Infrastrutture Wireless Italiane SpA

MIL:INW

Earnings Call Transcript 2019-Q1

[Operator]

Ladies and gentlemen, good afternoon, and welcome to INWIT First Quarter 2019 Financial Results Conference Call. Michele Vitale, Head of Investor Relations, will introduce the event. Mr. Vitale, please.

[Michele Vitale, executive]

Ladies and gentlemen, good afternoon. Welcome to the first quarter result presentation. As usual, together with our CEO, we have our CFO, Mr. Andrea Balzarini, who will provide you with an update of our first quarter '19 operating and financial performance. As always, 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 refers to the financial statement in March 2019. Let me guide you through the presentation by starting with Slide 3. As you can see at a glance, there are some substantial differences in term of figures compared to the first quarter '18. The fact is obviously due to the new accounting principle introduced by the IFRS 16. Without such effect, you will notice that INWIT keep following its growing path. So in terms of result, the first quarter 2019 find us on track in both the operating and financial sphere. The tenancy ratio increased up to 1.9x. Likewise, revenues grew by 3.6% compared to 2018. The EBITDA shows another positive step-up with 4.2% growth compared to 2018 on a comparable basis. Otherwise, considering the reported data strongly impacted by IFRS 16, it is 61%. Finally, recurring free cash flow reached EUR 43 million in a year, confirming a solid cash flow generation. Now I leave the floor to Mr. Giovanni Ferigo, who will guide you through the main highlights of our first quarter result. As usual, a Q&A session will follow the result presentation. [Operator Instructions] Giovanni, over to you.

[Giovanni Ferigo, executive]

