Infrastrutture Wireless Italiane SpA

MIL:INW

Earnings Call Transcript 2018-Q1

[Operator]

Ladies and gentlemen, good afternoon, and welcome to INWIT First Quarter 2018 Financial Results Conference Call. Michele Vitale, Head of Investor Relations, will introduce the event.

[Michele Vitale, executive]

Ladies and gentlemen, good afternoon. First of all, let me introduce our new CEO, Mr. Giovanni Ferigo. Mr. Ferigo will head INWIT, leveraging on his significant and successful experience characterized by a deep knowledge of all technological aspect of the telco industry.

Today, Mr. Ferigo is considered one of the most prominent professionals in the network deployment and development with a special focus on evolution towards 5G and small cell. His experience as a former TI Chief Technology Officer will greatly benefit INWIT, providing the kind of understanding of our customer needs, which will help drive our future performance.

I'm sure that his knowledge of the industry, together with his proven management skill, will let INWIT to continue delivering strong result.

Together with our CEO, here we have our CFO, Mr. Rafael Perrino; and our Business Support Officer, Mr. Andrea Balzarini, who will provide you with an update on our first quarter '18 operating and financial performance. As usual, the presentation will be followed by a Q&A session.

Now you can take note of our disclaimer policy that you should now see on Slide 2. Let me highlight that the reported data refer to the financial statement at March 31, 2018.

Let me guide you through the presentation by starting with Slide 3 where you can see that INWIT is continuing along its path of growth, diversification and efficiency.

In term of result, as you can see in this quick overview, the first quarter '18 find us right on track on both the operating and financial spend. Let me start with the most important KPI, the tenancy ratio. It increased up to 1.84x, confirming a growth trend of roughly 0.1 per year, fueled by new tenants especially other [ mobile ] operators. Likewise, revenues, excluding one-off, grew by 6% compared to the first quarter 2017.

Even the efficiency plan is in line with our expectation, as shown by 2.9 year-over-year lease cost reduction obtained through land acquisition and site renegotiation activities. The investment program set to fuel future growth is being deployed in line with the plan. They are now -- the run rate of the revenues deriving from new site, small cell and backhauling today accounts for roughly EUR 12 million, increasing in excess of 100% year-over-year.

CapEx grew by 59% year-over-year up to EUR 55 million, and revenues from new site and new services exhibit a fourfold growth in 2017, totaling roughly EUR 4 million. As a result, the EBITDA, excluding one-off, shows another positive step-up with a 16% growth in this first quarter compared to the same quarter 2017.

Finally, reported net income reached EUR 36.4 million, confirming a 26.4% year-over-year growth.

Now I leave the floor to Mr. Giovanni Ferigo who will guide you through the main highlight of our first quarter result. As usual, a Q&A session will follow the result presentation and you can book it by pressing [ start ] 0. [Operator Instructions] Giovanni, over to you.

[Giovanni Ferigo, executive]

Thank you, Michele. Before moving on with the presentation, I would like to say a few words. I'm honored to lead the company like INWIT. I've been following its startup and growth in the past 3 years from the customer's perspective, having a chance to experience the company's attention to customer needs, proactiveness and innovation potential.

I can tell you now that I can confirm the positive perception I had from the outside, a company based on solid foundations with an efficient structure and ready to face the challenges the market poses with a great performance potential. I can confirm we will have continuity on the key drivers on the plan, the underlying strategy and priorities are already set. Tenancy increase through the new customer is one of the goal of the company, together with the new business development.

I truly believe that INWIT can play a leading role in Italian tower market with a special focus on new opportunities like small cell and backhauling.

Let me focus on first quarter '18 results, starting from our revenues. The slide is the #5. As you can see, the first quarter 2018 revenues account for EUR 95.5 million and we can split into 3 main clusters. The bigger revenues from the Master Service Agreement with TIM related to the sites inherited through the IPO increased by 1.1% from the first quarter of 2017 as laid down in the contract. Let me remind you that the escalator is 100% of the previous year's CPI.

The second is the revenues from the other operators, totaled EUR 26.4 million in the first quarter. They derived from over 9,000 OLO tenants, precisely 9,550 OLO tenants, and include some one-off revenues.

