Infrastrutture Wireless Italiane SpA

MIL:INW

Earnings Call Transcript 2023-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome, and thank you for joining INWIT's Q1 2023 Financial Results Conference Call. [Operator Instructions]

At this time, I would like to turn the conference over to Mr. Fabio Ruffini, Head of Investor Relations and Corporate Development. Please go ahead, sir.

[Fabio Ruffini, executive]

Thank you, operator. Good evening, everyone, and thanks for joining us. [indiscernible] is Diego Galli, English General Manager; and Emilia Trudu, Chief Financial Officer. Over to begin. Please allow me to draw your attention to the safe harbor statement on Page 2. Following the presentation of the quarterly results, we will open the floor to questions. Over to you, Diego.

[Diego Galli, executive]

Thank you, Fabio, and welcome, everyone. The first quarter results show continued progress in all main indicators. We presented an updated business plan just over 2 months ago. This quarter is the first step of execution, building on our track record. Industrial KPIs recorded a strong beginning of the year better than in the past, where Q1 were lower. In particular, for new sites, an area of focus for us, they were up more than 2x. Organic growth is well into the double digits at the back of multiple sources of growth and [indiscernible] with strong inflation lease.

INWIT can count on the best assets in the market and 2 Tier 1 anchors, sources of competitive advantage underpinning our results, particularly in the current context of higher macro uncertainties. This positive trend, coupled with the reduction of lease costs led to margin expansion with EBITDA [indiscernible]above 70%, best-in-class. Investments were also up as compared with last year. We broadened our infrastructure with more sites, more upgrades, more [indiscernible] systems and land ownership, confirming our ambition to be the leading digital infrastructure player in Italy.

Let's now briefly comment the quarterly results on Page 4. Revenue were up nearly 13%, up from 9% in the fourth quarter of 2022 as we continue adding tenancy and the CPI link reflects average 2022 inflation. On a relative basis, new services were up the most. We reduced lease cost in absolute terms despite a bigger asset base inflation, thanks to our real estate efficiency measures. This led to 19% growth in EBITDA after lease and supported cash flow generation. Indeed, leverage was down after turn to 4.7x net debt to EBITDA.

Moving to industrial KPIs. We have been working to deliver new sites in new PoPs in a smoother way. We're satisfied about the beginning of the year with 130 new sites and more than 1,000 new ports. This is a function both of solid demand fundamentals as well as an improved internal delivery process. On the real estate front, we made progress in our plan of renegotiation by our transactions. At the same time, we reach an agreement with Telecom Italia for the purchase of about 200 let drops underneath in with towers. This is the first step of the commitment to invest more in land buy out, and it will be structurally reduced our cost base. So in brief, a quarter of continued execution consistent with guidance.

Now I will turn over to Emilia for a more detailed review of the results. Thank you.

[Emilia Trudu, executive]

Thank you, Diego, and good evening, everyone. I am particularly glad of being here today and presenting this set of results, and I look forward to meeting the investors [indiscernible]. Starting on Page 5, with domain industrial KPIs for Anchors. Q1 2023 was one of the best first quarter ever for confirming solid demand and growing quarterly base. We added 750 new Anchors PoPs, improving sequentially from Q4 and totaling about [ 2.5000 ] new PoPs in the last 12 months. This improvement was driven by [indiscernible] life the form of costs beside about 130 and new PoPs on existing size part of the ongoing network optimization efforts of our Ramco.

As mentioned, new sites were up more than 2.5x year-on-year and will continue trending higher in the coming quarters, in line with guidance. [indiscernible] infrastructure, we acted partners to customers seeking efficiency network deployment. We are now savings in costs and CapEx to operators, establishing a synergy and industrial relationship. In Vodafone today account for nearly 39,000 hospitalities in our network, growing 7% year-on-year in volume terms.