Thank you, Michele. It's a pleasure to be here to talk about our company results and our near future. Before commenting on the quarterly results, I would like to focus on the network sharing partnership repatriation I had announced for the first time last quarter when TIM and Vodafone signed the MOU. As you can see in Slide 4, we are talking about a transformational deal stemming from the merger between the 2 largest tower operators on the Italian market. After the merger, we will reach roughly 22,000 towers. Furthermore, these towers were the first to be built, therefore, they are generally taller and better positioned in term of coverage, and generally speaking, in terms of quality. This merger will lead to an average tenancy ratio of 1.75 before implementing all the synergies that we surely demonstrate in the next slide. Is it is an optimal figure considering that we could in the future host third-party tenants, not TIM nor Vodafone, under the limit set by the law. As you well know, the agreement derives from the need of MNOs to speed up their rollout of the new generation 5G network while ensuring relevant CapEx saving. In fact, instead of using 2 sets of equipment, antenna, remote unit and [ broadband ] unit, a single 5G setting sharing is used. This means less equipments, less CapEx, but similar electromagnetic emissions. For the TowerCo, this means optimizing the infrastructure usage both in term of electromagnetic space and physical space too. Basically, this is a win-win operation because it entails benefits for both mobile operators and towers operators. Another important aspect concerns the optimization of spaces on passive infrastructure, which would allow us to evaluate the repatriation of the third-party operators from previous technologies, 2G, 3G and 4G, allowing us to save on leasing cost for MNOs and to increase TowerCo profits. Finally, over the past few months, we have been fully engaged in business combination, namely the merging of the activity of the 2 tower operators with financial benefits. Moving on to Slide 5. Let's look at the impact of this deal on our company. The synergies that can arise from this deal are extremely relevant both on an industrial and on a financial level. Let's start from the industrial benefits. An important aspect is the hosting of the new 5G tenants of TIM and Vodafone as a result of the RAN sharing policy. The majority of the 22,000 towers will host 5G tenants shared by TIM and Vodafone. In order to evaluate the benefit, let's me first remind you that currently the MSA envisages the all-you-can-eat formula on our 11,000 sites. Therefore, TIM will be paying a fee only in the 11,000 of Vodafone. Vice versa should Vodafone sign an MSA along the line of TIM's one, it would have to pay for the size that are currently INWIT standalone. Summing up both contributions, this mean we could host up to 22,000 new 5G tenants. Another set of synergies derives from the repatriation of antennas currently fitted on the other TowerCos. We are talking about a few thousand towers, a share of which can be relocated to INWIT, generating new revenues for INWIT and savings for both TIM and Vodafone. Benefits are also to be seen in the opportunity of developing new business lines. I'm referring to backhauling and indoor micro coverage. In fact, INWIT will play a leading role, becoming the preferred supplier of the 2 main MNOs on the Italian market. The growth outlook for this market is remarkable and having an agreement with the 2 MNOs means we can aim for a larger share of this rich market. Finally, dismantling antenna gives us more opportunity to save costs, albeit with a lesser impact. This goes for cases where 2 antennas, TIM and Vodafone, are mounted on 2 adjacent towers. As you see, most of these industrial benefits have great visibility and entail a very low execution risk since most of the work has already been done. Plus, many of these benefits can be enjoyed in the short run. Let us now look at the financial benefits. One of the major benefits stemming from the deal is a greater efficiency on the capital structure. We currently have no debt and many of you consider this an element of inefficiency for a [ highly clear ], visible business such as ours. We are well aware that upon completion of the deal, the INWIT debt will be in the top range when compared with the peers. Obviously, I cannot provide further details on the deal structure because talks are still underway. In fact, I keenly ask you not ask any more questions on these items. Another element is the possibility of enjoying greater tax benefits generated by interest charge on the debt and by the transactional [indiscernible]. Finally, cash flow visibility, which is already high, will increase further owing to the enforcement of a second master service agreement to host Vodafone and TIM. Let's move on to Slide 6 to have a look at the current situation. Not much time has passed since the signing of an MOU on 22 of February of this year, but we are nevertheless absolutely on track for sealing the deal and getting to closing of the transaction by the end of the current year. All of the [ programmable ] activities are underway in order to fully evaluate the option of a corporate integration, from a first assessment of Vodafone's Tower Park, including data rooms, on site visits, economic consideration, building a common business plan and evaluating the synergies of the business combination. Among the upcoming goals, we have the signing of the binding agreement once all the tariffs have been defined and obviously the approval by the shareholder meeting by the end of the year and anti-trust authority's approval to be reached. We therefore expect the unveiling of all the details