Cellnex Telecom SA

MAD:CLNX

Earnings Call Transcript 2018-Q3

[Juan Jose Gaitan Mañoso, Head of Investor Relations]

Good afternoon, everyone. My name is Juan Gaitan, Head of Investor Relations for Cellnex, and I would like to thank you all for joining us today for our Q3 2018 Results Conference Call. I'm joined today by our CEO, Tobías Martínez; and our CFO, José Manuel Aisa, who will lead today's presentation. We have released earlier today a presentation, which we will refer to throughout our prepared remarks, and then we'll open the line for a Q&A session. After the session, the Investor Relations team will be at your disposal to answer any remaining questions.So now I'll hand over to Tobías Martínez. Please, Tobías.

[Tobias Martinez Gimeno, CEO, MD & Director]

Thank you, Juan. Good afternoon, everyone and thank you so much for your time today. I would like to start underlining the main milestones of the period. Again, a quarter of solid execution both operationally and financially. As you can see, we are continuing to generate strong financial figures as a result of our organic growth, our focus on cost control and operational excellence and direct contribution from new assets. Revenues grow 15%; our adjusted EBITDA, around 20%; and our recurring leveraged free cash flow are almost 11%. We continue to deliver on organic performance posting a solid growth in line with our medium-term guidance. I would also like to emphasize that Iliad continues to generate a steady flow of colocations in Italy, and that we are now hosting new clients in France and Switzerland. We are out always working in order to find new sources of organic growth. We are strengthening our relationship with Iliad both in Italy and France. We are seeing further demand for our portfolio of sites in France and Switzerland, and we are pursuing several indoor coverage project across Europe and assessing opportunities in order to play a key role in the 5G value change and become a long-term industrial partner for the European operators. We are reiterating our 2018 financial outlook, aiming at the top end of full year range. Maintaining our financial discipline is key and we have demonstrated our ability to talk -- to walk away from processes where our value creation criteria could not be met. And finally, I would like to reiterate that Cellnex is assessing a number of proprietary deals closely working with key European partners with an investor approach with the objective to reach value-additive agreements.And now I will hand over to our CFO, José Manuel Aisa, who will provide more details of the period.

[José Manuel Aisa Mancho]

Thank you, Tobías. If we go to Slide 5 it shows the historical performance of our key value metrics from 2014 through 2018. As you can see, revenues, adjusted EBITDA and recurring leveraged free cash flow have grown 20% annually, a growth that has allowed these metrics to be -- to double in just 4 years. Moving to Slide 6, total PoPs have increased 12% in the period, including the contribution of both organic growth and change of perimeter. If we focus on organic growth only, PoPs have increased 4.5%, above our medium-term guidance of 3% to 4%. This is mainly due to the continued densification trend in Europe and the contribution from Iliad in Italy. Finally, DAS nodes have increased by 20%, and we believe that the strong credentials we are building in these areas of DAS, Small Cells and mitigation solutions will translate into significant opportunities in the future.On Slide 7, you can see a list of the various commercial initiatives we have on the table right now in order to secure further organic growth. In summary, Iliad is now generating organic growth in Italy and France, and we believe that there is room to continue strengthening this very good relationship. We are seeing further demand of our -- for our portfolio of sites in France and Switzerland with initial colocations from Swisscom and Salt already in place. And finally, we are levering on CommsCon prevention as to deploy more projects in the area of indoor coverage across Europe.Moving to Slide 8. You can see here the building blocks of our adjusted EBITDA performance in the period. The positive impact of organic growth and efficiencies achieved is reinforced by the contribution of new deals, which explains the strong adjusted EBITDA in the period of 20%. The dark blue column on the right-hand side represents the positive impact at adjusted EBITDA level of adopting IFRS16 reaching EUR 439 million in the period.I will now move to our recurring levered free cash flow generation in the period of -- in the period on Slide 9. I would like to highlight that our revenues grew 15% and that under IFRS16 our adjusted EBITDA grows 19% and our EBITDA margin reaches 68%, a significant margin expansion of around 200 basis points compared to the same period last year.Moving now to the table. The contribution from Telecom Infrastructure Service coupled with a very well-managed cost base, leads to the 90% adjusted EBITDA growth already mentioned. Maintenance CapEx is in line with our guidance. Our change in working capital is positive due to implementation of management measures. Interest pay we pay our coupons as scheduled and tax, our initiatives in place on payments during the fiscal year.Moving now to our balance sheet on Slide 10. It is important to remind that adoption of IFRS16 provides a better comparability with peers as it equalizes treatment of land ownership and the management of ground leases. Our leverage ratio reaches 4.9x net debt annualized adjusted EBITDA, including the contribution to debt and adjusted EBITDA from IFRS16 as well as the full year contribution of new deals. Compared to December 2017, our balance sheet mostly reflects the increase in debt instruments and their associated cash as well as the capitalization of leases under IFRS16. Finally, it is important to highlight that we have a strong liquidity position of EUR 1.7 billion and a massive level of contracted revenues, a backlog of EUR 16 billion equivalent to 20 years of revenues. In Slide 11, you can see here the details of our debt structure and maturities profile, excluding the capitalization of lease liabilities. Our debt has an average maturity of around 6 years. No material refinancing is expected before 2022, and our inflation-linked revenues and fixed-rate debt allow us to expect positive impact from rising inflation. So in summary, we have a strong available liquidity, contracted revenues, long maturity, a very attractive cost of debt, a compelling business risk profile and no financing constraints. All this provide us with a wide array of options and flexibility to continue funding our growth strategy.Finally, a few words on our guidance on Slide 12. We are reiterating our 2018 financial outlook, narrowing our estimate and aiming at the very top end of our full year range. As is always in Cellnex, we will leave the good for the very end. So we feel very positive about the performance of the company. This has been a very good year, and we hope to close this full year 2018 very successfully. And with this, we are now available to answer any question you may have. So let's please open the line.