Moving on to OLOs Page 6. Subtilities with other clients were up significantly, plus 18% year-on-year for a total of more than 12,000 POPs. We added 350 POPs in the quarter, up more than 50% year-on-year despite Q1 typically being seasonally lighter. This continues to be one of the strongest organic growth trends in the sector and assessments to the attractiveness of our infrastructure. In Q1, we added new hospitalities from all clients, MNOs, FWA and others. In terms of mix, coherently with guidance, FWA and other clients, especially utilities accounted for the bulk of growth about 80%.

In Page 7, with a New services. New services have been growing [indiscernible]. They are now at nearly EUR 9 million per quarter, up 17%, representing a key growth driver for the business plan to 2026. Dedicated coverage projects mainly through indoor systems have been the main determinate of this growth. That are multitalent active equipment, the work in synergies with our sales repeaters to provide optimal levels of connectivity and capacity to indoor and outdoor. The result is superior user experience and security at proper with other technologies. They also enable advanced applications and there an answer to growing data use in traffic locations.

Demand is growing, particularly by location owners and while operators we have a selective approach, we expect the expansion to continue. We have been stepping up our efforts in this bond with a new and wider sales organization in place, the launch of an indirect sees channel and specific marketing actions. In the first quarter, we added 20 new dedicated coverage projects, including flagship locations in specific marketing actions.

In the first quarter, we had 20 new dedicated coverage projects, including flagship locations in luxury others, new zen and sport centers. Additionally, we continue to have sell to existing assets, which are about 7,000 re units and 1,000 kilometers of highways.

Moving on to the P&L on Page 8. You see that quarterly revenue was up to EUR 233.6 million, plus 12.8% year-on-year as a combination of CPI-linked based on average 2022 inflation applied from January 1, growing hospitality across all clients and expansion in new services. Growth was deadly spread between [indiscernible] with new services at conforming at 17% as mentioned.

As compared with Q4 2022, all discount fewer other revenues, which were particularly strong in the last quarter of 2022. This effect more than offset the positive quarter-on-quarter growth of all hospitalities revenues. With regards to cost, OpEx were slightly up year-on-year, mostly due to maintenance. Ground lease cost were lower. Efficiency in real estate more than offset the higher number of sites in the projects as well as inflation, driving margin expansion.

It's worth mentioning that the figure does not discount the benefit of land acquisition transaction with Telecom Italia. EBITDA after lease stood at EUR 165.6 million, up nearly 19% or a 71% margin, up broadly 4 percentage point [indiscernible] and a top levels in the [indiscernible]. Interest costs were up in line with the variable portion of debt, about EUR 530 million linked to [indiscernible].

Tax rate continues to be materially below the Italian statutory rate on the back of the Google to team entered into by the company in 2021. As a result of the board, the income stood at EUR 82.9 million, up nearly 22% year-on-year.

On Slide 9, we discuss cash flow. Cash flow generation in the first quarter was up 8% year-on-year, with recurring free cash flow at about EUR 137 million for a cash conversion of 64%. As usual, with minor cash out like for recurring CapEx amounting to EUR 5.5 million and almost no tax cash out. 2 timing effects occurred in the quarter and will reverse from Q2.

Net working capital was slightly negative and lease prepayment cycles, which similarly to last year is typically concentrated in Q1. Continued organic growth and the reversal of the above timing effects are coherent with an improving recurring free cash flow growth rate from Q2, in line with guidance. Net financial position was about stable quarter-on-quarter at EUR 4.1 million, including IFRS 16 liabilities. Because of [indiscernible] growth, leverage came down to 4.7x from 5.2x in terms of net debt to EBITDA. Cost of that remains fairly low at 2.3% with more than 80% of that being fixed and no relevant maturities before 2025 with the expiring of a term loan of EUR 500 million.

With this, thank you, and I leave again the floor to Diego.

[Diego Galli, executive]

Thank you, Emilia. A few thoughts from my side beginning with Slide 10. We highlighted 3 short-term strategic priorities as part of the plan, and I would like to go back to some key highlights. 2023 we'll see a further step up in new sites, material growth in new services and a renewed approach to capital allocation. Work done so far has already provided some positive results, an improved pace of site delivery, new dedicated coverage projects for DAS and the AGM approval for -- of the company share buyback. Solid quarter results as well as progress on key priorities allow us to confirm our guidance as detailed on Page 11.