As you can see, in the chart in the lower part of the slide, all the revenues without the one-off fee are about EUR 23 million, scoring a 7% growth year-over-year, consistent with the past trend. These one-off originates from the contract provisioning concerning TIM's commitment on new tenants deriving from the sharing agreement. In 2017, we didn't fully receive the agreed amount of tenants. A few hundreds were missing and TIM had to pay a one-off fee.

The revenues -- the third one, the revenues from the new sites and new services amounted to EUR 3.9 million, showing a significant 4x year-over-year growth. This results was [ properly ] led by approximately 350 new sites and more than 1,200 small cell. Another EUR 1 million stemmed from the 350 sites originally designated for dismantling, but retained for densification.

Let me remind you that here, we also take into account the contribution from the backhauling where revenues totaled for the first time EUR 100,000.

Total revenues, excluding one-off, grew by EUR 5.3 million from the same quarter of the last year. That's -- that is a 6% increase. So [ eventual ] exclusion of this one-off, our year-over-year growth or revenues meet the forecast [ past ].

Okay, we can change slides. Slide #6 show you an overview on the efficiencies expressed in term of operating expenses. The total OpEx amount to EUR 40.2 million. Each trend can better explained by breaking down the total amount in 3 components, it's shown in the chart. The most important is one -- the most important one is ground lease cost is decreased by another 3% compared to the first quarter 2017. These results has been achieved despite increasing costs related to new-build sites by reducing the ground lease cost through renegotiation and land acquisition.

In other -- the other operating expenses slightly decreased by approximately 13% year-over-year and still fall within the range of EUR 5 million to EUR 6 million per quarter.

Personnel costs grew slightly, mainly due to the headcount increase for the people dedicated to the new business.

All in all, the OpEx trend is showing a reduction of 5 -- 4.5% on year-over-year basis. It's worth mentioning that in the 3 areas, we achieved a cost reduction of 10% notwithstanding the increasing number of new sites, the costs related to the new business and the headcount increase.

In the slide -- moving to the Slide 7, let me show the main KPIs that explain our performance: on the left revenues, and on the right, the costs. As far as the revenue are concerned, the points of presence, the PoPs, other than TIM hosted on our towers grew in a year from 8,700 to 9,550. This 10% increase in terms of new points of presence has been fully deployed in an organic way, adding new antennas to our existing towers. Consequently, the tenancy ratio further increased to 1.84x from 1.75x a year ago.

As for the average revenues per site. In the first quarter, the year-over-year growth reached a good 6% for a total amount of EUR 33.3 million from the EUR 31.4 million in first quarter '17.

On the right-hand side, we focus on our lease cost reduction plan obtained through renegotiation and land acquisition. The chart show a recap of the results achieved so far. We have renegotiated contracts [ for ] acquired lands or long-term rights of usage of rooftops for roughly 4,400 contracts. As a result, the average lease of cost for sites dropped to EUR 12.3 million from EUR 12.8 million in fiscal '16, this diminishing by 4% year-over-year and by an impressive 18% (sic) [ 15% ] from first quarter '15 pro forma.

Slide 8. With Slide 8, I would like to recap our achievements in the new business. Regarding the new sites, we now own 350 new sites, up from 170 in the first quarter of the last year. In fact, we have managed to build 180 new operative sites in a single year with the growth rate exceeding 100%.

As for small cell, we have deployed roughly 1,200 remote units. Here, the year-over-year growth ratio a sixfold increase and this keeps us on track to meet our challenging targets. The small cell business, as you know, is and will be one of the key driver of INWIT growth, enable the telco market to move into 5G world.

Finally, let's talk about fiber backhauling. In the first quarter '17, we had no backhauling and hence our 210 connection are all incremental -- total incremental.

In terms of top line contribution, there are rental revenues for new sites. Small cell and backhauling activities are estimated to be around EUR 12 million with a yearly increase topping 100%.

Now I leave the floor to Rafael for the financial aspect for -- of our '17 results presentation.

[Rafael Perrino, executive]

Thank you, Giovanni, and good afternoon to you all. To begin with, let me review with you the first Q '18 reported results and the main KPIs.

Reported revenues stand at EUR 95.5 million and with OpEx at EUR 40.2 million. We reached the reported EBITDA of EUR 55.3 million. Our investments amounted to EUR 10.8 million. And reported net income amounted to EUR 36.4 million.

Analyzing this data more in detail, it is worth highlighting our solid top line performance with a reported revenue increase of 10.5% versus first Q '17, plus 6% net of the one-off revenues; a remarkable reported EBITDA increase of 24.9% versus first Q '17, plus 16% net of the one-off revenues.