[Operator]

[Operator Instructions] We have a first question from Roshan Ranjit from Deutsche Bank.

[Roshan Vijay Ranjit, Research Analyst]

Three for me, please. Spain had a strong performance this quarter. Is it possible to get a sense of the contribution from the fiber network, which I think you acquired last quarter? And how we should think about that going forward in the context of the concessions? Secondly, in Switzerland, you talk about initial colocations in the period, I think the first one that you have mentioned there. Is it possible to get an idea how many that is? And which operators if possible? And lastly just on your recurring or free cash. Now if I look at your working cap movement, how should we think about that into the fourth quarter looking at previous years where you have reported quite positive contribution into the year-end?

[Juan Jose Gaitan Mañoso, Head of Investor Relations]

Thank you, Roshan. On the first one, the -- in terms of the contribution by Xarxa Oberta in the quarter has been very little. So around EUR 1.4 million, EUR 1.5 million EBITDA in the quarter. Year-to-date, so for 2018, should be roughly a bit more than EUR 1 million. So again for 2018, note that each contribution from this new asset. Your second question, we are, as you know, that's Xarxa Oberta de Catalunya because we have been acquiring assets from them. Now we are also colocating. We are hosting in our site both Salt and Swisscom. It is true that the contribution is also very -- is at less than 10 PoPs this quarter, so it's almost anecdotical, but I think that very good news that these 2 clients are already included in our customer base.

[José Manuel Aisa Mancho]

Regarding your final question, the recurring leveraged cash flow working capital. We have always been very clear here that we do think that for a full year, working capital should tend to neutral. So right now, we are EUR 5 million up. Last year, at Q3, it was minus EUR 5 million. So more or less, we do think can be -- my feeling will be positive so we will end up with a positive working capital but not a big number. Maybe EUR 5 million is fine. I don't know. We have not been able to estimate this. But in showing us up, a good momentum. Here what is really important is that for us it's very important to sell but also to get the money on time, and this is what you should read from Cellnex. Both policies are very important, and that's the reason why working capital tends to neutral or slightly positive, okay?

[Roshan Vijay Ranjit, Research Analyst]

That's clear. Just a quick follow-up on the fiber concession. Should we expect you guys to be marketing that a bit more actively and through 2019 and maybe through 2020? So i.e., should we see a bigger contribution?