Generally, in organic terms, maximizing the growth opportunity in the domestic market in which aims to deliver high single-digit organic growth through 2026, coupled with 7 percentage points of EBITDA margin expansion to 76%. And recurring free cash flow above EUR 730 million in 2026 with per share accretion linked to the share buybacks. Organic growth is one of the main levers of value creation for II, which continue on Page 12.

Our business plan builds on the fundamentals of the company and its ability to create sustainable value in the long run. Beyond organic growth, we invest to expand digital infrastructure with compelling returns. There is an opportunity ahead of us to deploy more CapEx to maximize growth on top of business plan targets. We provide balanced return proposition to shareholders, deploying all tools available.

With this, I thank you, and we're now ready for the Q&A session.

[Operator]

[Operator Instructions] The first question comes from Roshan Ranjit of Deutsche Bank.

[Roshan Ranjit, analyst]

Just on the TIM purchase, the 200 sites, is that incremental to the raised number which you gave at the business update back in March? Or is that included within the kind of -- I think you said additional 2,000 at the time, that would be useful. And if I could just maybe squeeze in a quick one kind of related. You mentioned new next-gen EU sites. Is it possible to tell us the number of sites within the 130 new sites. That was part of that you [indiscernible].

[Diego Galli, executive]

So on the first question, the 200 land purchase are part of our targets. It's a way for us to accelerate and deploy at scale, but they are included in the targets. The second question is about the next-generation EU fund site, which are not included in the EUR 130 million, there will deployment of these kind of sites will start in Q2. And so we will start seeing them in the next month. But as far as Q1 is concerned, as I said, the 130 million does not include the next-generation EU funds new sites.

[Operator]

The next question comes from Andrew Lee of Goldman Sachs.

[Andrew Lee, analyst]

Just had one main one, which was just given we've seen speculation on Vodafone Iliad tie-up resurface again. I wondered if you could give us an update, straight recap of your thoughts on the impact of a consolidation deal between Vodafone and Iliad in Italy on your business, how would you think about that?

And if I may just -- if I were to be given a follow-up would just be on the anchor new PoPs, which were particularly strong. And I know, I mean, you mentioned that, that was partly driven by the new site -- 130 new sites. I think you mentioned it was also driven by something else. I wonder if you could just either repeat or give us a bit more color on what's driving those strong KPIs.

[Diego Galli, executive]

On the consolidation scenario you mentioned, I think that when thinking about it and assessing it, we need to bear in mind that INWIT has the best infrastructure in the country, the best locations. And as also strong contracts, particularly strong in the seats with their containers, which have key features and which are relevant when considering this scenario.

First of all, the all are not in closed; and second, the feature related to the fact that the MSA is related to the frequencies available at March 2020. So new frequencies used on the core network will drive additional fees. So considering these elements, our current assessment is that the consolidation scenario is basically neutral, if not positive to EBIT. Clearly, let me also say that in is a consolidation, eventually, we would as a negative lose the potential business included in our business plan for the future with Iliad. But again, considering the positive and the negative, our current assessment is for a neutral to positive and net impact.

With regards to the [indiscernible], yes, it's the result of the new sites. So new tenants on new sites as well as the continuous optimization of the network, also new tenants on existing sites for the buildup of the common grid between the Amcor.

[Andrew Lee, analyst]

So nothing massively new, just strong execution.

[Diego Galli, executive]

Yes.

[Operator]

The next question is from Samuel McHugh of BNP Paribas.

[Samuel McHugh, analyst]

Just a short follow-up on the TIM lamp acquisitions. When should we expect the CapEx to be booked for that transaction? And then do you think you have potential to do more? Is there a further pipeline of discussion with them that could further pull forward petition?

[Diego Galli, executive]

Can you please repeat the second part of the question, please?

[Samuel McHugh, analyst]

Yes, it was just a question of whether there's a bigger pipeline of deals done with them and whether we could expect more similar deals to pull forward lease optimization.

