Cellnex Telecom SA

MAD:CLNX

Earnings Call Transcript 2022-Q4

[Juan Gaitan, Director, Investor Relations]

Good morning, everyone. My name is Juan Gaitan, Cellnex, Director of Investor Relations. And I would like to thank you all for joining us today for our 2022 Results Conference Call. As always, I am joined by our CEO, Tobias Martinez; our CFO, José Manuel Aisa; and our Deputy CEO, Alex Mestre, who will lead today’s session.

We will now share the main highlights of the period with a focus on reiterating the messages we provided in the context of our strategic update last quarter and then we will open the line for your questions. [Operator Instructions] And without further ado, over to you, Tobias.

[Tobias Martinez, Chief Executive Officer]

Good morning, everyone and thank you so much for your time today. Let me please start by providing some context and reiterate that Cellnex has always listened to the market. We have been rigorous in all of our decisions and we will continue to remain disciplined and committed to our public targets regardless of leadership changes.

Therefore, today, I would like to take the opportunity to insist on the main characteristics of the next chapter of our equity story, which will be focused on execution and a clear capital allocation framework with an unconditional commitment to investment-grade rating. This new chapter has the following features: focus on free cash flow generation, with this metric trending to neutral by the end of 2023. This is 1 year earlier than what we said last quarter. Securing investment-grade rating is the overarching priority with any future excess cash to be deployed in manner consistent with maximizing long-term shareholder value; the assessment of strategic options for minority subsidiaries in order to crystallize value and accelerate the investment-grade process; and increased focus on organic growth and continuous progress on the crystallization of efficiencies and synergies in order to make sure that our OpEx and lease base grow significantly below inflation.

Our efficiency plan is well on track to meet our targets, and we are starting to crystallize synergies. These levers can already be seen reflected in the solid set of results we are presenting today. The period has been marked by a consistent operational and commercial execution with PoPs increasing 6% compared to last year. Revenues increasing 38%, our adjusted EBITDA 37% and our recurring leverage-free cash flow 39%. This outstanding operational and commercial performance has also translated in our ability to generate organic growth from new entrants the strengthening our industrial partnership with Telefonica in Spain by renewing existing contracts or the execution of remedies in a timely manner and an attractive terms. As mentioned earlier, we have an unconditional commitment to our public targets, so we are reiterating our medium-term guidance. And finally, we are adjusting our executive compensation structure in order to ensure a perfect alignment between strategic targets and remuneration.

I will now hand over to our CFO, José Manuel Aisa, who will provide more details on the period.

[José Manuel Aisa, Chief Financial Officer]

Thank you, Tobias. If we move to Slide 4, you can see here our performance in 2022 compared to our guidance. While our guidance has been adjusted during the year in order to reflect the closing of the Hutchinson UK transaction later than initially expected, it is still important to highlight the consistent organic growth generation in the period and the strong contain of OpEx and leases in a high inflation environment. On a like-for-like OpEx and leases have grown significantly below inflation, as a result of the efficiency measures in place, and we have seen a controlled impact from rising energy prices due to hedging and pass-through mechanism.

On the right-hand side, you can see our guidance for 2023, which is in line with market expectation and has a number of building blocks, which are worth explaining. Starting from 2022, we had positive impact for inflation in our respective revenues, the contribution from build to suit on organic growth generation in the period. Please remember that pass-through have a neutral impact on adjusted EBITDA. So comparing with these revenues in 2022, excluding pass-throughs, we are expecting our revenues to grow organically around 7% in 2023. We also include change of perimeter a bit more than 10 incremental months contribution from Hutch UK compared to 2022 and the expected impact from remedies in France and the UK.

With this, we get to a business perimeter in 2023 that allow us to reiterate our 2025 guidance and provide neutral free cash flow 1 year earlier than communicated last quarter. And as Tobias mentioned earlier, we have adjusted our executive compensation structure to ensure consistency with our strategic targets. Our annual bonus in 2023 will be linked to organic growth, recurrent levered free cash flow, net debt-to-EBITDA, consistent with our past investment grade and ESG initiatives. And our 2023-2025 long-term incentive plan will be linked to absolute and relative this year, free cash flow and ESG initiatives. Now since you already have the full presentation, I will just provide a few additional comments on capital allocation priorities and financial strategy.

As Tobias as already mentioned, we have made the unconditional commitment to maintain adjusted leverage consistently below 7x with objective to become investment grade by S&P as well as to maintain our investment grade status by Fitch. Defining free cash flow as recurrent leverage free cash flow minus build to suit CapEx minus expansion CapEx plus cash received from remedies. We are expecting to become free cash flow neutral by next year, 1 year earlier than communicated last quarter.

