Infrastrutture Wireless Italiane SpA

MIL:INW

Earnings Call Transcript 2024-Q1

[Operator]

Good afternoon. This is the Chorus Call conference operator. Welcome and thank you for joining the INWIT First Quarter 2024 Results Presentation. [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. Good evening, everyone. Thanks for joining us. With me today is Diego Galli, INWIT's General Manager; and Emilia Trudu, Chief Financial Officer.Before we begin, please allow me to draw your attention to the Safe Harbor statement on Page 2. As usual, following a brief presentation of the results, we will open the floor to Q&A.Over to you, Diego.

[Diego Galli, executive]

Thank you, Fabio, and good evening, everyone. First quarter results display an overall improvement in industrial and financial indicators, confirming the company's execution track record. INWIT business model is based on investments in digital infrastructure, creating value to sharing best quality assets.In Q1, we press forward on this front with higher investments in new sites, new indoor coverage DAS and land ownership, making the company stronger. New services, particularly DAS, are confirmed as the fastest growing line in the business, up 60% year-on-year. The market is expanding as clients are asking for turnkey solutions for managed infrastructure services with different connectivity technologies involved, making locations more smart and sustainable. Our goal is to continue leading the development of this market.The Italian telecom industry continues to be under pressure with limited returns and budget constraints for operators. However, demand for digital infrastructure is confirmed as structurally solid and neutral host players are recognized as an efficiency driver. In 2024, we are witnessing several transformative corporate transactions which have the potential to improve market fundamentals and unlock more discretional investments.In this context, the 2026 guidance is confirmed, implying high single-digit revenue growth, highly visible, an industry leading 76% EBITDA margin and a progressively growing balance sheet flexibility, providing a balanced profile of growth and yield.In 2024, INWIT enhanced shareholder remuneration policy is in full execution with an increased dividend to be paid in a couple of weeks and the share buyback plan ongoing.Moving to the main trends of the quarter on Page 4, revenues were up 9% year-on-year on the back of CPI, applying 2023 inflation, asset expansion with more new sites and more DAS, tenancy ratio growth now up 2.26 and strong in new services.EBITDA after lease was up 11% with more than 1 percentage point margin expansion. This was underpinned by lease cost efficiency which resulted in more than 400 real estate transactions in the first 3 months of the year.Recurring cash flow was about EUR 150 million, up 10% year-on-year, leading to leverage reduction with net debt to EBITDA of 4.5x, despite strong investment activity and continued share buyback activity. We continue to be pleased about INWIT's industrial capabilities.We added more than 200 sites in Q1, confirming our leadership in the market and providing fuel for future tenancy growth. New PoPs were nearly 1,000 in Q1, up year-on-year and consistent with our full year targets when taking seasonality into account.In brief, Q1 marks a solid beginning of the year, displaying growth and resilience in the current industry context.Now, I will turn it over to Emilia for a more detailed review of the results. Thank you.

[Emilia Trudu, executive]

