the time the CFO was with me. We spent, we had one-day meeting with all of them, analyzing market by market, and in every single country, we met our most important clients. With some of them, we had to reinsure that the strategy was not getting Investment Grade, just not performing the agreement we had with them.

So it was operations first, customer hand-in-hand with operations, and then we made a very strong due diligence on numbers. So all the numbers that are in this group have been revised. It has been, believe me, a tough 100 days, not only for me, but also my colleagues had to, how can I say, to leave with me, and so it was a tough couple of months. Just to remember, my 100 days lasted 60 days. So it's a bit unfair, because my 100 days ends mid-September, just for the love of arithmetics. So where we are very good? Every single client I've been talking with told us that we are a good partner.

This, for me, was a breath of fresh air and this is extremely important. They were scared that we could be less engaged because of CapEx constraints and when we told them we will find a way to do both CapEx and leverage, they were relieved. Technically speaking, I found that all our guys at the operational level are particularly good, so very well. The third strength, I would say that there is a spread knowledge of the financial metrics. So every time you speak with someone, he is well aware of the value driver and the financial value driver. So there is a spread knowledge.

Three weakness, one is we have 12 countries and 13 operating models. So we have – we can have more synergies if we standardize some of the things we do. There are always good reasons for being different but sometimes there are even better reasons for being the same and this is one element we can do better. Second, our IT can be improved. This requires a little bit of IT CapEx. No worries, the payback will be super, super duper short and well, I have not in mind, the third. So I stay I stay with 2.

Disposals. So what are the rules of the house in my head? We have premium asset. We want premium evaluation. You were mentioning not below the trading multiple of Cellnex. So you're very, very, very pessimistic. I would say not below the best of the market. So I'm not – we are not talking about something that you can easily find in the market. We have backlogs that are billionaire. We have relations with the customer that are multi-country and this is a strength. We have operations in place. There is a scarcity factor. There are not so many good assets on sale. There is a size.

All the countries we are sizable apart with exception of a couple of countries. So we have premium assets. We don't sit at the table if there is not someone who wants to give us premium valuation. BTS make it longer. I think exactly the opposite. I want my customer to have a strong 5G but this is not on – there is zero doubt that we will have to stay on the plan. So, what we are doing? We created a capital allocation, quite severe capital allocation procedure including at the Board level we created a capital allocation committee in order to be 100% sure that we will allocate our resources with a priority list that not only makes sense but it turns into value constantly. So, it's not making the story longer that you get the result, it's putting the money with a clear priority. And I'm sure that if there is not a clear priority, everybody understands that it can be delayed. Hope I answered.

[Luigi Minerva, HSBC]

Yes. Thank you very much.

[Marco Patuano, Chief Executive Officer]

Thank you, Luigi.

[Juan Gaitan, Director of Investor Relations]

Next question comes from Jakob Bluestone from Exane. Please go ahead.

[Jakob Bluestone, Exane BNP Paribas]

Hi. Thanks for taking the question. I'll keep it to one. You talked earlier about how you wanted to find new low capital-intensive revenue sources and I was hoping you could maybe expand a little bit on what do you mean by that and what are some of these sort of additional revenue streams. And I guess, I mean, Cellnex has probably been pursuing some of this already, perhaps through the sort of augmented tower co. So maybe if you can sort of particularly zoom in on what is it that you're going to do differently on the revenue side, that would be helpful.

[Marco Patuano, Chief Executive Officer]

I was mostly referring to intelligent co-location. Once again, the project we have signed in France is the type of project that we have to sit and discuss with our clients. Sometime and the question that Luigi made a second ago can be very useful. My client believes that building a new tower is faster for them to deploy the 5G network. It's faster than to co-locate on an existing tower. We are going to demonstrate that this is not true, that with the limited CapEx, without the CapEx necessary to reinforce an existing tower, we can easily co-locate their 5G and we will save a lot of money.

In the case of France, we saved more or less 800 BTS going on new PoPs. Even if I have to reinforce the tower or what we call work and studies, you can easily imagine that the cost of the work and study is well below the CapEx required for a new BTS. There are other businesses that are relatively low CapEx because they use existing infrastructures. I make you a very concrete example. We are winning TETRA agreements. The TETRA agreement goes on existing tower. So you just have to make some CapEx, and then you have a beautiful new tenant.

That, by the way, you never expected because it's not an MNO. Who pays? Of course, a little bit less than an MNO, but at the end, it's very good. In some countries, you have IoT, FWA. You have a lot of things that you can do. We are exploring opportunities with new entrant. Example, Portugal. Portugal is building something like 3,000 new PoPs on existing sites. I can talk with you about how we can explore broadcasting towers in order to deliver new services to the cut.