Our free cash flow generation will further accelerate as we reach the end of our build to suit programs, and this will support our rapid deleverage. Cellnex is constantly monitoring market conditions to decide the most appropriate way to tackle near-term refinancing needs. And additionally, we can always use already available undrawn credit lines to meet these needs. Going forward, generating cash flow will substantially exceed their maturities. And our commitment to investment grade should allow Cellnex to access a deeper market at compelling terms.

And with this, we remain now as you complete disposal to answer-any-questions.

[Juan Gaitan, Director, Investor Relations]

Thank you, José Manuel and Tobias. The first question comes from Akhil Dattani from JPMorgan. Please go ahead.

[Akhil Dattani, JPMorgan]

Hi, good morning. Thanks for taking the questions. I have got a couple, please. And maybe I can start with your guidance and outlook in general. On the Q3 results call in your presentation, you talked about your illustrative growth drivers for the midterm. And if I understood correctly, you were talking about 6% to 7% organic revenue growth and then double-digit EBITDA growth. But I guess if we look at where you’re now guiding for 2023 and then where your guidance sits for 2025 it looks like the embedded EBITDA growth is much lower than that. So I just wondered if you could help us understand, is that prudent? Is it simply you’re not going to update that until we get management change? So just if you could generally just help us understand the difference between what you said at Q3 and your growth levers and then what your guidance embeds at the moment? So that’s the first question. And then the second one was the comment you made at the beginning of the presentation around being open to assessing ways of opening your capital structure in your subsidiaries. I just wondered if you could give some comments on exactly what that means? Are we talking about asset sales of non-core markets? Are we talking about selling minority stakes in businesses or what are the parts you’re looking at as you try to accelerate the move to investment grade? Thanks a lot.

[José Manuel Aisa, Chief Financial Officer]

Okay. Thank you very much. No, listen, regarding your third question, let me answer in two ways. I think that it’s important, first of all, to look at this Slide #9 of the Q3 presentation as of 2022. You can see here the building blocks that you are saying and we said, first of all, that our organic growth was sustained in three main levers. First of all, contracted escalator then densification and finally, efficiency and all this together, we’re giving a total revenue growth of 6%, 7% and adjusted EBITDA and recurring free cash flow of 10%, 12%. If you take more or less FY ‘22 now in Slide 4 compared to guidance ‘23, for instance, adjusted EBITDA, we are going from adjusted EBITDA in 2022 of €2.6 billion into €3 billion in 2023, which represents more or less the 10%, 12% that we said in Slide #9 of Q3 2022. So I think it’s completely coherent, but happy to give you further comfort offline. So the second question, it was about opening the capital of different business units. Well, maybe Tobias.

[Tobias Martinez, Chief Executive Officer]

No, it’s just pure optionality. We are open to consider potential co-investments or minority stakes coming from some investors that could put share with us the same strategy and could be helpful for us. This is not a must, this is very important, this is not a must for us in order to reach investment grade, which is – the objective is to reach on December 2024, obviously, if we could reach earlier, much better. But again, it’s pure optionality because some investors are approaching us in order to co-invest or to get interest in order to get a minority stake and sharing with us a project in several countries. So it’s just pure optionality.

[Juan Gaitan, Director, Investor Relations]

And maybe Akhil, just one final comment, maybe also a slight difference in terms of the EBITDA growth and EBITDA after leases growth, which is also maybe what – which is the great period that we use in the slide in Q3, José Manuel mentioned also to provide you more detail?

[Akhil Dattani, JPMorgan]

Sorry, can I just – that’s very useful. Can I just use one super quick clarification, which is I completely understand the building blocks for ‘23, I think that’s very useful. I guess my question was more on the 2025 guidance because if we take the midpoint of your guidance for ‘23 and then your midpoint of ‘25, the implied growth rate on EBITDA is a lot lower. So I guess I was trying to understand, is there a specific reason for that slowdown in growth or are there other things you might want us to think about to explain that difference?

[José Manuel Aisa, Chief Financial Officer]

Okay. No, Akhil. So listen, I think that you know that Cellnex has always been a prudent company, okay. We commit and deliver. So far our 2025 guidance is between EBITDA €3.3 billion and €3.5 billion. If you do your math, I understand that you are going maybe to €3.6 billion, but taking into account that also will have different elements like inflation during this period of time, the build to suit programs. So we prefer to maintain this €3.3 billion, €3.5 billion as adjusted EBITDA for guidance of 2025. If, as it tends to happen in Cellnex, if things go better than expected, we will on due course increase it, okay?

[Akhil Dattani, JPMorgan]

That’s clear. Thanks so much.

[José Manuel Aisa, Chief Financial Officer]

Welcome.

[Juan Gaitan, Director, Investor Relations]

Next question comes from Jakob Bluestone from Credit Suisse. Please go ahead.