[Emilia Trudu, executive]

Well, considering the CapEx, the CapEx reported in Q1 included the fee transaction partially, partially to the transaction. And of course, we would love to do more of such deals in the future if opportunity arise because it's an efficient way to execute our plan with larger deals.

[Operator]

The next question is from Fabio Pavan of Mediobanca.

[Fabio Pavan, analyst]

Just a follow up on the FWA demand and also for new services numbers remain absolutely strong. Do you have any DBVT for the coming quarters, I guess. So are you expecting some acceleration on that front, this trend remains stable new clients coming. So anything with that.

[Diego Galli, executive]

With regards to fixed [indiscernible] we have experienced across the last quarter some volatility. So there are ups and downs. We do see still a strong demand. And honestly, we are working on to make this demand more, can I say, stable and visible for the long term. What we actually -- this is particularly where we have already done with Open Fiber and the plan for building new sites with Open Fiber, which will display its impact in the coming quarters. And we think it's a reasonable initiative and action also for other customers.

With regard to new services, we are really excited by the opportunity because the -- and I refer to mostly indoor coverage and thus for improving indoor coverage because we do see strong interest in the market for better indoor connectivity and 5G with its technology features, which we know will -- is less effective in penetrating the world of buildings will make even more relevant, the additional equipment and additional equipment’s within the buildings to provide better connectivity.

So we do see the market opportunity. We do see strong interest, and the location owners are keen to get better connectivity to provide better service to their customers or to increase the value of their locations, and we do expect to accelerate -- we are putting additional initiatives internally, additional resources, and we have strengthened the sales organization. We built also a dedicated unit within the company to capture the opportunity and to drive a significant step up on this revenue line.

[Operator]

The next question is from Georgios Ierodiaconou of Citi.

[Georgios Ierodiaconou, analyst]

I've got one follow-up and one question, please. My follow-up is on the comments you just made on new services and also more broadly, now that you are executing on the site additions, whether you are seeing any incremental demand on the commitments when you discuss with the Anchor tenants, there's always concerns about the financial outlook, but I’m curious if operational needs to force them to engage with you for more sites regardless of the fact that the market is competitive.

And then my second question is just to clarify a few things about recurring levered cash flow, and I appreciate you already made a comment on net working capital seasonality. If it's possible, can you perhaps talk us through a couple of the other lines, including taxes and financial expenses, just to get a bit of clarity as to how we should expect them to evolve through the year.

[Diego Galli, executive]

With regards to the demand, I see that actually already in the plan, we -- the updated plan we shared on last February, we have included actually additional demand in terms of new sites and basically relative new pups. So actually, we added 10 additional sites. And this shows the fact that clearly there is demand and there is focus on keep on building a stronger and optimized network to support 5G deployment. And as we discussed in the past, actually, has been more up to us to put on the ground the capacity to deliver new sites as much as possible and as soon as possible. So we are very pleased with the progress we made in the last quarters. And actually, we will continue on this pace and accelerate in terms of number of new sites in the next quarters.

[Emilia Trudu, executive]

To the net working capital trend, as mentioned, Q1 discount due timing effect, the partial [indiscernible] working, in particular, discount the partial [indiscernible] of positive net working capital in Q4 2022. So we do expect this timing effect reverse starting from Q2. And on a full year basis, we do expect positive -- neutral positive net working capital for the full year, at least in line with 2022.

Overall, in terms of recurring free cash flow, we do expect cash flow generation to remain strong on the basis of ongoing growth of EBITDA and margin expansion due also to this cost efficiency, lower recurring CapEx in the order of 2% to 3% on sales and a limited cash out or efficient tax payment following also the benefit of the goodwill tax team and relatively, let's say, relative low cost of debt in the order of 2.3%, considering that the bulk of our debt structure is fixed. We have just 20% floating. So the variable cost is applicable to disposing.

[Operator]

The next question is from Luigi Minerva of HSBC.