So, the list can be as long as you wish. Each program, each project is something different, something new. But what is important is that the more you ask to the countries to include these into their span of attention, the more you see that there is a multiplicative effect that is going to work. So and another thing at corporate level, we are creating a sales excellence team that is going to transfer know-how from one country to another because, for example, Spain is super strong in TETRA and we can use this experience in other countries. By the way, at the corporate level, we are decreasing the headcounts. Did you say ever the number?

[Jose Manuel Aisa, Chief Financial Officer]

Yeah. €55 million, €60 million.

[Marco Patuano, Chief Executive Officer]

So in order of magnitude of 20% to 25%.

[Jose Manuel Aisa, Chief Financial Officer]

Yes.

[Marco Patuano, Chief Executive Officer]

So we do much more with significantly less people.

[Jakob Bluestone, Exane BNP Paribas]

[Indiscernible]

[Marco Patuano, Chief Executive Officer]

Yes. Please.

[Jakob Bluestone, Exane BNP Paribas]

I was just going to ask a follow-up just on, as you described it, the sort of increasing smart tenancies. So I guess, I mean, essentially, there's a bigger focus on growing the number of tenants per site. Are there any particular markets which you would highlight where there's a particular opportunity for that that you've identified?

[Marco Patuano, Chief Executive Officer]

All in every market. All in every market because what we need is to put in the brain of our commercial guys that there is the possibility of doing more. There is. We risk – the risk of that I see is that we make the same mistake we were doing at the beginning of this century when we are talking about Internet. So everything was Internet and then we thought that nothing was Internet. The truth is that we were just missing the timeline.

Make an example at a certain point, we thought that we would develop a gazillion Small Cells, DAS whatsoever. Now you take the business plan of everyone, there are no Small Cells. So they disappeared. So we are putting just wrongly on the timeline. I think that if you take the CapEx intensity of a huge small cell program, you will be surprised that the CapEx per node is relatively efficient. So we have to think differently. It's a matter of thinking differently. Sorry, I'm making very long, so please pardon me.

[Jakob Bluestone, Exane BNP Paribas]

Thanks so much. That's very helpful.

[Juan Gaitan, Director of Investor Relations]

Thank you, Jakob. Next question comes from Fernando Cordero from Santander. Please go ahead.

[Fernando Cordero, Banco Santander]

Good afternoon and thanks for taking my two questions. The first one is to some extent a follow-up on the previous one and that we just extend, the – one of the organic growth levers that is present – has been present in the story, particularly not just in assets, will you continue to be there? Now in that sense, I don't know, to which extent do see investment in [indiscernible] and you named the small cells, but also talking about fiber to antenna or edge computing are sitting in these smart growth on low invested capital.

And in that sense, I would like to understand if your comments on this kind of organic growth should arrive on change on your views on the targeted organic expansion CapEx, which is currently at 10% of the sales. And at which extent do you see some kind of change on this guidance? And the second question is on capital allocation and particularly on the basis that you were having already the Investment Grade, whatever it takes. But how are – what is your approach for it in terms of shareholder remuneration and what extent the shareholder remuneration to represent part of the capital generation as I said, whenever you get the Investment Grade? When you get there.

[Marco Patuano, Chief Executive Officer]

It starts to be a little bit difficult to continue to elaborate on organic growth. But let me tell you. We have to – we have not to forget that we are partners of mobile networks. And I used the plural because it can be 4G, 5G, but it can be security network, it can be FWA, it can be a lot of things. It can be a microwave ecalling. It can be literally a lot of things. In some circumstances, Spain and France, for example, we're working on fiber which is not only fiber to the antenna, we are buying also metropolitan area networks. So I think that it's important to consider the driver of the industry we are part of.

Point number one, new services are going to be deployed on higher frequencies. Higher frequencies need – mean smaller cells. Smaller cells means to have more dense passive infrastructure. Point number two, electromagnetic limit. We hope that it can be released, but permitting it's still – in urban areas it's still a nightmare. This means that neutral networks that are going to be deployed and looking – and forward looking, it's going to be deployed. Third, forget about the fiber to the client, but the fiber to industrial premises is a growing business. There is a growing demand of wholesale fiber. And what we are building is a relation with our clients, where we have significant spare capacity that we can sell wholesale.

So what I wanted to tell you, Fernando, is there is organic core and there is organic adjacent and there is BTS. We are not saying that we are not going to make the BTS. We have contracts and we have contracts that we have to build another sort of 20,000 BTS, and we will do. We will respect all our contracts with all our clients. We will do it. But we have not to limit our growth to CapEx-driven growth. We have to add also more.