Thank you, Diego, and good evening, everyone. On Page 5, let's look at New Sites activities. As mentioned, we are pleased to see a consistent delivery pace at high levels. More than 200 sites in the first quarter means more than 50% growth year-on-year and greater confidence in reaching the full year target. Demand is solid and backed by 3 different contractual arrangements. Operator sample are completing coverage of the market and improving densification both in urban and rural areas.On a last 12-month basis, we added nearly 1,000 New Sites, a very accretive use of capital because of 2 anchor PoPs committed to every new MSA site and the double-digit IRR. Anchors PoPs development benefited from these results as shown on Page 6. More than 600 new PoPs with TIM and Vodafone in Q1, for a total of more than 41,000 and 6% growth year-on-year. This trend is in line with contractual commitments supporting an efficient rollout of 5G.In terms of mix, there is a growing proportion of new PoPs on New Sites while the common grid optimization program reaches maturity. The figures confirm that even in the current challenging context, mobile infrastructure investments are a priority and the rollout of [ cellular ] 5G continues.Then OLOs on Page 7. Hospitalities with other clients are up 13% year-on-year to nearly 14,000. INWIT infrastructure is open to multiple client categories and technologies from mobile to FWA and IoT. We had 350 new PoPs in the quarter, in line with the first quarter of 2023. In terms of mix, IoT clients showed the trends, in particular, the Utilities segment where towers are used to host gateways to monitor real time consumption data. Going forward, 2024 guidance implies a slight acceleration from these levels, consistent with the usual seasonality of our clients.Next on Page 8, we review New Services. Revenues in the first quarter were up by about 60% year-on-year to more than EUR 14 million. The quarter-on-quarter trend reflects the strong year end performance and the non-repetition of some revenues, which had a lower recurring fee components. This is a feature of the location owner business model, which is growing and we believe will provide structural support to the market. Revenue growth was driven mostly by indoor coverage solutions with DAS technology, both new locations and new tenants on the existing asset base.The current pipeline includes more and more large connectivity projects where INWIT provide managed infrastructure services. Macro sites, DAS, small cells, fiber and IoT, work in synergy to enable advanced applications, making venues and cities smarter and more sustainable meeting the strong demand from location owners and end users. We added about 20 new locations in Q1 for a total of more than 470. The figure will more than double by 2026, in line with revenues from New Services expected at more than EUR 100 million.Next, we review the P&L. Revenue growth stood at 9% in line with the 2024 guidance midpoint. This was due to material CPI support with the 5.4% average recorded in 2023 applied to INWIT MSAs, which are uncapped and to a lesser extent to the other contracts. New tenants with tenancy ratio up to 2.26 and continued strong growth in New Services as discussed.Operational expenditures developed in line with revenues as we invest to support growth in the services and maintenance follows the overall asset growth. As a result, EBITDA margin was stable at 91.5%. The main efficiency lever continues to be lease costs, more than 400 real estate transactions in the quarter supported the EBITDA after leases growth of plus 11% and margin expansion from 70.9% to 72.2%. Efficiency partially compensated the effect of higher asset base, macro and micro and the inflation impact limiting this cost growth on a quarterly and yearly basis. Moreover, D&A are slightly up in line with the CapEx trend. Interest charges are about stable as compared with the previous quarter and taxes are up in line with the phasing of the tax schemes in place. Despite this, the tax rate continues to be very efficient at 16.7%.Moving to the cash flow on Page 11. Recurring free cash flow was EUR 150 million in the first quarter for a 65% cash conversion ratio. Besides growth in EBITDA after lease, we recorded low recurring CapEx, a structural feature of INWIT, no cash taxes which are due in Q2 and Q4, about neutral networking capital which we expect will be positive in the full year. Cash interest was higher year-on-year in line with expectations in guidance, also due to different phasing in the payment of interest for valuable debt and to the increased cost of debt on the floating amount.Below the recurring line, we recorded higher CapEx, nearly EUR 80 million in line with our industrial activity and a partial reversal of the cash advance booked in Q4 related to the next generation EU CapEx subsidy. This is in line with expectations and a function of the mechanics of the 5G consortium, where 90% of CapEx is subsidized, but only a portion directly in [ lease ] payment.Leverage was down to 4.5x based on annualized growth of EBITDA, despite the growing CapEx and the continued [ direct activity ] was EUR 23 million in Q1. As flagged in the past, INWIT funding needs for 2024 will require a limited amount of additional financing to cover part of the investment plan and shareholder remuneration. Our debt structure continues to be efficient with more than 75% of debt being fixed and no near-term maturities.With this, I hand it back to you, Diego. Thank you.

[Diego Galli, executive]

Thank you, Emilia. A few concluding remarks from my side. INWIT business model based on a shared infrastructure investment support growth and resilience in different macro scenarios as shown by our track record and Q1 results. We strive to be an efficient partner to mobile operators, particularly in the current context where cost control is key.The industry is acting to address its challenges and there is a potential to unleash a new cycle of investments in connectivity, indoor and outdoor. We are ideally positioned to capture it based on the best infrastructure assets and unique industrial capabilities. We stay committed to affirming our leadership in the market, expanding margins at double-digit rates, offering compelling shareholder returns and progressively building balance sheet flexibility as source of optionality and shareholder value.With this, I thank you and we are now ready for the Q&A session.