[Jakob Bluestone, Credit Suisse]

Hi, good morning. Thanks for taking the questions. I have got two, please. Firstly, if you could maybe just help us understand the change in your free cash flow guidance to getting to neutral in ‘23 already? Maybe just help us understand what’s changed could you maybe pull forward more BTS into 2022, you had quite a high BTS in Q4 or are you now including the divestment proceeds? I am not sure if that was in your free cash flow definition in the Q3 slides? And maybe if you can also give a little bit of guidance around the DTS CapEx, I think your Q3 slides indicated around €1.5 billion in ‘23 and ‘24. So, any sort of help on just understanding what’s changed there? And then just secondly, as you mentioned on your new management compensation, one of the metrics for the 2023 bonuses is hitting or getting to investment grade already this year. Could you maybe just help us understand, I mean, to get there already in ‘23 would that require those asset disposals or is there something from your conversations with the rating agencies that suggest you could get there just organically? Thank you.

[José Manuel Aisa, Chief Financial Officer]

Jakob, thank you very much for your two questions. And I think somehow both of them are linked, okay. So, how it’s important to understand that Cellnex has an important build to suit program that is negative in the free cash flow generation. But at the same time, you know that we have some remedies that are cash in. So our free cash flow, when talking about build to suit program, you have to take into account, we should take into account those towers that we build, but also those towers that we sell, both things have to be – I mean, is both things are important. So – and this is, again, important to understand your second question, which is what happens why your management compensation is incentivizing management to become investment grade, if possible, in 2023. Well, because somehow we are trying not to cash in as much elements as we have. Tobias before, was talking about option ability regarding potential sale of some minorities in any of our business units. Now we are talking about also in the management compensation, you can see that optionability how this factor into our incentives. And I think that trend into neutral also is a good sign in the right direction that we define as of Q3 2022. So everything is coherent and belongs to the same ecosystem.

[Jakob Bluestone, Credit Suisse]

So I will maybe just ask one follow-up. I mean, just versus what you are seeing in November, is there anything you would sort of call out as having changed since then? Is it greater confidence around divestments or more visibility on BTS deployments or is there any particular element that you would flag behind the guidance change?

[José Manuel Aisa, Chief Financial Officer]

Maybe Jakob, let me try. Bear in mind that in 2023, in terms of our free cash flow definition, we have also improved the free cash expected from remedies in France in ‘23, okay. So that helps achieving this at cash flow neutral in ‘23. Also, the service incremental component of our cash in – additional cash in expected in the year. That clearly helps. Also bear in mind that in terms of the investment-grade target that we are including in our MBO in our annual variable, just to clarify, I mean, we don’t have internal target of achieving investment grade by ‘23, but this target directly relates to a path to investment grade. So it is an objective. It is a target which is consistent with this path investment grade that if nothing changes. It is expected to be achieved by the end of ‘24. Obviously, we are open, as José Manuel and Tobias was mentioning here, we are also open to options that might accelerate this event. But as of today, we are not changing our targets. And the other thing that we are saying is that by ‘23, we are committing to this path that we provided last quarter in order to achieve investment grade by the end of ‘24.

[Jakob Bluestone, Credit Suisse]

Thank you. That’s very clear.

[José Manuel Aisa, Chief Financial Officer]

Thank you, Jakob.

[Juan Gaitan, Director, Investor Relations]

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

[Georgios Ierodiaconou, Citi]

Yes. Good morning. Thank you for taking my questions. A couple of follow-ups, actually. The first one is around the path to investment grade. And I think from your answer, what I gathered is with organic free cash flow generation that you have now and the growth in EBITDA you are expecting to get there around sometime in early ‘24. I just wanted to clarify if that’s a realistic expectation on that front? And just as a reminder for us, do you have to get exactly to that level before the rating agencies make a decision or would it be possible maybe for a decision to come in a bit earlier than you exactly reaching that target? And then linked to that is the discussion around opening the capital structure in some of your subsidiaries, do you want to just give us a bit of an idea of what are the criteria for you to consider this? I know you spoke about it in the past, but just to get a bit more clarity as to how you’re thinking about it now? And also if I could ask whether you are having any engagement with investors as things stand, I know in the past, you were approached based on your statements, whether there is something that you are already discussing on that front, it would be great to get some color on that? Thank you.

[José Manuel Aisa, Chief Financial Officer]

So regarding the investment grade, you are going in the very right direction, Georgios. It’s clear that if we were able to get – to become below 7x net to EBITDA according to Standard & Poor’s on a sustainable basis, we could became investment grade at that time. You are suggesting that this could happen at the beginning of 2024. This could happen at the beginning of 2024, our first half of 2024. So yes, I think that this is an option that is – that might be on the table that can be on the table. And the second question, Tobias?