Let me underline that notwithstanding our business enlargement, our costs are constantly decreasing. In particular, let me focus on the OpEx components. Lease costs fell by 2.9% year-over-year equivalent to EUR 1 million reduction. Personnel costs increased by EUR 0.1 million year-over-year mainly due to the increase in the headcount dedicated to new business deployment. Other costs decreased by EUR 1 million, year-over-year. Overall, as previously mentioned, total OpEx decreased by EUR 0.9 million, equivalent to a 4.5% drop versus first Q '17.

Our reported net income for the period equaled EUR 36.4 million, exhibiting a substantial growth of 26.4% compared to first Q '17, plus 12.8% net of one-off revenues.

Regarding cash flow, let me highlight that the solid performance in EBITDA drive the reported recurring free cash flow to increase more than 100%, plus 94.6% net of one-off revenues, reaching the remarkable amount of EUR 47.5 million.

Moving to Slide 11, let me show you our historical economic performance from the first Q pro forma to present day. As you can see, our reported EBITDA kept growing constantly. We have moved from EUR 33.7 million at the first Q '15 pro forma to EUR 55.3 million in first Q '18, constantly increasing our EBITDA margin from 42.9% in first Q '15 pro forma to 57.7% in the first quarter of 2018, 56.1 net of one-off revenues.

To confirm these achievements, let me highlight how strongly correlated our reported EBITDA margin and our tenancy ratio are as shown in the growth of ratio during our equity story from 1.55x in first Q '15 pro forma to 1.84x in first Q '18 at an average base of 0.1x per year.

All these results are due to our strong commercial effort in both our traditional business and in new technologies. This effort is visible in our investments, which increased from EUR 7 million in first Q '17 to EUR 11 million in first Q '18, showing a year-over-year growth of around 59%.

Also, let me point out that most of the CapEx is dedicated to new business development.

On Slide 12, you can see our first Q '18 reported net income, totaling EUR 36.4 million and showing a year-over-year increase of 26.4%. This increase in net income mainly stems from a 10.5% increase in reported revenues and a 4.5% decrease in total operating expenses, leading to a 57.7% first Q '18 reported EBITDA margin. Similarly, our reported EBIT margin achieved a remarkable 54.6%.

Concerning taxes and interest charges, as the slide shows, we have EUR 14.7 million of taxes carried out in the 3-month period with an implicit tax rate of 28.5% and interest charges equal to EUR 1 million.

On Slide 13, you can see our cash flow at end of March 2018.

The CapEx rollout is in line with our investment plan. In this first quarter, we invested EUR 10.8 million entirely dedicated to our expansion activities such as land acquisition, new sites, backhauling and small cells deployment. During this quarter, we achieved a reported recurring free cash flow of EUR 47.7 million (sic) [ EUR 47.5 million ], growing from EUR 22.4 million in first Q '17.

The cash flow shows no tax cash out because, as you know, taxes in Italy have to be paid during the second and the fourth quarter of each year. Thus, we delivered a positive reported cash flow to equity amounting to EUR 36.7 million.

Let me remind you that it was approved dividend distribution for a total amount of EUR 114 million, equivalent to EUR 0.19 per share, roughly a 3% dividend yield.

In this last slide, we provide you an overview of our balance sheet at end March 2018. At the end of this quarter, our net financial position amounted to EUR 9 million. The current situation leads to a net debt on annualized EBITDA ratio lower than 0.1x, leaving our financial leverage significantly below 1x EBITDA.

Lastly, the fully distributable reserves at quarter-end increased up to EUR 839 million corresponding to approximately EUR 1.34 per share.

[Michele Vitale, executive]

Rafael, thank you. We can now open the Q&A session where our CEO, Giovanni Ferigo; our CFO Rafael Perrino; our Business Support Officer, Andrea Balzarini, will answer your question. [Operator Instructions]

[Operator]

[Operator Instructions] First question comes from Mr. Fabio Pavan from Mediobanca.

[Fabio Pavan, analyst]

Welcome to the new CEO. The first question is for you. What do you think would be sector driver in the near future? It's interesting given your previous [ experience ], consolidation in the sector or innovation in terms of new business?