[Operator]

[Operator Instructions] The first question is from Jakob Bluestone with BNP Paribas.

[Jakob Bluestone, analyst]

I had a question on site deployments, please. You show on Slide 5 that new sites were 205 in the quarter. So up year-on-year, but down Q-on-Q. Can you help us understand is the slowdown from last quarter seasonal or should we -- or is there something else at play here?

[Diego Galli, executive]

Thanks, Jakob. Yes, I would say the rollout of new sites is progressing well. The end-to-end machine is well oiled and the number of the quarter to be read in the context of seasonality is higher than last year by, I think, 50%. And that shows the underlying trend. We -- Q1 follows also particularly strong Q4. So again, the demand is there and our ability to deliver the -- to build new sites is well on track.

[Operator]

The next question is from Ranjit Roshan with Deutsche Bank.

[Roshan Ranjit, analyst]

One, please. You're highlighting the higher EMF limit on Slide 11. So that's now been approved from my understanding. Can you run us through what, in practical terms, are the next stages? And whilst you have always said you haven't been constrained by this limit, what is the potential upside from the raised limit for INWIT?

[Diego Galli, executive]

Thanks, Roshan. Yes, the new law has been approved. It's in place since actually few days with the increase of the limit from 6-volt per meter to 15-volt per meter. So it's a significant increase, though still significantly below the EU limit, which is [ 16 ]volt per meter. As we shared in the past, this is not going to be a game changer for INWIT. It's going to be a facilitator in managing new requests for colocations, though we don't expect a significant upside at this stage. So again, not a game changer. We'll facilitate and support the deployment of our plan.From an operational point of view, the law has been implemented, has been approved and now there will be also some operational decrease to be -- decree to be approved and implemented. So again, not a game changer, but support a facilitator to support the continuous improvement of our tenancy ratio, which is expected to achieve 2.5 by 2026.

[Roshan Ranjit, analyst]

If I may just follow-up, do you see it more beneficial for FWA customers or OLO customers who are focused on the I guess traditional MNO side?

[Diego Galli, executive]

Yes, clearly the general relaxation of the limits, clearly the impact is more meaningful for the MNOs. As far as the fixed wireless access is concerned, the EMF impact is relatively limited. So the facilitation and the support will be mostly for collocation from MNOs.

[Operator]

The next question is from Andrew Lee with Goldman Sachs.

[Andrew Lee, analyst]

Just had a question on the -- you alluded to it, and obviously it's behind your underlying growth in the quarter. But just on the operator landscape in Italy, has there been any change you've seen at all in terms of overall demand? Any signs of -- or kind of reason to hope for an improvement sooner than expected? And is the split of where that demand has receded or kind of been held back a little bit between anchor tenant and OLOs been any different to how you would have anticipated? So any kind of change there would be helpful.

[Diego Galli, executive]

Yes. Thanks, Andrew. Actually, so far no significant changes to highlight. The plans agreed with the anchor tenants are progressing on track with the committed operational plans and revenue profile. So no significant change. Clearly, we don't expect any significant change during 2024. We think it's going to be a year of, what can I say, transition towards new operating models and new entities both considering the separation for Telecom Italia, the network separation and having the NetCo focused on service and connectivity going further, as well as having the Fastweb, Vodafone, the new Fastweb, clearly we would expect focus as well on improving network quality, investment connectivity.So no expectation for a change in the short-term, but prosecution of the current commitments, but a positive view on the development of the industry for the medium, long-term. And there is, I think, an opportunity in the medium term to catch up with the low investments, relatively low investments done to support 5G and to recover and accelerate the investment cycle.

[Operator]

The next question is from Georgios Ierodiaconou with Citi.

[Georgios Ierodiaconou, analyst]

It's actually on a comment you made in your opening remarks, Diego, about corporate actions that could be available to the degree that you can comment both timing and the kind of actions you are considering, it will be great to get a bit of color as to what to expect.