of the agreement when the tariffs shall be over. This will happen when the binding agreement is signed, and we expect that to happen during the summer. As soon as all the terms have been defined, we will fully and accurately disclose them to the market accordingly so as to proceed with the vote of the minority shareholders giving them full awareness. In order to finalize everything by year-end, this will take place through the AGM specifically dedicated of – to the approval of the deal, likely to happen next autumn. Over to the quarterly result. Let's begin, as usual, from the revenue analysis on Slide #8. As you can see in the slide, our fiscal '19 total revenues account for EUR 94.9 million and we can split in 3 main clusters. Revenues from the master service agreement with TIM, or related to the site inherited through the IPO, 1% up from first quarter '18 due to inflation increase as laid down in the contract. Revenues from other operators and others totaled EUR 23.7 million in this year. They derived mainly from OLO tenants, our MNO customers and fixed wireless access operators. In fiscal '18 contribution, we did not take into account EUR 4 million of not recurring fee which are referring to full year '17. Here an impact comes from the Wind Tre merger, which has led to a reorganization of the Tower Park, and consequently to a decommissioning of Wind tenants from our towers. We can assure you that this is a transitory effect that is almost over. Revenues from new sites and new services amounted to EUR 5.3 million, showing a significant growth over the year. These results derive from new sites built from the micro coverage agreements for cell and DAS and from backhauling The [ procedurals ] business location coverage plan with multi-tenant cell has just begun. We will begin to notice the first economic impact in Q2. Summarizing. Total revenues grew by EUR 3 million from the last year. That is 3.6% increase. Going to Slide 9. You can find an overview of the structure of our operating expenses. Here the effect of adoption of IFRS 16 accounting standard is extremely clear. The trend can be better explained by breaking down the total amount in 3 components. The most important one is ground lease costs. The EUR 2.5 million figure only includes the contract which terminates in 12 months’ time. But considering the ground lease on a comparable basis, rather removing IFRS 16 component, the trend is quite positive, with the 3.6% reduction year-over-year. This has been achieved by reducing the ground leasing cost through renegotiation and land acquisition despite the increase in cost related to the handling new build sites and small cell. Other operating expenses have the typical up and down trajectory. This I think collects the start-up of new business, small cell and DAS and backhauling, which, with time, acquires greater relevance, and other varied costs, which is -- which in this quarter include extraordinary cost owing to retired staff. The third component is personnel cost. This component has increased as a result of personnel expansion. Moving to Slide 10. Let me illustrate the main industrial KPIs that explain our performance. First, we can focalize on revenues on the left. The average revenues per sites confirm a growing trend, reaching a 2% growth year-over-year, up 15% in 3 years. The PoPs, the point of presence other than TIM, grew mainly thanks to the increase on fixed wireless access component. They have reached 10,300 and we estimate a stable growth, driven by the new related services and the growth of new players such as [ Link ], [indiscernible], OLO and other wireless local loop operators, open fiber, IoT operators. In the end, the tenancy ratio has reached 1.9x, taking in account only the micro size. On the right, there is a detailed view of cost saving, showing the result achieved on the renegotiation and land acquisition and their impact on lease cost per site. We have reduced our average lease cost per sites below EUR 11,500 per IFRS 16. Since 2015, we have acquired about 800 plots of land and we have renegotiation more than 5,000 plots. Now I would like to recap our achievements in the new business deployment. We can claim an impressive growth in all the 3 businesses. We are commenting Slide #11, okay? We registered a 57% increase of new sites built in a year. We developed 200 sites over a 1 year period, reaching 550 built sites by the end of the quarter. We doubled the amount of small cell and DAS deployed, even if the major contribution derives from DAS technology, because the small cell trend reflects the technological change from mono-tenant to multi-tenant, which now already implemented in some locations, as mentioned before. We multiplied by 3 times the amount of backhauling links, which offer an extra value to our customers. Looking at this metric, it's clear how strongly we believe in the radio network deployment. There are several factors that push to the densification of radio access network in the near future and they are confirmed by the cost and request for new infrastructure by the telco companies we serve. For example, it's sufficient to mention the outlook on traffic data consumption and the multiplying of connected objects we see every day owing to new applications and use cases of all sorts, bringing closer spheres at the table so far being separated such as smart metering, smart traffic, health and so on. These business models are driving stakeholders to share risk, especially on the side of infrastructure. I would like to keep on talking about the near future that wins us, where everything will be optimized and easy to use, but it's time to leave the floor to Andrea for the presentation of the financial aspects. Andrea, please.