[Luigi Minerva, analyst]

I have 2. One is, again, going back to new services. I was wondering if you can -- we have reached like the pace of EUR 9 million per quarter, and you hinted there will be more. So if you were to think of a sort of steady state scenario in 2024, 2025, what sort of contribution from new services you would expect on a quarterly basis?

And secondly, just a clarification, Diego, I think towards the end of your remarks, you mentioned the deployment of digital infrastructure investment on top of the business plan targets. I may have missed more of your remarks there, but can you just give us more details about that statement.

[Diego Galli, executive]

With regards to new services, we do expect to change, again, order of magnitude, actually, we do expect by 2026 to achieve a business which is basically 3x 2022 business size. So 2022, we expect to grow by basically 3x. This is this on the back of mostly low coverage or projects, bigger projects, which may be a mix of indoor and outdoor. And then gradually, just by the end of the plan, we will have also the contribution by -- coming from small cell.

With regards to-- let me say, the additional CapEx during the I was referring to the additional financial flexibility to the financial headroom that we have embedded in our plan considering that we have a target leverage corridor between 5% to 5.5%, and we will have a strong capacity to deliver. And also after the additional shareholder remuneration, actually, we will be -- our leverage will be down to basically 4x by 2026.

So this allow us to consider additional investments in small tower portfolio in that assets in additional land buyout in large special coverage projects and maybe medium term also clearly considering the involvement in the active equipment when the opportunity will be unlocked by the operators. And probably with a progressive approach.

So as shared, our focus is clearly enhancing boosting the organic growth with expanding our perimeter and leveraging the flexibility, the room that, again, will be gradually available to build on top of the organic growth already embedded in the plan additional growth.

[Operator]

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

[Ben Rickett, analyst]

First question is just a follow-up on your comments just in on sort of owning the active equipment. The stories that Wind Tre going to assemble the majority stake in their equipment to [indiscernible]. I just wondered if you had spoken to them about buying the active equipment that's hosted on your sites and whether that's a transaction you looked at and rejecting [indiscernible]?

And then second question is around your anchor PoP -- very strongly in Q1, and they seem to be ahead of the sort of rates implied by the guidance for the full year. So I just need to check with you're expecting that rate declined throughout the year or could the guidance be a bit conservative there.

[Diego Galli, executive]

Apologies, the line was a bit off on the second point of your question. What is it rate were you referring to versus guidance, please?

[Ben Rickett, analyst]

The anchor put guidance the same there'll be less than 9,000 anchor tenants by the end of the year.

[Diego Galli, executive]

With regards to the active equipment, we do see over time the opportunity because clearly, it would make sense for our company, which managed the active equipment to extend the perimeter to extend the partnership with the tenants with its customers also to the active part of the network. And this is also consistent -- potentially consistent with the development of technology with the open run where actually the active equipment on the towers will be a little bit, let me say, not in a technical way, but a little bit less intelligent or less relevant from a strategic point of view for the operators and then there could be more willingness to outsource and to offload to the tower companies.

So in our portfolio of opportunities when thinking about the deployment of the financial flexibility that we do have this is clearly an opportunity that we have in mind. But again, it's mostly up to the operators to unlock this opportunity. We are open to assess and support to consider it. With regards to the anchor PoPs, yes, was a very good quarter. And also it's -- we are that we start the new year with good pace. I wouldn't say at this stage this goes beyond the guidance of the year.

We will -- there will be some fluctuations across the years we do expect. But anyway, I think it's a sign of health in terms of our capacity to -- as a result of our capacity to deploy new sites. And again, it's a good start. What we will see in the next quarters. It's a higher number of new sites, which gradually over time, will also a little bit translate in a high level of new PoPs on site.

So overall, let me say, too early to call for an upside, but very pleased we started in the right manner.

[Ben Rickett, analyst]

And just on the first one. Did you look at the Wind Tre.

[Diego Galli, executive]

Wind Tre our customer, so the Wind Tre active equipment’s are also on our towers, yes.

[Operator]

The next question is from Stefano Gamberini of Equita SIM.