[Diego Galli, executive]

Yes. Thanks, George. My comment was actually related to the industry and to the sector and related to -- also to what I said in relation to the previous question. Actually, after many years where the industry and the telco industry in Italy has been declining and under pressure in terms of returns and the full investments, in 2024, we see significant changes that in our view again go in the right direction to make the industry and the operators more sustainable. And so both if we think about the telecom separation, Vodafone, Fastweb and also the fixed wireless access operators have been redefining their strategy and restructuring. So some tangible things have happened and we'll go to execution again in our view, supporting a positive view on the market in the industry in Italy.

[Georgios Ierodiaconou, analyst]

And if I could ask it in a slightly different way, from your perspective, in your own industry, are there opportunities that you could act upon yourself? Or is it more how you see the MNO market develop?

[Diego Galli, executive]

I think from our side, clearly we have quite clear priorities in keep on expanding our assets through the investments as we are doing. So sites, indoor and outdoor sites. So not only new towers at, I would say, strong pace, new indoor coverage. So continue expanding our assets through deploying, but also happy to acquire existing assets from operators as we did in the past.As well as when thinking about a more dynamic industry open to assess opportunities as they will emerge. We spoke in the past about, for instance, the active involvement in active equipment. We keep on being open about that, a slightly different case compared to passive infrastructure, but open to consider and assess. So I think that we are in a healthy situation where we have strong industrial capabilities, credibility with our customers and partners and financial headroom, we can put at work to keep on supporting our growth either organically or with bolt-ons and inorganic options.

[Operator]

The next question is from Stefano Gamberini with Equita.

[Stefano Gamberini, analyst]

Just a quick question regarding investments. Now you have a leverage of 4.5x debt to EBITDA. So how you can -- we can say, releverage your company forthcoming also quarters. So my question is regarding, are there some new M&A files that should arrive shortly? Or could you accelerate the land buyout that was already good in this first quarter? Or finally you have a buyback now already approved of EUR 165 million that will end in October? Could we expect some, we can say, extending that you can extending this buyback for the following quarters or not?

[Diego Galli, executive]

Yes, Stefano, yes, the -- I think it's good to see how our leverage keeps on clearly declining, was 4.5 in Q1, also absorbing the impact of the buyback, otherwise it would have been 4.3x, so a continuous ability to deleverage. So in terms of capital allocation in the framework of a more prudent, or let me say cautious leverage profile, we said between 5x to 5.5x. We have a significant headroom. And we are considering -- we are clearly always monitoring opportunities and some of the ones you mentioned are relevant. The acceleration of land buyout is an option provided that we can continue to acquire with good financial returns. So provided that the market remains balanced, but it's clearly an option because it creates value.We can accelerate investments on energy as well. We can accelerate investments on big projects related to smart city and more towers always welcome and also more adjacent businesses such as edge, data center and IoT. So we are assessing the options which are consistent with our priority, meaning creation of industrial synergies and returns -- very competitive returns. As we did in last year, if the opportunities for additional investments to support growth will not materialize, then we will consider additional shareholder remuneration, we constantly review the capital allocation, so it's clearly a topic we will keep on considering.

[Stefano Gamberini, analyst]

A quick follow-up, if I may. I didn't catch what you think about investment in energy, if you can elaborate a little bit?

[Diego Galli, executive]

Yes, we have started investing on solar panels and we have started -- now I think we have 400 sites which are -- take the benefit in terms of energy consumption from the solar panels. And it's an interesting business because it's fully consistent with our business model. It makes our infrastructure more resilient for the short and long-term and also may offer if somehow towerized, may offer good returns aligned with our -- again with our business model. So there is the opportunity we are considering to invest a little bit more on this field.

[Operator]

The next question is from Patrick Maurice with Barclays.

[Maurice Patrick, analyst]

If I could just ask a bit on the OLO growth on Slide 7, where you gave the splits of other clients that grew by 1,600 in the last 12 months. You say in the slides there was a bit of a mix shift in terms of other clients, like utility clients. But could you just give us a broad sense of the split between MNOs, FWA and others in terms of that 1,600 in the last 12 months?