[Andrea Balzarini, executive]

Thank you very much, Giovanni, and good afternoon to you all. To begin with, let me review with you our historical economic performance to present day. As you can see, our EBITDA -- on Slide 13 we are -- kept growing constantly even without considering IFRS 16 effect. We have moved up from EUR 39 million at the beginning of 2016 to EUR 54 million today, which means plus 4% year-on-year calculated on a comparable basis considering the EBITDA per IFRS 16. Obviously, using the reported figure, we would have lower operating costs due to cancellation of rental costs and [ specifically ] a higher EBITDA value. Our EBITDA margin constantly increased from 48% at the beginning of 2016 to 56% per IFRS 16. Moving over to CapEx. In this quarter, we didn't perform as well as we wanted. It's an EUR 8 million figure, slightly lower compared to the first quarter of the previous year. What's behind it? Well, we reduced the speed of the deployment while redefining the development plans considering the forthcoming merger with Vodafone Towers. The integration with Vodafone Towers will imply the creation of TIM-Vodafone common grid and the clear picture on it is needed in order to target investments where needed and avoid redundancies and inefficiencies. This had an impact on small cells deployment, but even more so on backhauling. We will soon be ready to get going again as the details for the integration will become clearer and we trust we can boost the value of our investments in the near future. In this regard, it's important also to underline that especially on small cells, the unitary CapEx keeps on being lower following the lower cost of technology. Looking forward, considering our plan and the MNOs' willingness to rollout the new 5G network, I'm sure we will continue on our investment path. In terms of recurring free cash flow, the trend is almost flat in the first quarter of '19. We reached EUR 43 million, minus 0.6% year-on-year, owing to working capital. Moving to Slide 14. You can see our first quarter reported net income totaling EUR 32.4 million, substantially stable if compared to last year's value. We didn't show any comparison in the reported P&L since this year's results have been highly impacted by IFRS 16 adoption in almost all items, namely OpEx EBITDA, D&A, interest and even taxes for a small portion. In the first quarter of '19, D&A stood at EUR 31 million, while P&L taxes totaled EUR 13.4 million, with an implicit tax rate of 25.9% and interest charges amounting to about EUR 6 million. The higher EBITDA value led to an EBIT margin at a remarkable 55%. On Slide 15, you can see our cash flow at the end of March. During this first quarter, we achieved a recurring free cash flow of roughly EUR 43.3 million, almost flat compared with last year. This result comes from a better EBITDA year-on-year even in the comparable basis analysis and the slightly higher variation of working capital. As for working capital, we can see the typical fluctuating trend. This time it was negative for roughly EUR 9.6 million, minus EUR 2.2 million year-on-year. The yearly trend can be confirmed as neutral. As usual in the first quarter, the recurring CapEx is not present because of seasonal adjustment, and financial expenses are just below 1% of the gross debt of EUR 170 million. Moving to cash flow-to-equity, we registered a EUR 19.6 million result, driven down by delta in working capital on development CapEx. In this last slide, Slide 16, we provide you with an overview of our balance sheet at the end of March. The effects of the enforcement of IFRS 16 led to: an increase in fixed assets for the registration of the right of use of EUR 685 million since the present value of lease cost is treated as an asset; and a corresponding increase in the value of financial liabilities, which pushed up the debt by about EUR 669 million. Consequently, at the end of this quarter, our net financial position reported amounted to EUR 686 million. This led to a net debt-to-EBITDA ratio in the area of 0.1x pre-IFRS 16 or 2.1x reported including IFRS 16 application, leaving our financial flexibility intact. Lastly, despite the generous dividend distribution in May '18, the fully distributable reserve stand at EUR 734 million at quarter end, corresponding to approximately EUR 1.2 per share. So back to Michele for closing our part.

[Michele Vitale, executive]

Okay. Giovanni, Andrea, thank you. We are now -- we can now open the Q&A session, where our CEO, Giovanni Ferigo, and our CFO, Andrea Balzarini, will answer your questions. Please remember that one single question per person is allowed so that everyone may speak. Thank you.

[Operator]

[Operator Instructions] First question comes from Mr. Luigi Minerva from HSBC.

[Luigi Minerva, analyst]

Yes, I wanted to thank you the additional details on the synergies both on the industrial and the financial side. And I wanted to ask you if you are in a position at this stage of your due diligence to give an estimate or to quantify those synergies?

[Giovanni Ferigo, executive]

Okay, thank you. We are working on the project of the integration among the 2 tower companies. It implies several upsides. MNOs can lower their spending while speeding up the deployment, while INWIT can receive a relevant amount of new tenants from Vodafone and TIM and save some costs. Some synergies are easily quantifiable for the MNOs since they are associated with deployment CapEx and positively impacted by active and passive sharing. The synergies for INWIT are less easy to assess since they will also result from negotiations. And since the contracts regulating them are still being drafted, it's still too early to provide detailed figures. I will therefore just describe the nature and drivers of these synergies. As soon as the deal is set, the figures will be fully and clearly disclosed and sealed in the contract. And being guaranteed by a contract, they should greatly reduce the execution risk.

[Operator]

Next question comes from Mr. Simon Coles from Barclays.

[Simon Coles, analyst]

It's Simon from Barclays. I just had one on the small cell momentum. So you mentioned that you've reduced some of the deployment because of the Vodafone deal, but I think you had also said previously that you're waiting for multi-operator small cells as well. Are you now deploying the small cells and is that going to help with momentum going forward and should we expect the pace to pick up throughout the rest of this year?