[Stefano Gamberini, analyst]

Just a few questions regarding M&A deals. So you have something on the table and could we expect some small acquisitions in the forthcoming quarters or M&A is postponed next year? And the second, regarding the buyback, EUR 300 million are now available with the spread over the 18-month period for which you received the authorization? Or could you try to concentrate this purchase as early as second half '23?

[Diego Galli, executive]

With regards to the M&A, yes, let me say there are small M&As, which we are working on. we hope we are exploring, we are scouting to identify opportunities for small acquisition of assets, again, to keep on increasing our perimeter. So this is clearly a more focus area, not in main or as visible as today.

With regards to the, let me say, yes, the big M&A and as we discussed in the past, clearly, at this stage, still not a priority considering that we -- the market prices are still high. We still have -- we have a situation of high financing costs. So we monitor, but I wouldn't say it's a priority for us now.

With regard to the buyback, actually, we have been waiting for the green light from the Security Authority, Italian Security Authority from Console as soon as the green light will be received and we do expect in a few weeks. Clearly, we will disclose the way the plan will be set up. For now, to your point, we are thinking about a more spread approach across the 18 months.

[Operator]

Next question is from Maurice Patrick of Barclays.

[Maurice Patrick, analyst]

Just a simple one for me, please. On Slide 7, you've talked about a new services division. You talked about the sort of new sales organization and revamping your indirect sales channel. Just wondered if you could give us just some thoughts in terms of how quickly that's likely to result in a change in growth and I guess, by a new organization, it's presumably a higher cost as well and when that starts flowing through would be very helpful.

[Diego Galli, executive]

That for us is a key priority. The [indiscernible] we do see is 2 main -- can I say 2 main lags. One leg is the operational capabilities to deliver, to deploy new sites, new DAS. And so the operational excellence as a-- can I say, a network and network infra player. So excellence in deploying and delivering. So mostly operations. But the other lag that is as well as important is the lag in terms of commercial capabilities. So not only the delivery machine, but also the sales machine, which means not only being on the pool side from the -- of the demand from an containers and other customers, but also being on the push side on chasing opportunities and chasing clients and customers, including location owners.

And this is where, after the progress we made on the delivery capabilities where we are focused now on stepping out the sales and commercial capabilities on key verticals quite well in the Pass. We are leading on that in the market, but we think there is the opportunity to do more. That's why we revamped the sales organization. We enhanced the leadership. We are bringing on board people also from the market to increase the power, the strength of the organization.

So clearly, this is a process which started already by the end of last year, and we do expect to see signs of tangible results gradually starting already from Q2 and then filing up across the different -- the following quarters. As I said before, we have the ambition to grow by 3x the new service revenues we reported in Q2. And that's clearly the sales organization, the sales capabilities are a key lever to achieve that goal.

[Operator]

The final question is from Fernando Cordero of Banco Santander.

[Fernando Cordero, analyst]

And just on the financial side, your balance sheet is and your leverage is quite comfortable and the outlook is [indiscernible] but I would like to understand your thoughts regarding the refinancing of 2025 and which extent do you believe or do you feel that to be full investment-grade rating is required or not? Or in other words, how are you seeing the 3 market dynamics in order to cause it to be to investment at or not?

[Diego Galli, executive]

Actually, we -- the full investment grade is not an explicit goal as part of our industrial plan. We -- our leverage profile and deleverage profile will bring us there because we will get after the additional shareholder remuneration close to basically at about 4x by 2026. So it's a target which is clearly achievable, but it's not as well as the target core resort that is of leverage, which is between 5 and 5x.

So actually, it's achievable, but it's not an explicit target also because, honestly, our bonds and our-- are already appreciated. So actually, we -- there wouldn't be a material tangible benefits in terms of cost. So in short, not an explicit target for us at this stage.

[Operator]

And at this time, there are no more questions registered.

[Fabio Ruffini, executive]

Thank you, everyone, for connecting.

[Diego Galli, executive]

Thank you.

[Emilia Trudu, executive]

Thank you.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over, and you may disconnect your telephones.