[Tobias Martinez, Chief Executive Officer]

Second question, Georgios, is about three conditions. Now there to summarize that first of all, first, it’s a potential candidate has to be a minority shareholder. We are not considering to sell down majority stakes. As you very well know, this is not just about a question of consolidation it’s a question on role and responsibilities. The second one is to share this strategy. I mean this is not because we are looking for how to find some financial investor because we want to delever the company. It’s more than that. It’s about to share the strategy. We have our path, our business plan in every country. So very important to share this strategy. And the third one is, in a way, this kind of investors can help us in order to develop our existing business plan, which at corporate level, obviously, it’s about one of the main milestones will be to reach the investment grade on December 2024 as José said earlier, but if we could do it earlier, much better, but also at the local level. I mean just to recall that, for instance, we have a minority shareholder in Switzerland, which is Swiss Life. So such kind of investors fits perfectly with us and fits with our strategy. This is the idea to be open because – some investors are approaching us and well, so at a certain point of time, why not to consider it, but again, it’s pure optionability. Those three conditions are the principles.

[Georgios Ierodiaconou, Citi]

And are there any current discussions on this already or is it something open for the future?

[Tobias Martinez, Chief Executive Officer]

No, no, Georgios, it’s for the future. We are not planning, we are not having discussions. But well, it’s a different chapter of our strategy and being very transparent with you, why not, not to listen, why not to consider at this point of time. So it’s a question of optionability in this new chapter of our strategy.

[Georgios Ierodiaconou, Citi]

Very clear. Thank you.

[Juan Gaitan, Director, Investor Relations]

Next question comes from Andrew Lee from Goldman Sachs. Please go ahead.

[Andrew Lee, Goldman Sachs]

Yes, hi, everyone. Apologies, I am just going to – I had a further follow-up to Akhil and Georgios’ never ending questions around the sale of assets and then just a question around what you do once you get to investment grade status? So on the asset sales, I guess, following you from Georgios’ question, what really strikes me is your focus on the minority stake sales as opposed to full 100% stake sales. I think it was in the third quarter results where you adjusted your M&A strategy in a big way. You mentioned that you could sell 100% stakes in smaller subscale assets? And so obviously, where there is less ability to really set strategy and commercialization in those markets why are you preferring to and majoring on selling minority stakes versus both 100% stake – 100% subscale stake sales? It would be good to get your sense of – a bit more of a sense of what the rationale for that is? And then secondly, on investment grade status, once you hit that investment grade status, could you just give us an update on your thinking about shareholder returns, any sense of preference between dividends and buybacks if you do start shareholder returns? And also a sense of the timing over which you could give a statement on shareholder returns? Could you give that immediately post reaching investment grade status? Could you give an advance? And just trying to get a sense of when we could see a shift from you spending money to paying out to shareholders? Thank you.

[Tobias Martinez, Chief Executive Officer]

Thank you, Andrew. José Manuel, do you want to?

[José Manuel Aisa, Chief Financial Officer]

Okay. Well, listen, yes, let’s start by the second one, once we get to investment grade, we will assess, as we said to you in Q3 2022, we will assess a new dividend policy that can be forecast can be buyback. This is something that has to be defined and second, we will define a capital allocation policy that will allow us to foster some interesting projects that we also share with you as of Q3 2022. But everything is subordinated to become investment grade, okay. And the first part of your question was regarding between shareholding or disposal of total assets, there are two criteria here. First of all, if we are going to sell a business in one country, for instance, it’s important that this business in that country has already been – has already get to a point of mature – has to be mature somehow. If it is at the very beginning of the process, we are going to leave. We can – we run the risk of leaving money on the table. So we should run that asset for a while before disposing all of it. And second, very important is the subordination. If we were to sell a whole business, we have to be very careful of not subordinating that other level of Cellnex Telecom sales. So we said to you that we are thinking different options, but there are clear criteria in terms of value and that subordination of Cellnex Telecom sales.

[Juan Gaitan, Director, Investor Relations]

Thank you.

[Juan Gaitan, Director, Investor Relations]

Thank you, Andrew. Next question comes from Sam McHugh from Exane. Sam is not available now. We can maybe go to the next one. And the following question comes from Emmet Kelly from Morgan Stanley. Please go ahead.

[Emmet Kelly, Morgan Stanley]

Yes. Thank you very much, Juan and good morning everybody. I have just got a couple of questions, please. The first question is on the topic of potential European telco consolidation. This is probably emerging, I think, is the core debate in the telco sector with I think telcos suggesting that staggering Brussels might change your view on consolidation and allow pan-European consolidation. Can you just remind us, please, how your contracts are protected in the event of consolidation and maybe some would say network reconfiguration opportunities that could bring you in the future? And then my second question, please, is on 5G. I think about a year ago, Oscar Pallarols, said that just I think 20% of your PoPs had been their data and upgraded to 5G. Can you maybe just give a quick update on that start and can you say whether you are seeing accelerating 5G rollout, whether it’s network densification and increased demand for secondary PoPs potentially from 5G? Thank you.