[Giovanni Ferigo, executive]

Okay. Thank you for the question. As you know and as I said in the previous call conference, the availability of the multi-operator small cell is a recent factor. So we started to deploy in a very -- in the market, in the sector of the luxury brand, in the downtown of the cities. We are testing the solution and we believe strongly that the MNOs will upset this kind of solution. And the speed, the acceleration of this kind of [ development ] in the second -- in the third -- fourth quarter of this year will gain relevant results.

[Operator]

Next question comes from Mr. Roshan Punjabi from Deutsche Bank.

[Roshan Punjabi, analyst]

Can I just ask about -- a bit more detail around your framework agreement with Iliad given the news last week that they are selling their towers? How does that impact framework agreement? Is there some form of MSA that you have with Iliad?

[Giovanni Ferigo, executive]

Okay, let me see. I start with the -- 2,000 of towers of Iliad is sold to the Cellnex. We didn't have any impact on this because Iliad has a contact with us. We are working with them. They are asking to us 2 -- we can divide in 2 major items. One is the substitution of the Wind tenant that they prefer. They are choosing the size, where Wind will leave the space. And second one, they are asking to us -- I think -- I can say each -- monthly, okay, there's some interesting numbers in the new sites and new hospitality because they have to accelerate the rollout of their own network. Otherwise, they have economic problem because, in my opinion, they cannot continue to pay the roaming to the Wind network. But the numbers are interesting. They are -- we are collaborating with them.

[Roshan Punjabi, analyst]

Thanks. And could I just follow up? You say that the numbers are interesting. Any more details you can give on that? Are you seeing an acceleration in run rate for [ INWIT ]?

[Andrea Balzarini, executive]

Well, Giovanni told you that we are negotiating with them. We already signed several contracts. And we do not disclose any part of that [ agreement ].

[Operator]

Next question comes from Mr. Andrea Devita from Banca Akros.

[Andrea Devita, analyst]

A very simple question just to help me squaring the KPIs in terms of other OLOs' size and your revenues in OLOs. So looking at the net DAS of size in Q1 on [indiscernible], it doesn't seem to be a negative number, on the contrary. So is that they are willing to pay less to stay? Or is that the effect is not visible in the number of sites yet?

[Andrea Balzarini, executive]

Okay. Sorry for the delay, but at least myself need a slight clarification on your question. So the point is on the dynamics of revenue, if I get it right, you are also mentioning new sites. So let's start from new sites. We've been adding another 50 from the end of last year. So there is an ongoing activity which keeps on rolling. On revenues, we are showing on the OLO and others figure a healthy growth I would say of 5% when compared with the first quarter of last year. Obviously, we do not include in the first quarter of last year figures the EUR 3.9 million one-off that we had last year. So net of that effect, you have a 5% increase. So these things have been rolling as well. You should consider that we are still under the effect, anyway, of the Wind Tre network integration, which is bringing a few tenants from Wind away from our towers. That is an effect which was widely expected and well known and over time is going to be compensated by the substitution of the Wind tenant with the Iliad tenant over time. The 2 moves do not happen exactly at the same time. This creates some effects also in economic terms in certain quarters, and this quarter is a witness in that unfortunately negatively. We are getting the impact from Wind not yet the positive one or not fully yet the positive one from Iliad, which over time will offset the negatives.

[Andrea Balzarini, executive]

Just to make my question more clear, I was referring to the quarter-on-quarter comparison. So Q1 '09 to Q4 '08 you have more antennas for OLOs and lower sequential revenues. This was the arithmetic that I was not able to square. That's all.

[Giovanni Ferigo, executive]

Okay. I think Andrea answered you on -- with the Wind Tre tenant that are churning out from our side.

[Andrea Balzarini, executive]

Or to say -- to add one aspect, if your questioning is are prices going down, we are not seeing prices going down.

[Operator]

Next question comes from Mr. Henrik Herbst from Credit Suisse.