[Juan Jose Gaitan Mañoso, Head of Investor Relations]

In 2019, what you should be expecting is the figure which, with the market at the moment of announcing the transaction. We mentioned EUR 6 million EBITDA, and that is our expectation to reach in 2019.

[Operator]

The next question is from Ben Rickett from New Street Research. Sorry gentlemen, he just hung up. So I take the next question. It is from Giles Thorne from Jefferies.

[Giles Thorne, Equity Analyst]

It's Giles here from Jefferies. I have 3, please. The first one was, what do you expect the outputs of CNMC's public consultation on the future of DTT in Spain to be? What are you expecting there? Secondly, with a large wave of brand-new spectrum being bought to market in Europe for 5G, could you remind us of your ability to capture revenue growth through amendments? Amendments is a big feature in the States but it's been less prominent in your story so far, and it would be interesting to hear if the 5G spectrum wave could change that. And then finally, quite a high-level question, but as you've executed on your strategy over the past few years, you've begun to build scale and presence in quite a large number of areas outside macro towers. So it would be useful to understand that as you look at the diverse array of investment opportunities you have ahead of you, be it small cells, or fiber, or data centers and of course, macro towers, how do you prioritize each area? Is it still purely IRR or NPV? Or is there a particular area that has strategic value higher than the others?

[Tobias Martinez Gimeno, CEO, MD & Director]

Maybe let me start from the third question. For us, the core business is the sites, I mean the tower, the roof tops, the wireless infrastructures. Then moving near to the core business should be Small Cells, DAS. And the third would be fiber to the antenna. And the fourth then would be the edge computing. I mean, this is the part of the supply chain where we are quite far away, at least in Europe. I mean this is not a technical issue. I am talking about business model, different type of roles, et cetera. So we have also to understand that mobile edge computer -- edge computing should be amassed where we talk about industrial 5G services. I mean, when the latency requires less than 5 milliseconds latency. So this is not for the first day of 5G. This would be, let me say, a second wave of requirements from the 5G network. So our focus today is to expand the densification and maybe to work on the transmission before on the edge computing. Those are our priorities. And maybe if I can replay the first question about the assessment -- the new assessment of the transmission of the terrestrial television, we do not expect relevant changes on this regulation. This regulation is just to provide access to our infrastructures for the wholesalers, so all in all, we do not expect major changes.

[Juan Jose Gaitan Mañoso, Head of Investor Relations]

There was a -- what was the question, last question, which is -- what's your second one?

[Giles Thorne, Equity Analyst]

It was about the potential for revenue through amendment.

[Juan Jose Gaitan Mañoso, Head of Investor Relations]

Yes, incremental revenue through amendment. Yes, the short answer is yes. As you know, our contract mechanism and how we charge fees is mostly based on the concept of PoP, that basically states a given amount of space and weight. So it's depending on the new information we'll have when 5G is developed, as the requirements in terms of whether the space go beyond this PoP concept, then our contracts allow for the facility to attach amendments. So the answer is yes, but I think it's too early to quantify.

[Giles Thorne, Equity Analyst]

And just on the consultation, I appreciate this is a consultation on an existing regulatory regime, but that regulatory regime has delivered an outcome of 0 interest in access to your towers. Is there any risk that they might appropriate a completely different regulatory approach to the provision of DTT services rather than just focusing on a subsegment of the overall value chain?

[Tobias Martinez Gimeno, CEO, MD & Director]

No, because this is oriented to the wholesalers, and we are providing B2B services to the final customers, and we do not expect major issues.

[Operator]

The next question is from Ben Rickett from New Street Research.

[Ben Rickett, Communications Services Associate]

Sorry about earlier, the minor technical glitch. First question, I'm interested in the organic EBITDA growth on an adjusted basis. So that seems to be growing really strongly in Spain and France when we exclude the impact of your fiber acquisition in Spain last quarter. But from our calculations, that implies that the growth rate slowed in your rest of Europe segment, and I wondered if you could just speak about what's driving that slowdown in the rest of Europe. And how we should expect that to evolve going forward? And the second question just on the impact of Wind Tre's network consolidation in Italy, do you have a sense for how many tenancies you could lose as a result of that and the time scale for those losses?