[Diego Galli, executive]

Thanks, Maurice. Yes, the OLOs -- it's good to see how the hospitality keeps the new tenants, keeps a good pace. Overall, the MNO tenants are, let me say, across the planned time frame at about 15% of the total as the rest is fixed wireless access and IoT. In the more recent quarters, fixed wireless access, as we discussed, has been relatively soft. So the IoT component has been more higher. Yes, that's in terms of overall composition of the OLO PoPs.

[Maurice Patrick, analyst]

As a quick follow-up, is the 15%, so is that of net adds rather than total or both MNOs?

[Diego Galli, executive]

Yes, it's net new PoPs. So net adds considering the planned time frame between now and 2026.

[Operator]

The next question is from Luigi Minerva with HSBC.

[Luigi Minerva, analyst]

Yes, it's really a couple of clarifications on previous questions. So the first one is on the share buyback and I understand your message, Diego, there. And I'm wondering if essentially the limited free cash flow generation can limit your ability to do further shareholder distribution beyond what has been already announced. I suppose that if you have to issue a bond or open new credit lines with banks to support shareholder distribution, then it makes that option less attractive.And the second question is on -- perhaps also related to -- this is your discussions with your leading shareholders, Ardian and Vantage. What kind of priorities are they communicating to you when it comes to capital allocation? And perhaps whether the listing of the company, medium to long-term, is still the best solution from their perspective? Thank you.

[Diego Galli, executive]

Luigi, yes, let me start from the end. I think that what is the shareholders' direction is reflected in our plan, which has been fully supported by the Board, including clearly the capital allocation and, in particular, capital allocation which has been approved in March, which has been an evolution of the previous one and which, as we do remember, has meant an increase in terms of dividend, a cautious -- more cautious leverage profile, more investments for growth and also the share buyback. So I would say a full portfolio of tools have been put at work and this framework is still the reference framework for the plan.And with regards to the buyback, you are absolutely right. Clearly, I mean, when making these kind of decisions, we consider different elements, the leverage which keeps on reducing. Of course, we are mindful of the share price trading, which has been and still is low level. But at the same time, you're right. We are cash -- we are still -- we are not yet cash positive, so we need to consider the cost, also the cost of debt, which is clearly still on the high level.So, as we did last year, the decision is the result of the weight of the different elements, including clearly the perspective of investing to fuel additional growth. So, as I said, we constantly review the capital allocation, we weight the different factors. And as we did last year, we will continue assess and implement, I would say, fairly balanced capital allocation approach.

[Operator]

The next question is from David Guarino with Green Street.

[David Guarino, analyst]

Hey, we've seen INWIT amongst other TowerCos across the globe display, pretty poor stock price performance over the past year. But it's interesting that the transaction we see in the private market suggests there's still a pretty strong bid for tower assets. So I was wondering if you could just explain, why do you think that disconnect exists between public and private market investors? And is there anything INWIT can do to close that gap?

[Diego Galli, executive]

Yes. Thanks, David. Yes, the difference is, let me say, still there. I think there are considerations about clearly the macro environment, the impact of interest rates, the leverage and so the overall cost of financing and returns expected from the transactions, which position a different -- in a different level, the public and the private.Let me take the view that I would say the private has been quite -- sorry, the public has been quite depressed in the last few months. Clearly the correlation with the American rates, the U.S. rates, is particularly high. So I think that there is clearly room for a recovery of the share price in the next month as soon as the rates -- interest rate situation will gradually improve.Structurally, I think that INWIT has been demonstrating the strength of its operating model, which is fundamentally based on adding 2 anchor tenant, which allow us to realize synergies and then being open to all the operators in the market, not only to mobile operators, but to all kind of operators and also expanding in adjacent business quite quickly.

[David Guarino, analyst]

That's helpful. And then, just as a separate follow-up, it seems to be there's a pretty big growing cluster of larger size data centers that are popping up around Milan, a mix of both hyperscale and colocation facilities. Would INWIT ever consider expanding into some of those larger scale data centers? Or do you think internally that maybe edge data centers are really the only complementary asset type for your portfolio?