[Giovanni Ferigo, executive]

Okay. Thank you for the question. Okay, my vision is that, let me say, the tower environment is enough exciting because the new technology that are arriving, for example, 5G, are obliging them, the mobile operator -- the [ fixed mobile ] operator to define a different policy of development and so could be a good opportunity for the TowerCo. This is my opinion. The -- together -- this, together to the deployment of the small cell, that in my view, are very, very important, this is the opportunity that the TowerCo and INWIT will have in the next month because the future is now, okay?

[Operator]

Next question comes from Mr. Simon Coles from Barclays.

[Simon Coles, analyst]

It's Simon from Barclays. So on small cell, you're obviously guiding to reach 10,000 small cells in the coming years and you've been deploying small cells for a number of years now. I was just wondering if you could give us some color on how that's progressing with the MNOs, the desire for more and more small cells, but also what you've learned from the deployments you've done so far and how that's shaping your plans for the small cell deployment, going forward.

[Giovanni Ferigo, executive]

Okay, a very important issue of the mobile operator -- concerning the mobile operator coverage that all the mobile operator have a huge problem, that is the indoor coverage. The indoor coverage, you keep in mind -- in your mind that the 80% of the data traffic in the mobile environment is deployed in indoor areas. So the small cell will be really the key solution for this kind of traffic of end customer and we learned that, finally, the mobile operator needs to coverage indoor -- to improve the coverage indoor and through DAS or small cell we are doing it. With the new technologies, there are many other possibilities. But okay, this is the key that in -- my vision and you have to keep in your mind that the indoor coverage must be solved only with the small cell. So this is my answer, okay? Thank you.

[Operator]

Next question comes from Mr. Ricard Boada from Morgan Stanley.

[Ricard Boada, analyst]

A question for you, the new CEO. What surprised you more in your arrival at INWIT? Or let me put it this way, what are you more excited about the company? And do you really see any room to improve beyond your communicated guidance?

[Giovanni Ferigo, executive]

Okay. As previously commented, I had a strong, huge experience as customer -- of INWIT customer. And so the most impressive thing that I discovered here is the lean society, the lean company and the commitment of each single employee to do the target that the company has put in the charts, let me say. Finally, I think that with my, let me say, technical preparation, we will push all these new business -- okay, we can solve a lot of problem because, for example, in Italy, there is not the presence of the [indiscernible] also in terms of coverage. There is a lot of problem with the municipalities about the electromagnetic pollution. And so I think that after the small cell, after the DAS, after the indoor coverage, my proposition to be a very interesting and aggressive and performance in [indiscernible] in Italy -- that in those sites where it's very, very important to, let me say, mitigate the presence of big [ implants ] towers and so on, okay, because remember that we have a lot of touristic areas where it's very, very difficult to install antennas and so on. And then this is the [indiscernible] could be, let me say, industrial solution for this.

[Ricard Boada, analyst]

And if I can have like one follow-up to this. Obviously, having been a customer of INWIT and being like at the major carrier in Italy, white spots or areas of no coverage is a topic that you might be very familiar on. Can you maybe give us some color of how do you see the Italian landscape or how many -- what's the opportunity from a TowerCo perspective that you see in terms of size of covering white spots for either like Telecom Italia or other operators?

[Giovanni Ferigo, executive]

Okay. Okay, in Italy, I think after Poland, we are the most severe legislation about the electromagnetic, say, potential -- potent law issue. Just to do an example, we have the limit of 6 volt [ for ] meter, the German, [ 14 ]. So in Italy, so this is another problem that we have to solve. In Italy, from the point -- the geographical situation is very difficult and we -- there is a lot of tourists -- very nice touristic areas, that we have to cover that from an industrial point of view is very difficult to justify the investments. But with, for example, mobile, in a sense, the offer that we can move base station we can solve this kind of problem. For the -- another point to reinforce is the railway and the highway that we have to improve the coverage because it's very difficult. There is a lot of [ galleries ], a lot of mountains and so on. And so we have to study. We start to study -- Telecom is asking to us to cover all this lack of coverage and so we are studying the best way from the technical solution point of view, okay?

[Operator]

Next question comes from Mr. Jonathan Dann from RBC.

[Jonathan Dann, analyst]

It was a quick follow-up on the -- if I understand right, so the debate is with 5G, small cells versus massive micro -- sorry, massive MIMO on macrocells, and you're saying that you think that for a variety of reasons, massive MIMO won't take off in Italy whereas small cells will. Is that the right way to understand?