[Henrik Herbst, analyst]

I just wanted to follow up on your comments around the other OpEx. You were saying that the increase to EUR 6.8 million was mainly due to small cells and DAS. And then you were saying there was a nonrecurring personnel cost. Would you be able to split that up? So how much of the increase was nonrecurring personnel costs? And also the small cell and DAS increase. I guess given that, it doesn't seem to be much I guess year-on-year. It's a bit of a small increase in revenues from new sites and services. The other question I had was your comments on CapEx and the low unitary cost on small cells. I think you've guided in the past for EUR 10,000 to EUR 20,000 per remote unit. Does your comment mean we should now think about the DAS being at the lower end of that? And when we then think about the revenues associated with small cells, does that mean that you can sort of drive the lower end of your guidance for revenues, which I think was EUR 3,000 to EUR 7,000?

[Andrea Balzarini, executive]

I will start with the second on small cells. The answer to your question regarding where you should position unitary CapEx is, yes, you should position them to the lower part of the range. Is this going to impact on pricing? Pricing is going to be driven by a number of additional conditions and elements, including obviously the attractiveness of the location. When we're talking small cells, we're talking indoor ones, you well know. And in these kind of situations, there is, let's put it this way, a scarcity of capacity, a value that we can -- in terms of a gap that we can close with our small cells. So pricing can be more driven by this kind of elements rather than a pure cost plus mechanic. On the other OpEx, let's get a little bit into it. Your question was how much of the EUR 6.8 million is due to the nonrecurring personnel cost? It's less than EUR 1 million, which is due to that. Whereas, the small cells and DAS, if your question is: why do I see the cost and I don't see the revenues yet? The cost we have here are costs which are also related to activities on the planning -- and obviously, I'm not talking the economic, but the radio planning -- and the number of activities which need to be carried on in order to be able and set up the equipment in order to be able and start the revenue stream. So here as well we have a nonperfect alignment between costs and revenues popping up in the P&L.

[Operator]

Last question comes from Mr. Ben Rickett from New Street Research.

[Ben Rickett, analyst]

I was just trying to follow up on your comments about the lost Wind tenancies. Are you able to quantify how many Wind sites -- or how many sites Wind exiting in Q1? And also give us an idea of the total number of sites that Wind is going to be exiting? Because previously we had understood that was an 2018 issue with a limited few hundred sites. So yes, it would be good if you could quantify that for us.

[Andrea Balzarini, executive]

First of all, on the timing. Unfortunately, it is not something limited to 2018 because we have the plans from Wind on this and they're going to enter 2019 also in the following quarters. In terms of sizing, we're always talking what we always told you, so it's going to be a total figure, which is going to be of a few hundreds. So this kind of, let's say, dripping is going to show up -- showed up in the first quarter, it's going to show up also in the next ones. But as I said, the good thing is we know what is coming and we know that this component is going to be offset by Iliad.

[Ben Rickett, analyst]

If I can just a quick follow up. I mean, how should we think about the slowdown in incremental OLO tenancy? So in Q3 '18, Q4 '18, we're doing about 200, 300 additional OLO tenants and then slowed this quarter to 150. So -- I mean, is that reduced amount from Iliad? Or are you seeing Vodafone pausing its tenancy adds? Or what's happening there?

[Andrea Balzarini, executive]

Honestly, there has been a few factors you should consider. First of all is -- I'm sorry to repeat myself -- the Wind impact, because I think you're talking net numbers in terms of tenants additions and net numbers that suffer from the reduction on the Wind side. On the other side, there is obviously a moment given that we are discussing the big opportunity for tenants increase, which is the integration with Vodafone Towers. While you're discussing this big transformational deal, it is somehow natural that varies timing, of slowdown. While you try to set up the new framework, you want to see it sealed. And then all things are going to roll out in a very defined way. Because once the deal will be in place, obviously there's going to be a contract which is going to set a very clear and defined framework for additional tenancies and will talk to many of the [ facets ].

[Michele Vitale, executive]

This was the last question for this first quarter '19 result presentation. Thank you all for joining us and for your interest in our company and our conference call. As usual, feel free to call us for any additional questions. Thank you again, and have a great evening.

[Operator]

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