[Juan Jose Gaitan Mañoso, Head of Investor Relations]

Sorry, Ben, can you please maybe clarify the second question?

[Ben Rickett, Communications Services Associate]

Sorry, the second question about tenancy losses in Italy as a result of the consolidation of Wind Tre's network. So for example, Inwit has said they're expecting to lose about 200 tenants in the second half of this year, and I wondered whether you had any visibility on how many tenancies you would lose.

[Juan Jose Gaitan Mañoso, Head of Investor Relations]

Thank you, Ben. Now it's clear. Let me start with your last one. The -- well, the answer is that as you know, Wind Tre is an anchor tenant on our sites in Italy as a result of the acquisition we closed in March 2015. So they have already long-term commitment with us in the coming 15 or 16 years, so we are not expecting to -- basically we are not expecting to lose any PoP in association with that process. And then back to your first question, I remind that you that basically rest of Europe for us is mostly France, and we are in the integration mode. We are basically building our portfolio of sites by acquisition and by construction of new sites in France, called Bouygues Telecom. Also, we have Switzerland, which is a portfolio of sites we have bought from Sunrise a few months ago, so we have already established our base there. And then we have also a presence in the U.K. and Netherlands with organic growth rates. That not changing. So I would say that rest of Europe as a whole is a mode that I would say is more in integration mode. It's not generating, so far, a huge contribution in terms of organic growth but on the same time, we are not seeing that the organic growth is declining.

[Operator]

The next question is from Henrik Herbst from Crédit Suisse.

[Henrik Herbst, Research Analyst]

I was just wondering about the organic PoP growth. I mean, just looking at what you're saying or listening to what you're saying regarding demand in France with Iliad potentially picking up, Italy Iliad is just starting, Switzerland talking about framework agreements with Salt and Swisscom. I mean, it sounds like from those comments that your organic PoP growth could further accelerate. Just wondering if I'm missing something. Is there anything in your sort of already above-your-guidance numbers that is a one-off type and would become a headwind as we go forward. And then secondly, I was just wondering in France and the new deal with Arcep and spectrum renewal, which requires quite a lot of new sites to be built. Are you seeing anything? Are you getting any interest from the MNOs in terms of building out those sites at all? And do you think that could sort of contribute to your growth going forward as well?

[Juan Jose Gaitan Mañoso, Head of Investor Relations]

Thank you, Henrik. We are very happy with the results we have seen this quarter. As you mentioned, we have Salt and Swisscom. We are starting to see new cooperation from new customers in maybe not so traditional countries. I think it's too early to extrapolate any future trend. On the moment we have more information and the moment we see sustained demand in France, in Italy, happy to reassess our medium-term guidance. But let me just clarify what that would -- what we have in place is a medium-term guidance. Just 1 quarter, it's maybe too early to extrapolate a trend. So if this trend consolidates, happy to go again through this high calculation. But I mean, I guess that our position today is just to be happy about our PoP list results, and these trend consolidate, happy to reassess our view. In terms of the white-spots project in France, we see that moving quite slowly to be honest. The commitment is in place. As you know, this kind of coming between French mobile operators and the Arcep, the French regulator. We believe we can play a role here. It may be an opportunity for us, but it is true that so far we see this as moving slow. So again, at the moment this accelerates or we have more information, happy to try and quantify how this could be an opportunity for us.

[Operator]

Thank you. We have no further question at the moment. [Operator Instructions] The next question is from Emmet Kelly.

[Emmet Bryan Kelly, Head of European Telecoms Research]

Tobías, just got a question for you please on the kind of growth areas you mentioned earlier. You mentioned the Small Cells, DAS. You mentioned fiber and mobile edge computing. Just one thing I saw earlier in the week which caught my eye was at data centers. I believe Telefónica has placed some of its data centers up for sale in Spain, Latin America and I think some in the United States as well. Is data centers an area that you would look to potentially make some acquisitions in the future?

[Tobias Martinez Gimeno, CEO, MD & Director]

No, because this type of data centers are not the data centers that we should require in 5G. I mean, these type of data centers are more central that data center than mobile-age computing data centers. So we need a different kind of assets. We need a different type of infrastructures in order to provide this service. So we do not approach this type of assets, let me say, like traditional data centers.