[Diego Galli, executive]

That's an interesting topic. Clearly we expect for the future that the edge to the towers will be relevant, but it's not. Will take time. So for sure that's a business which will be relevant for us, the far edge to the tower. At the other opposite, there are the big data center. And in the middle, there are, let me say, the regional, local data centers.So I would think -- and I would say that between the far edge and the regional ones, there is a business which deserves interest and analysis from our perspective, because there are a lot of similarities to our business is a business where clearly there is an investment which is shared, so supports the role of neutral host would allow us to make synergies with our car rental and customers and expand further customers. And it's an interesting infrastructure model. We are considering it's very close to -- again to our assets and to our business model. So again, opportunities where there is the chance to create industrial synergies and good returns are in our scope of consideration and assessment.

[Operator]

The next question is from Usman Ghazi with Berenberg.

[Usman Ghazi, analyst]

I just wanted to follow-up on your comments on the data center opportunity. Clearly very relevant, but can you expand into this without making an acquisition? I mean, are there any assets of interest in the sector? Or is this kind of just new territory which INWIT can play a part in growing the market?

[Diego Galli, executive]

Yes, I would say, clearly organically, it allows us to exploit the space we have available. We have 24,000 sites, 24,000 locations. Clearly, many of them are in central areas, in business district areas. So we have already -- clearly, the location -- the sites are connected with fiber. There is energy protection, so -- and there is physical space in many of them which allow to host additional kind of equipment. So there is -- again, our core infrastructure supports synergies towards an organic investment when edge and data center, let me say, computing capacity will be needed at the far edge of the network. So there is a layer which we can leverage on. There are also other opportunities which may come. And again, we do assess multiple options. And if there will be interesting to share with you, we will do at -- when and if it will become again interesting and relevant.

[Usman Ghazi, analyst]

Diego, can I follow-up? I guess, I mean, I can understand the far edge opportunity is obviously very close to your core, which is these 24,000 locations and hosting compute capacity here. That I understand. But what you described earlier was an opportunity somewhere in the middle, between the far edge and the centralized data centers of the hyperscaler. So it's something like what American Tower did with CoreSite. Is that the kind of opportunity that you're exploring now or am I misunderstanding?

[Diego Galli, executive]

Yes. Again, I think that when we talk about far edge, I think it's an opportunity which we don't see in the short-term, but is relevant -- with also thinking about the run -- the cloud run and the way run will evolve in the medium, long-term. So, that's clearly something we are considering and assessing and studying because it's connected -- strictly connected to our core business. The hyperscale data center is different -- completely different. And is -- yes, we still consider it a little bit far from our core interest.

[Operator]

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

[Ben Rickett, analyst]

I just have 2 quick questions. Firstly, you've mentioned the impact of higher interest rates in the quarter. I was just wondering what you're assuming for interest rates in your 2026 guidance? Does that assume that interest rates remain roughly at the current levels? Or are you assuming a decline there?And then second question, a few months ago, we saw the sale of OpNet, Wind Tre. I was just wondering if you'd had any initial discussions with Wind Tre about what they are planning to do with the asset and whether you think there's a risk there that you see tenancy losses as a result of that?

[Diego Galli, executive]

So Emilia on the first one.

[Emilia Trudu, executive]

Ben, yes, I'll take the first question about the interest rate. Actually, when we think about the refinancing of existing debt or the limited amount of new financing that we will pay for 2024, we are assuming rates in line with the current rate environment. So our business plan already assumes the current rate in the range of, let's say, 4.5%, 5%. So this is admitted in our guidance.

[Diego Galli, executive]

And with regards with OpNet, yes, the deal was somehow expected. We have not yet started to discuss with Wind Tre about the development of OpNet. We think that it's good to see that OpNet has been -- has found a way to progress and to -- I guess, to keep on investing then on the development of fixed wireless access network for which clearly our towers are available to host additional equipments when and if they will, together with Wind Tre, deploy some developments -- development plan.

[Operator]

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

[Diego Galli, executive]

Thank you, everyone. Have a good evening.

[Fabio Ruffini, executive]

Thank you.

[Emilia Trudu, executive]

Thank you.

[Operator]

[Foreign Language] Ladies and gentlemen, thank you for joining. The conference is now over. You may disconnect your telephones.