[Alex Mestre, Deputy Chief Executive Officer]

Yes. Thank you, Emmet. This is Alex Mestre for your questions. So in relation to telco consolidation, I think it’s worth to mention because that seems to be a trending topic that it will be for a while on the first line, especially on the transaction in Spain, which is now under scrutiny. The element that we have to protect our contracts has been there since inception. So it’s something that we have taken into consideration since the very beginning. And there is a reason for that. You may recall that our first transaction in 2015 was the acquisition of the – outside of Spain, the acquisition of twin towers in Italy. And that transaction was already under the potential consolidation since 20 years, it was already the discussion between in Telcom by them and Hutchison. So we already took that into consideration by them. And the way to protect ourselves around that is basically due to the concept that we call all or nothing at renewal. So, most of our contracts are either 15 or 20 years. And at that moment, there is the renewal event that both parties we are sitting, and we are all very clear that either we renew everything or not. So that’s, we believe, a strong mechanism in order for us to, well, factorize in a very reasonable way, the second term of the contract that will go for 30 or 40 years. So that’s something which is embedded in every single contract with anchors that we have been doing. It is true, which is not an element which is on the third parties contracts, which are longer term and are more, let’s say, driven by commercial dynamics. So that will be one part of your question.

On 5G, well, it is true that we’ve been lagging. And I think this is a well-known fact all over Europe, especially when compared with other geographies on the deployment of 5G, especially because even some countries have not yet when – or gone with the new spectrum that allows that 700 and 3.5 gigahertz. But on those countries where those frequencies are already allocated, we are starting to see some traction. In one way let’s say to monitor that is the concept that we are also mentioning on our results, which is around the engineering services. So we do perform a lot of engineering services on our existing sites in order to have those sites ready for 5G. In some cases, we, yes, generate an additional revenue around that, in some cases not because as you know, when we do – and when we did the transactions, 5G was part already of that reserve space that the for himself in order to have certain space for growth. But yes, so 5G is already coming finally and that traction is already seen on our activity.

[Emmet Kelly, Morgan Stanley]

Thank you.

[Juan Gaitan, Director, Investor Relations]

Thank you. Next question comes from Sam McHugh from Exane. Please go ahead.

[Sam McHugh, Exane]

Good morning. I hope you can hear me now. A couple of questions, please. Just on the free cash flow guidance again and the divestment assumptions. So in France, you have, I think, expecting to receive €800 million from the divestment. And in the past, we’ve been kind of guided to roughly being 50-50 between 2023 and ‘24. Is that still the assumption or is it a bit more front-end weighted and assumed it comes in, in 2023? That’s the first question. Second one is then On Tower in Poland. I think you still have the minority outstanding at some point, presumably you will buy, are there any assumptions embedded in the guidance on an acquisition of the minority in Poland? And then, sorry, the last third one was just on energy cost. Any kind of help you can give us on how that €230 million step-up is split between Italy, Poland and other markets, would be really helpful? Thank you.

[Juan Gaitan, Director, Investor Relations]

Thank you, Sam. On the – it is true that all we are expecting the acceleration of the cash in associated with the revenues in France. So maybe now you can assume that 70% to be received in ‘23 with remaining 30% to be received in ‘24, okay? So in any case, so very well suggest this as a timing issue, the total scope of the revenues is unchanged. On the second, yes, also, I think that you are right. And we do have a minority. We have Elliott minority in one of our Polish company. And one potential scenario will be to show up that minority by Elliott with a new investor, okay? So just to do a swap, this is one of the elements that we were talking about, optionability before, and it makes sense, maybe we could swap, we could roll up this minority On Tower Poland to Cellnex Poland, that will be another opportunity. But yes, we would not be interested initially in acquiring that stake from Elliott. And on the third question, Samuel, if you don’t mind, can you please repeat this, I think it is related to pass-throughs?

[Sam McHugh, Exane]

Yes, just on the energy pass-through, how it’s split between the different geographies?

[Juan Gaitan, Director, Investor Relations]

I don’t have the details, apologies for that. I mean it is data for ‘23 on a consolidated basis at group level, we are expecting a delta. So €230 million more of pass-throughs – revenue pass-through in ‘23 compared to ‘22, but let me please come back on the geographic estate.

[Sam McHugh, Exane]

No, thanks for that.

[Juan Gaitan, Director, Investor Relations]

Thank you. Next question from Ondrej Cabejšek from UBS. Please go ahead.