[Operator]

The next question is from Fernando Cordero from Banco Santander.

[Fernando Cordero Barreira, Equity Analyst]

The first one is related with the Spanish business, and particularly with network services. And I know that it's typically almost 1/4 of business, but we have seen an acceleration on the revenue growth in the third quarter, and I would like to know if this acceleration is going to continue in coming quarters. The second question is also on the whole Spanish business, and we haven't seen margin expansion in the last 12 months so versus the third quarter last year despite the increase in internal acceleration. And I would like to know if there has been any reason for that lack of margin expansion in your Spanish activities. Finally, within your CapEx development, we have seen also an acceleration on the investments in ground leases. And I would like to know if the statement that you have made probably 2 years ago regarding the savings on ground leases to be reduced by close to 5% of the total revenue point remains in place. Or if this acceleration on ground leases CapEx is driving you to update that guidance?

[Tobias Martinez Gimeno, CEO, MD & Director]

Yes, you present several questions. The last one, where we obviously we did this efficiency plan I think is 3 years ago, as you were suggesting. What we are finding is that it's working well. It's working well and at the right moment, we will present to you our next steps. Yes, it is true that it is working better than expected and -- but let -- give us an update at the moment that we ended it up, which will be in 2019. But yes, you are in the way, right direction.

[Juan Jose Gaitan Mañoso, Head of Investor Relations]

On the third question, whether network was -- is an activity that provide us with maybe a volatile performance quarter on quarter. So we don't -- difficult to extrapolate trends. We have seen the quarters with the performance, also very good ones. So I think that is going to be the typical quarter-on-quarter performance of this activity going forward. So as you know, this is also the -- a bunch of different sub-activities so it's not only just one. So depending on how each of them perform on a consolidated basis, so to say, we can find different performances every quarter. Finally, just to clarify that in Spain, we don't only report our operating activity. But also we have the cost of headquarters. So I mean then, if we hire senior staff and also if every single effort we make in terms of site management or these corporate services, these costs are included here. So that this might be maybe distorting the EBITDA performance despite, as you mentioned, this very good organic growth.

[Operator]

The next question is from Ottavio Adorisio from Societe Generale.

[Ottavio Adorisio, Equity analyst]

This is Ottavio, by the way. A couple of questions on my side. The first one, it's straightforward, is on the provision for the workforce reduction you booked early this year. If you can just tell us how much of this has been used? And is it already generating cost savings for you? The second is on the DAS. We had a number of quarters or years with a lot of KPIs on the growth. I was wondering if you can start giving some financials. What's the contribution you get from DAS in revenues? And what sort of growth you're achieving on that segment? The third, it's a bit more open. It's on the M&A on -- there was a very brief comment in the start of the call reiterating that you will be very opportunistic. On Page 14, in the appendix, you show a chart whereby you basically highlight your ambitions of following your peers in the U.S. Now if somebody followed that chart, it says that the U.S. has flattened in terms of growth on their portfolio for exactly from the year where you are at the moment until year 8. So effectively they take a pause of 4 years before they start to build -- acquire new towers. Now given your balance sheet at the moment, somebody would wonder that potentially could happen to you because the fact there's not a lot of room today to do big acquisitions. So that's the question I'd ask is first of all, if that particular path something that you envisage to follow? And remain on the same topic, we're bombarded on our side about operator, that now they're very keen on monetizing their portfolio. We heard Deutsche for a number of quarters, if not years, potentially waiting to do with the rest of the towers. Vodafone is going to announce something next week, but it looks that they already did a tender for an outsourcing of 50 shared towers, whereby also your name was put on the frame. So I know that you cannot comment in terms of you're talking to and you're sort of, let's put that way, agreements you can engage, but could you tell us a bit of an idea about, first of all, are your approach is to complete your footprint where you are or potentially to enter new markets? If so, which of the markets are -- you basically set markets a few quarters ago. If those same markets still the one that you will be targeting? And second one, it's the -- in terms of the -- your balance sheet. With the IFRS16 you had a benefit to your gearing. Still, we're talking about potential capping at 6x net debt to EBITDA or something will change.