Is it something that we can do tomorrow morning because I arrived at the day before yesterday? No. It means that we have to push in this direction. It will take a little bit of time. It means that we have to organize in a slightly different way. We will do it. The – considering if you're a believer, Bible says that the planet has been made in 6 days. So I don't pretend to make everything in one day. Capital allocation and shareholder remuneration. As I told you, I will not going to change the plans vis-a-vis the client. Then words are words, facts are facts.

Until the day before yesterday, it was in INWIT and so what we did, when we reached the target leverage, we said we go back and we better remunerate our shareholders. Words are words, facts are facts. So I think that I don't want you to believe my words. I want you to look at my facts.

[Fernando Cordero, Banco Santander]

Fair enough. And thanks for the color, Marco. Just a follow-up. What are your views regarding the broadcasting business in Spain?

[Juan Gaitan, Director of Investor Relations]

Sorry, Fernando. Your line is not fantastic. Can you please repeat?

[Fernando Cordero, Banco Santander]

Yes. Sorry. Just I was asking for Marco's view on the broadcasting business in Spain and at which extent you may think – what are your plans on that business? I know that there are some tax efficiencies coming from that segment, but also, we know which are the long-term outlook?

[Marco Patuano, Chief Executive Officer]

Yes. I'm a crusader of the poor broadcasting because I'm the defender of the phase of the broadcaster. The poor broadcaster is that it's treated too badly. If you make the return on the invested capital of broadcasting, you will jump on the chair because the capital allocated has been amortized since ages, and we are making very good returns. I think that we are looking to the broadcasting using the wrong parameter. If you ask to the broadcasting growth, of course, you're not going to have growth.

If you ask to have a 90% EBITDA, you don't know the business, so because it means that this requires more FTE, requires more and more attention. This SLAs are very strict, the infrastructure. But if you look at the right metrics, which is the return on the invested capital in this business, you will love it the same way I love it. It's a fantastic cash generator, it pushed up our ROIC performance in Spain. And I'm proud of the guys who have a level of expertise. Incredible.

By the way, their level of expertise is allowing us to create and we are starting now to create an European NOC pan-European SOC. So we can use their experience in order to use their spare time in order to offer services to other countries where you have to have a network control. So I wish I had $1 every time that someone told me that broadcasting was dead because I would have been a millionaire and I would not be here with Jose Manuel but the truth is that the broadcasting is doing well. The Spanish government just said that they are going to launch ultradefinition 4K on their multiplex, which is super good news because it extends the life of this service. So happy to have it.

[Fernando Cordero, Banco Santander]

Very clear. Many thanks for the answer.

[Juan Gaitan, Director of Investor Relations]

Thank you, Fernando. Next question comes from Roshan Ranjit from Deutsche Bank. Please go ahead.

[Roshan Ranjit, Deutsche Bank]

Great. Thanks for the questions. Good afternoon, everyone. Just a quick follow-up on the extension to the SFR deal in France, please. I think just based on the headline numbers, it adds around €50 million of CapEx a year as part of the build-to-suit. Marco, you've been very clear around the scope for kind of CapEx efficiencies. I think you outlined in new efficiency plans at the CMD, is this a precursor combine in the build-to-suit in France? I think the previous guidance was around €1.6 billion of build-to-suit CapEx in 2023. So can we see upside risk to that number as a result of these efficiencies? And just a quick follow-up on organic growth, which you've got into great detail, 7% growth for the PoP growth for H1. I know your guidance is greater than 5%. But given the way densifications are going, is there a kind of a material upside to that number do you see? Thank you.

[Juan Gaitan, Director of Investor Relations]

I don't know if I have followed well the first question. Your first question was about acquisition, build-to-suit, you have said €50 million. I think you are talking about potentially acquisition of lands that we have carried out. Yes, Roshan, just in case, if you could please repeat just to make sure that we have the same question, Roshan. Sorry, please.

[Roshan Ranjit, Deutsche Bank]

Sure. So it was with the SFR deal, the secured investment at €275 million yes, and how that builds into your existing build-to-suit program?

[Juan Gaitan, Director of Investor Relations]

Correct. That is essentially, that is on top. So that is not what was initially contemplated. Also bear in mind that that is not going to impact any guidance because of the nature of the process, it is a stuck-on time. Also, you shouldn't be expecting an immediate deployment of this project. Our expectation is that maybe the benefit is going to be more visible from 2026 onwards. You know that the run rate for this project is 2029. So I think that that is something we can accommodate within our objectives. And when we are mentioning our intention is to become free cash flow neutral by the end of 2023 and 2024, that is not going to be changed because of this project.

[Marco Patuano, Chief Executive Officer]

Yes. We can easily accommodate the 2023 and 2024 portion, we can easily accommodate in a CapEx optimization that we are designing internally. So no worries on this. I don't know if there was a second part in your question, Roshan?