[Ondrej Cabejšek, UBS]

Hi, thanks for the presentation, and also taking my questions. I’ve got two, please. So one is on the lease optimization efforts, which I think clearly are stepping up. You’re already at 10% expansion CapEx to sales and you’re guiding for capital ratio to remain for the foreseeable future, at least 2023. So I was just thinking in terms of the guidance for the lease cash out next year, you’re saying €850 million, which is, I guess, reflecting the efforts that you’re putting into this. But then if I look forward into 2025, you initially guided for something like €830 million, but then if you keep on kind of investing more heavily into optimization, at the 10% to sales, is it not rational to expect that, that number could actually end up in ‘23 and ‘25 being close to €800 million? That’s one question, please. And then my second question on the new kind of European Commission proposal around the gigabit infrastructure act. So there is the kind of aim to include tower companies within the scope. So I was just curious if there is been some kind of initial assessment from you in terms of what that could mean example around mandatory colocation or opening up at different rates that you are currently and any read on that draft would be very helpful? Thank you.

[Juan Gaitan, Director, Investor Relations]

Thank you, Ondrej. Please accept our apologies. We are having some difficulties understanding might be – might have something to do with your line. Maybe on the second question, we can try, Tobias?

[Tobias Martinez, Chief Executive Officer]

Yes. No, Ondrej, thank you very much. Well, you know that, well, I am the Chairman of the European Tower cost, independent tower cost, we are fully in contact with the European Commission talking about the GIA, currently is the GIA, the name that was the CIA, but now it’s GIA. We are having discussions about that, that for us, it’s not an issue to open our infrastructures in order to host other players. We understand perfectly that well, all of us are in different countries. And currently, it depends on the country. Some tower costs are already electronic communicator operator. I mean there is no new, for instance, for Cellnex in certain countries. We are already regulated by this. But for us, it’s very important also the benefits, because the benefits it if you are into the GIA, you will be – at European level, you will be an electronic communications telecom operator, which allowed us also to ask for colocation services in a wholesale basis in the rest of the infrastructure. So – it doesn’t mean that this is, let me say, a regulation in terms of pricing, but it’s providing access.

I think access is one of the principles of the benefits of the profile of the tower cost. I mean we are – as the telecom infrastructure companies, we are extremely, extremely happy in order to open our doors for third parties. This is very clear and very – also clear that this regulation is not cost oriented or not something like that. So happy to provide wholesale access, we are talking about wholesale access. So let’s see what will be the end up of this regulation, which we expect that it would be a regulation, not a directive. So it seems that we will take also time in order to be approved by the rest of the European authorities. But again, it’s under discussion among the different memberships of EWIA, which is the European Wireless Infrastructure Association, and let’s see. But so far, so good and we are having a very high degree of interaction with the European Commission about that. Well, assessing pros and cons, we do see that this is more benefits than cons.

[Juan Gaitan, Director, Investor Relations]

And Ondrej, if you don’t mind repeating your first question, sorry about that.

[Ondrej Cabejšek, UBS]

Yes, so can you hear me better now?

[Juan Gaitan, Director, Investor Relations]

Yes, please. Yes, go ahead.

[Ondrej Cabejšek, UBS]

Okay. Thank you. So the first question was really around the expansion CapEx now being guided to be around 10% as opposed to the previous range, 9% to 10%. And then what implications that has for your lease costs because you already are guiding for a decline year-over-year in 2023, so at €850 million. But then if you continue investing at 10%, part of which is going into lease optimization, then the question was previous guidance 2025 was about €830 million in terms of lease cost, but if you keep running expansion CapEx of 10% to sales, is it now more rational to expect that the optimized number by 2025 would potentially be closer to €800 million as opposed to the original €830 million. Thank you.

[Juan Gaitan, Director, Investor Relations]

Thank you for your question. Expansion CapEx is – has several topics, not only leases and you can see the split within the excel sheet you have the one part of it goes straightforward to these, but the other goes maybe to open the door to improve the tower, so that a new entrant now in, maybe in Italy or in Portugal, can join our tower. So expansion CapEx, it’s very important for different topics. And you know that in Portugal, we have a new entrant that also is going to provide significant organic growth for the group. So – and regarding the total quantum of lease, you know that this year, in 2022, we guide you initially to a number which was around €800 million. And after – I mean, you see that now it’s a €790 million. So it’s important to take into account that this also depends on the impact of the CPI, okay, on the leases. So all in all, I think that the guidance we are giving to you is prudent, is compliance with other years, and we think is sustainable. And this is what we are looking for.

[Ondrej Cabejšek, UBS]

Thank you very much.

[Juan Gaitan, Director, Investor Relations]

Next question comes from Maurice Patrick from Barclays. Please go ahead.