[Juan Jose Gaitan Mañoso, Head of Investor Relations]

Thank you, Ottavio. I will start with the 2 initial questions. Out of the EUR 55 million provision, we have already used EUR 25 million. So that has been cashed out. On DAS, noted, we will try and provide figures going forward. As of today on an annual basis you can consider EUR 8 million revenues with a EBITDA margin of around 30%. And M&A strategy, I will leave José Manuel to elaborate.

[José Manuel Aisa Mancho]

Well, Ottavio, you have -- in this last question, there is still a lot of questions, no, so let's -- I will try to give you answers. First, you were talking about the graph in Slide 14. Well, this is an aspiration. It's not tracking or imitation model. It's aspirational model. So I don't know if I -- we will buy one tower tomorrow or not. So what we try to give you here is what has happened and what could happen to us, but eventually it would not happen in the same way. So it's just aspirational. So do not track it every year. The following point is, it is true, 3 years ago and you -- all of you that are asking today, you have always been with us, and you have followed our equity study at the very beginning to explain that tower in Europe made sense, was difficult, was difficult. Because maybe some may not worth thinking of that. As of today, you are suggesting several names that seems to be thinking about. And this is a key point. The business model works. There is value. There is value to start. And I can tell you that we are working in this business model and in detail with ideas. Now one of the ideas that you are suggesting is about IFRS16 and impact on the balance sheet. You know, Ottavio, that IFRS16 is one of the most important change in accountancy in the last years. And we are very well prepared to face this new M&A pipeline, not only from an industrial perspective, which I think is key, but also from an accountancy perspective. When you talk about net debt EBITDA, when you raise your points about the balance sheet, obviously, the impact of IFRS16 is going to be important in the balance sheet of all the companies: MNOs, towering companies, retailers, everyone. So it's important to help ourselves, our clients and the community to explain that the metrics are going to change. So we are involved in this task, not only for us, but also for our clients and obviously talking to different stakeholders regarding credit: banks, rating agencies, bondholders. This is going to have an impact on the net debt EBITDA for sure. How much? Yet me let tell you that IFRS16 has not been yet implemented. Mandatorily speaking in Europe, this will start in January 1, 2019. At the moment we will see the results, and I can tell you that we will be ready to have a new view on balance sheet evolution. But many times, we think or we feel that the stakeholders have not adapted yet. That's the reason we present to you the numbers, taking into account year '17 and IFRS16. Okay? So it's a process. We are leader in this process, and we are quite happy.

[Operator]

The next question is from [ Stefano Embellini ] for [ Tussing ].

[Unknown Analyst]

Now just a quick clarification regarding the build-to-suit programs and the M&A CapEx that I noticed accelerated a lot in the third quarter. If you can just give a little bit more color of what happened in the third quarter. And what we could expect for these 2 items in the last quarter?

[Juan Jose Gaitan Mañoso, Head of Investor Relations]

Thank you, [ Stefano ]. Well, basically, you know that our reporting will have 4 different lines, maintenance CapEx, performing in line with previous quarters. Also we have expansion CapEx. The vast majority of that is being devoted to our efficiencies program, so the management of our leases. Also we have what we call build-to-suit CapEx. That is a line dedicated only for the purposes of tracking the build-to-suit around for Bouygues Telecom in France and Sunrise in Switzerland. It's in EUR 70 million with EUR 67 million devoted to France and only EUR 3 million devoted to Switzerland. And then on a cumulative basis, we have also posted EUR 221 million for M&A CapEx. The majority of that, as you can anticipate, is allocated to the sites we are acquiring from Bouygues Telecom in France. Also I would say that the balance roughly is devoted to the Xarxa Oberta de Catalunya, the fiber company we announced the previous quarter.

[Operator]

Thank you. There are no further questions in the conference call. I now give back the floor to the speakers. Thank you.

[Juan Jose Gaitan Mañoso, Head of Investor Relations]

Thank you, so much. We have now reached the end of this. I would like to thank you all for your time today, and as always, the Investor Operations team will be at your disposal to answer any remaining questions. Thank you so much, and have a great weekend. Bye-bye.