[Giovanni Ferigo, executive]

Thank you, but I didn't -- I have not said that the MIMO will not be deployed. With frequency that are 3.7 gigahertz, very, very -- it's very difficult to cover the indoor traffic. And so for the outside coverage, it's absolutely incredible solution, the MIMO. But for an indoor coverage, it will be impossible to cover with the MIMO solution. I do -- for example, I do industrial example. Do you know Comau, this is the robotic -- one of the most important robotic areas -- industry in Italy. Okay, they are using the 5G to control the robots because their latency is very low. And that's necessary, will be obtained through the indoor coverage. So the indoor coverage will be complementary to the MIMO because the indoor traffic, the indoor application, the indoor solution will be very, very important for the solution and for the business solution for the telco operator in the slicing solution of the network, okay?

[Jonathan Dann, analyst]

Can I ask a follow-on? Have you started to have discussions with, say, Vodafone, your biggest -- your second-biggest customer around sort of macro-, MIMO-type deployments?

[Giovanni Ferigo, executive]

Yes, because Vodafone is one of our most important customer and they will install in our tower the 5G antennas, okay. We are learning a lot, and today, we are trying and testing and learning because we installed the first 5G antennas in Bari and Matera area for Telecom -- for TIM Group. And so, sure, Vodafone will ask to us the 5G deployment MIMO antenna, okay?

[Operator]

Next question comes from Ms. Irene Rossetto from MainFirst.

[Irene Rossetto, analyst]

My question is just an update on Iliad as a potential customer. Do you -- are you still in talk with it? And when -- if yes, when do you expect to have more visibility?

[Giovanni Ferigo, executive]

Absolutely, yes, we have -- we are managing a frame agreement with them. I think that within June, July, we will -- can say something more concrete.

[Operator]

Next question comes from Mr. Stefano Gamberini from Equita.

[Stefano Gamberini, analyst]

Just a quick question regarding the one-off, the EUR 3 million one-off derived from this sale of delivery of new tenants from TIM. Could you give us more granularity about that, and if you expect that these tenants will arrive in 2018.

[Rafael Perrino, executive]

Okay. The one-off are related to this -- to some revenues, some are one-off revenues that are linked to TIM components related to the agreement, the Master Service Agreement, that we had. So it is something that is specifically related to this year.

[Operator]

Next question comes from Mr. James Ratzer from New Street Research.

[James Ratzer, analyst]

I had a question just regarding your balance sheet, please. As new CEO, you inherit a company, which has almost no debt on the balance sheet and yet the peer -- you're often compared with Cellnex who's around 6x levered. So some shareholders wondered whether your balance sheet is being managed as efficiently as it could be. Of course, new board at the parent level in Telecom Italia at the moment also seems to be talking a lot about shareholder value crystallization. So I was wondering if you had anything to say about how you thought about running the balance sheet going forward, what would be your level now of optimal leverage as the new CEO?

[Andrea Balzarini, executive]

It's Andrea Balzarini speaking. Well, honestly, the question is, is the balance sheet managed efficiently. It's pretty clear that we are underlevered to the average of our sector. I think we've been pretty consistent in admitting this and in saying that the situation is such because we want to retain our financial flexibility in order to face one trend in the sector that we expect is going to gain traction in the near future, which is consolidation, and the first question we got today was mentioning whether we see consolidation as a trend. Sure, it's expected and we are ready to shoot our ammunitions when -- if and when value -- there's going to be a chance, to create value in a transaction of that sort for INWIT. So it's going to be managed over time and it's going to be managed looking at INWIT targets and at INWIT's value, I would say, without thinking of what other people at other levels will think or need to do over time.

[James Ratzer, analyst]

Do you have any medium-term targets in mind of where you'd like to take leverage?

[Andrea Balzarini, executive]

There's no precise medium-term target we set ourselves. It's going to be set dynamically as long as opportunities will arise. Obviously, should opportunities not arise, a time will come when we will try and trend towards the sector average.

[Michele Vitale, executive]

Thank you, James. This was the last question for this first quarter '18 result presentation. Thank you all for joining us and for your interest in our conference call. Once more, we are pleased with the good result and we hope you are pleased, too. As usual, feel free to call us for any additional question. Thank you, again, and have a great evening.

[Operator]

Ladies and gentlemen, the conference is over. Thank you for calling INWIT.