[Maurice Patrick, Barclays]

Yes. Hi, guys. Hopefully, you can hear me okay. Look, if I listen to the responses you’ve made to a number of the questions so far, it’s very much around accelerating the deleveraging towards investment grade and not buying in minorities and maybe selling minority stakes ourselves. Look, when it comes to some of the organic investment opportunities ahead of you, I know you’re spending or looking to spend 10% of sales again on expansion CapEx, but as how you sort of view on the hurdle rate of some of these projects changed? I mean the idea is to get to investment grade as quick as possible and to make your executive compensation also based upon that. I wonder whether your view on the hurdle rates has made investments has changed or moved up slightly? Thank you.

[Juan Gaitan, Director, Investor Relations]

I think that’s the first part of your question, we agree, okay? So you are going to the right direction. And the second is thresholds. Yes, I mean, it’s clear that also in Q3 2022 release we gave to you a new, let’s call it, risk and reward policy, capital allocation policy by which Cellnex was factoring on top of – factoring 6% or 8% spread on top of the 10-year IRS swap in that coin, if we are talking about swiss fracs, we are talking about euros, we are talking about pounds. So obviously, this is more the money than before. And we do think it makes sense in an environment of higher interest rates. So somehow, yes, we are agreeing with you, we tend to be, I mean, coherent with this environment and to ask more for our investment.

[Maurice Patrick, Barclays]

That’s very helpful. Just a quick follow-up, if I can. Just when we think about things like the ground lease buyouts and the rent renegotiations, are you less excited about some of these kind of moves in light of that to manage your lease costs?

[Juan Gaitan, Director, Investor Relations]

I mean this is an activity, as you know that historically, where we have been the [indiscernible] a substantial portion of our expansion CapEx. Today, this is an area that we find extremely interesting. Maybe in the past, the strategy has been more focused on but we are more than open also in the current environment to consider a straight land buyout. So in terms of intention – in terms of strategy, this is something that fits perfectly with what we want to achieve, maybe in the current environment, in a high inflation environment it is something that we want to do even more. But as was mentioning, being extremely rigorous on how we deploy that capital. So also makes sense in this more recent in the current macro environment to be even more selective in terms of how we assess this land acquisition opportunities.

[Maurice Patrick, Barclays]

Super clear. Thanks, guys.

[Juan Gaitan, Director, Investor Relations]

Thank you. Next question comes from Jerry Dellis from Jefferies. Please go ahead.

[Jerry Dellis, Jefferies]

Yes. Good morning, and thank you for taking my questions. Just moving back to the issue of minority stake sales, you mentioned that there are certain assets where you’d be leaving money on the table to consider full divestment, that not also applied to some of these potential minority stake sales across the rest of Europe, perimeter, our tenancy ratio today is about 1.24x and obviously, still at 1.2x in France? So can we take it that those assets are probably not candidates also for selling minority stakes since they do appear to be rather sort of undermonetized at this stage? And then my second question is just that in the statements on minority stake sales, you’ve linked that to the idea of achieving an investment-grade rating potentially quicker. I wondered if you’ve run that idea by the credit rating agencies and what have they said and in particular, how do you deal with situations in which minority investors and subsidiaries might be requiring dividend payments? Thank you.

[Juan Gaitan, Director, Investor Relations]

So the last question you raised is regarding subordination that as we said before, it is a clear criteria when defining what kind of assets or shareholding, we can sell, okay? We can sell. So you are right, this is key, this is key, and this has to be assessed in detail. Your first question, you were raising one KPI regarding the maturity of one asset, which is a tenancy ratio. This is one KPI, but there might be others. For instance, the pending build to suit program, also how many core tenants do we have in a country. Also, we were talking before about lands, canceled bank land. So how many rounds we have done with landlords to somehow improve the leases? And for sure, the TowerCo consolidation and what can happen in that market regarding how many TowerCo they are, if they are going to consolidate or not in the future. So it is not only one KPI, I think we are taking into account several angles. And when we execute this, you will see that it makes sense on different criteria.

[Jerry Dellis, Jefferies]

Could I just follow-up and just ask whether potential investor partners needs to bring any particular industrial expertise or whether these transactions are likely to be purely financial?

[Tobias Martinez, Chief Executive Officer]

No, there is no – we do not require industrial track record. It’s over a financial one. So the profile of the investor would be more a financial one.

[Jerry Dellis, Jefferies]

Thank you.

[Juan Gaitan, Director, Investor Relations]

Next question comes from Luigi Minerva from HSBC. Please go ahead.

[Luigi Minerva, HSBC]

Yes. Good afternoon. Thanks for taking my two questions. The first one is a clarification on your medium-term guidance. You had the ambition to reach the recurrent level free cash flow per share level between €5.5 and €6 medium term. And if I remember well, that assumed in terms of perimeter underlying the deployment of the M&A firepower. Now obviously, with the change in strategy, I just wanted to understand whether that item of the medium-term guidance still holds or whether it’s no longer valid? And secondly, if you could give us an update on the process to appoint the new CEO, I appreciate it’s in the hand of the Board. But yes, whatever you can share with us would be helpful? Thank you.