[Roshan Ranjit, Deutsche Bank]

Yes. Sorry. It was just on the organic growth, you delivered 7% PoP growth in H1 in your previous guidance, you've said greater than 5%. And the way you've been talking around really driving the tenancy and the lease-up and densification from requirements from the MNOs. Is there upside to this number now? Thanks.

[Marco Patuano, Chief Executive Officer]

Yes. I think that if you look, we gave also the deployment of the 7% by country, and you see that there is a very important contribution coming from Portugal, which is the acceleration, the Digi is asking us in order to deploy their network envisaging the launch of the service. You know that the Digi project is a strong project that is giving us extra boost. So I would say that part of these exceptional Digi is pushing the 7%. Never forget, as per Chart number 6, that the 7% is sort of 3.3% is coming from BTS and a sort of 4% is coming from new locations.

So the BTS is following a program. 2023 is a heavy number. It's a heavy CapEx year, which means a lot because if we are able, and I believe that we will be able to be free cash flow neutral, so forget about the recurring, let's use free cash flow. We are – see, if we are free cash flow neutral this year with the amount of CapEx we are going to do this year, 2024 which is lighter in terms of CapEx, you see that the trajectory of the 2024 is for a natural improvement in free cash flow.

But to go to your question, so the 7% is given today by a 3% BTS and 4% new co-location. That 4% of new co-location has a push from Digi Portugal. Are they going to push all the time? Until when they push, we are happy. The day they will stop pushing, we will ask to some other country to do more. I think that the 7% has been something outstanding. So we are not going to change our target because of the 7%.

[Roshan Ranjit, Deutsche Bank]

That's very clear. Thank you.

[Juan Gaitan, Director of Investor Relations]

Thank you so much, Roshan.

[Marco Patuano, Chief Executive Officer]

So now it's two old friends.

[Juan Gaitan, Director of Investor Relations]

Yes. As we are going past the hour, so the last question or questions will come from Fabio Pavan at Mediobanca. Please go ahead.

[Fabio Pavan, Mediobanca]

Hi.

[Marco Patuano, Chief Executive Officer]

Yes. To be clear, I cannot answer to Nick. So I will take Nick Delfas because otherwise, he kills me and since we know each other, since I will never say for many years because it means that he's old.

[Juan Gaitan, Director of Investor Relations]

Fantastic. We have created more time. Please go ahead. Fabio, are you there?

[Fabio Pavan, Mediobanca]

Yes. Yes. I'm here. Hi, Marco. Welcome. So we had discussed about almost everything. Just trying to join in some dot. It seems you have in mind some new business opportunities from disposals. So one question could be, what is the corridor for the leverage you would consider it for Cellnex? And the other question is on new business opportunities again in the future. The Bouygues deal refers to edge computing. So do you think artificial intelligence could be much more source of new revenues? I'm thinking about cloud and edge or it will have much more to do about options for efficiency and cost savings? Thank you.

[Marco Patuano, Chief Executive Officer]

I start from the first, which is the corridor for the leverage. We said we are going to go below 7x. Maybe we can find our sweet spot a bit – a little bit lower than just below 7x. But I think that our industry and most importantly, our backlog. I never saw in my career such an impressive backlog as this company has. Sometime I think we tend to underestimate the power of this backlog because if by chance we stop investing, we make so much cash that we will ask ourselves what to do with the cash. So I think that I don't see us going below 6x, but let me say that if we just stay below 7x, probably we can do a little bit more than below 7x.

Your second question, I think that short-term network virtualization is more an efficiency lever than a new source of revenues because if you consider that this year, we have more than EUR 4 billion revenues in our forecast, okay, let's make the revenues without the pass-through, it remains well above – so let's say, EUR 3.5 billion. And so the contribution of artificial intelligence to net revenues is going to be nanometric. Not the same on the possibility of having interesting effects.

On the network topology, on the CapEx and on the costs, just to make you clear, if we go to a virtual run configuration to a cloud run configuration, antenna will become much lighter and probably smaller, which means that you can host more antenna on the same tower. And you can remotely control, if you control the former MSC that tomorrow will be point of aggregation of virtual run. So I think that our configuration in France is super interesting because we are buying this point of configuration and point of aggregation that can give us a very interesting possibility in this sense. So Fabio, I think it's more from efficiency or network design.

[Juan Gaitan, Director of Investor Relations]

We no longer see Nick connected. So we will finish with…

[Marco Patuano, Chief Executive Officer]

Nick Delfas, if you're there, otherwise, we end here. So you can witness that I made. So if he complaints, it's not myself.

[Juan Gaitan, Director of Investor Relations]

Fantastic. Then thank you so much all of for your time.

[Marco Patuano, Chief Executive Officer]

Thank you, all. It has been a pleasure to be with you in this conference call. I hope to see you in-person soon.