[Juan Gaitan, Director, Investor Relations]

Okay. Regarding the first question, Luigi, this pipeline €5.5, €6 per share was not midterm, was on a run rate basis. So it is a little bit more than mid-term, mid-term we can be talking about 2025. But this run rate will be [indiscernible] yes this is a timing point, which is important. On top of that, as you can see in our presentation, as of February ‘21, when we share with the market is €5.5, €6 per share in terms of recurring level free cash flow, we were clearly indicating that this number could be obtained with an optimized balance sheet. So obviously, if we don’t optimize the debt level, this company deleverage significantly and therefore, maybe the recurrent free cash flow is less, but you will receive more dividends in exchange. So somehow if you are going to do your numbers, you have two alternatives or you run your model on a run rate basis with an optimized balance sheet and you will get to this number or you run your model without optimized balance sheet, but please consider the recurrent free cash flow and on top of that, the dividends that you are taking. At the end of the day, make something which is coherent, and so on everything. And maybe Tobias, you can just...

[Tobias Martinez, Chief Executive Officer]

Yes. Well, Luigi, you know that this is a topic which is difficult to disclose any information when we are under discussions and the process is going on. But well, as you very well know, the Board started the process to appoint my successor in January, immediately after I informed them of my intention to resign. The process is comprehensive, and we are making good process. But up today, it’s too early to comment on when, specifically when we will be in a position to announce the name. So I have to be prudent, as you can imagine. However, we will do so as soon as possible, obviously, and we will in any event to provide an update on the process ahead of my departure for sure, for sure. But again, I understand perfectly your question. But as you can imagine, I’m not in a position now to be more specific because now it’s – we have to wait for the final outcome, if I may say. So again, fully – I fully understand your question, but hopefully, you can understand that I cannot be more specific on that.

[Luigi Minerva, HSBC]

Absolutely. Thank you very much for the comment.

[Tobias Martinez, Chief Executive Officer]

Thank you, Luigi.

[Juan Gaitan, Director, Investor Relations]

Thank you, Luigi. Next question comes from Nick Delfas from Redburn. Please go ahead. So then if Nick is not available. Last question will come from Fernando Abril from Alantra. Please go ahead.

[Fernando Abril, Alantra]

Hello. Good morning, thank you for taking my questions. Just a couple of follow-up on expansion CapEx. I don’t know if you can break down a bit more your 10% expansion CapEx overseas for 2023 between main items on ground lease optimization, OpEx efficiencies adoption of sites. And even more importantly, what unlevered returns you expect from these investments? And then second question is on colocations. So I think that the colocations in Q4 have accelerated. I don’t know, I guess that Portugal is helping now. I don’t know if you can give us a guidance of colocations rate for next year or this year, ‘23?

[Juan Gaitan, Director, Investor Relations]

Thank you so much, Fernando. On the second question, I guess that we haven’t seen any issues, that we have seen a quite a strong Q4, and we are extremely happy about that. At the same time, we are not seeing any structural change in the different trends we have seen on a per market basis. Italy continues to be extremely strong. You know that there is an event on deploying their own network, exactly the same case in Portugal. We are starting to see a ramp-up associated with the network rollout by Digi. So a very strong quarter. But at the same time, I guess, that we prefer to be prudent and see how ‘23 goes, and we are sticking to our dialogue, which is more than 5% PoP growth, including okay? On expansion CapEx, sorry, Fernando, you had a follow-up?

[Fernando Abril, Alantra]

Yes. No, no, no nothing on it, please, sorry.

[Juan Gaitan, Director, Investor Relations]

On expansion CapEx. I guess historically, what we have seen is maybe a split of 60% leases, so ground lease efficiencies and 40% activities associated with incremental organic revenues, whereas maybe this year in 2022, what we have seen is maybe this split be more 50-50, okay? So between efficiencies and organic revenues and we think that in ‘23, the same split applies. So, 50-50 between incremental revenues and the management of leases that is what we are expecting for 2023.

[Fernando Abril, Alantra]

Okay. And returns on the – I’m more particularly more interested on the lease side. I don’t know if you can comment on returns of these investments?

[Juan Gaitan, Director, Investor Relations]

Yes, of course, we are – we have a payback, which is circa 8x, 10x, okay?

[Fernando Abril, Alantra]

Okay. Okay. Okay. Thank you.

[Juan Gaitan, Director, Investor Relations]

Welcome.

[Juan Gaitan, Director, Investor Relations]

Thank you so much. And we have now reached the end of the session. I would like – we would like just to thank you for your attention and your time. Thank you so much. Bye-bye.