Infrastrutture Wireless Italiane SpA

MIL:INW

Earnings Call Analysis

Q2 2024 Sees Solid Growth and Strategic Investments

In the second quarter of 2024, INWIT delivered strong performance with 8% revenue growth and an 11% increase in EBITDA after lease. The company expanded its infrastructure significantly, adding over 200 new sites and 1,000 new Points of Presence (PoPs). Shareholder returns included additional dividends and stock buybacks. The firm continues to invest in new sites and indoor coverage solutions, anticipating sustained demand driven by the limited rollout of standalone 5G in Italy. Future growth is expected as the company aims to leverage structurally transformative trends in digital infrastructure.

Strong Financial and Operational Performance

INWIT's second quarter performance showcased robust financial and operational execution. The company enjoyed solid revenue growth of 8%, driven by inflation-linked pricing and new services. EBITDA after lease grew by 11%, supported by efficient operational strategies such as real estate transactions. These efforts led to a 2-percentage-point increase in EBITDA margins .

Healthy Expansion of Infrastructure

INWIT continues to expand its digital infrastructure, completing over 200 new sites and nearly 1,000 new Points of Presence (PoPs) in the quarter. This brings the company closer to its annual target of 2,000 new PoPs. This expansion aligns with INWIT’s strategy to consolidate its leadership in the Italian market, particularly in the fast-growing 5G segment .

Enhanced Shareholder Returns

Shareholder remuneration took center stage as INWIT returned additional value through dividends and a share buyback program. Despite this increased payout, the company managed to lower its leverage ratio. This demonstrates INWIT’s strong cash flow generation and disciplined capital management .

Market Opportunity and Strategic Positioning

INWIT is well-positioned to capitalize on the growing demand for digital infrastructure in Italy. The ongoing transformation of the Italian telecommunications sector provides a favorable backdrop for further investments. This trend is expected to continue, as Italy's need for modern digital networks remains urgent compared to other European countries .

Guidance and Future Expectations

For the full year, INWIT expects to maintain revenue growth in line with the first half's 8.6%, supported by ongoing infrastructure projects and new services. The company forecasts inflation to remain within 1%-2%, with a proportional impact on EBITDA growth. This guidance indicates confidence in achieving the annual targets despite market volatility .

Addressing Market Dynamics

The Italian digital infrastructure market is undergoing a transformational phase, leading to higher future investments. INWIT’s strategy focuses on leveraging these opportunities through large-scale projects such as indoor coverage solutions and smart city initiatives. The company’s investments are aligned to meet the rising demand for advanced digital services across various sectors .

Earnings Call Transcript 2024-Q2

[Operator]

Good morning. This is the Chorus Call conference operator. Welcome, and thank you for joining the Second Quarter 2024 INWIT Financial Results Conference Call. As a reminder all participants are in listen-only mode. After the presentation there will be an opportunity to ask questions. [Operator Instructions].



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

[Fabio Ruffini, executive]

Good morning, everyone. Thanks for joining us. With me today are Diego Galli, INWIT General Manager; and Emilia Trudu, Chief Financial Officer.



I will begin, please allow me to draw your attention to the safe harbor statement on Page 2. Following a brief presentation of the quarterly results, as usual, we will open the floor to questions. Over to you, Diego.

[Diego Galli, executive]

Thank you, and good morning, everyone. Looking at Q2 results, I would highlight the continued solid execution of industrial operations with a high volume of new sites and real estate transactions, growing financials with any sale commitments on track, strong revenue growth in indoor coverage solutions, and a double-digit expansion in EBITDA after lease.



In the quarter, we also delivered a compelling shareholder remuneration in the form of additional dividends and buybacks. More broadly, INWIT business model based on shared digital infrastructure investments continues to be resilient in the context of a transformative year for the Italian telcos. We view the ongoing transition as positive, we can count on a strong and positive sales, and there is potential to improve market fundamentals and unleash additional investments, investments needed to meet the need for digital infrastructure in Italy, which today is lagging behind European standards. This is a structural growth trend INWIT is well positioned to capture it.



Moving to main trends on the quarter on Page 4. A few key numbers, 8% revenue growth on the back of inflation-linked, new bots and new services, 11% growth in EBITDA after lease with margin up by 2 percentage points. Recurring cash flow at EUR 150 million, up 6% quarter-on-quarter. Net debt to EBITDA at 4.9x, reflecting the increased shareholder remuneration. We reduced leverage by [indiscernible] a year ago when excluding only the additional portion of dividends just paid and the buyback. Strong industrial delivery with more than 200 new sites across 3 programs, nearly 1,000 new PoPs on track for the full-year target for a tenancy ratio of 2.3x, almost 400 real estate transactions, our main source of efficiency.



In summary, Q2 and first half results show retrial execution with growth trends in line with targets. We keep on investing at accretive returns to expand our infrastructure assets, more sites, more into coverage locations, more land ownership. Industry context is one of transformation for many clients, which will be in a structurally different position from 2025 onwards.



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 morning, everyone. On Page 5, new sites, consolidating the leadership in the Italian market, INWIT builds 240 sites in Q2 and about 1,000 over the past year, in line with expectations, a steady delivery pace at high levels. Demand for new sites continues to come primarily from MSA commitments and the Italy generation in new programs, which we are pleased to say is progressing on track. Besides address coverage, capacity and densification needs. With standalone 5G in Italy still being very limited, we anticipate a sustained demand for new sites in the long term.



Moving to anchor PoPson Page 6, 400 additional PoPs with TIM and Vodafone in the second quarter for a total H1 figure of just above 1,000. This is in line with commitments and coherent with full-year expectations of approximately 2,000 new PoPs. Quarter-on-quarter, we discussed the phasing effect of new PoP activation on the site, which we expect will normalize in H2. As mentioned in the past, in terms of mix, there is a growing proportion of new PoP from new site, while the common grid optimization program reaches maturity.



There's OLO's on Page 7. Other clients other than Vodafone are up 13% year-on-year, further diversifying our client base. INWIT microsites to multiple client categories and technologies, in particular, mobile, fixed wireless access, and IoT. In mobile, we added new PoPs with every major MNO. The LWA market seems to be stable at low levels of growth with no further deterioration, and IoT clients continue to be resilient, expanding smart cells applications. We added 520 new PoPS in Q2, an improvement quarter-on-quarter and consistent with full-year expectations.



Next on Page 8, we review new services. Quarter 2 revenues increased by approximately 40% year-on-year, reaching more than EUR 15 million. Notably, this is nearly EUR 2 million higher quarter-on-quarter. Growth was driven by the addition of 50 new locations served by indoor coverage solutions with DAS and repeater technologies and [indiscernible] growth on the 520 locations we serve. The indoor coverage market continues to be dynamic with greater market acceptance and appreciation of DAS technology. Location owners in a variety of different verticals vary improved interconnectivity, which enables advanced services that have a direct impact on their business. Indoor coverage projects are becoming larger and more complex, smart city-like opportunities integrating multiple layers of managed infrastructure. We are actively proving this market, and the Fiera Milano and ROMA5G project we recently announced going this direction.



Next, we review the P&L. Revenue growth stood at 8.2%. The drivers were the inflation-linked with the average figure of 2023 applies in with MSAs, new tenants on new and existing sites with tenancy ratios up to 2.28%, and a 40% growth in new services as discussed. OpEx was only marginally higher year-on-year, while we continue to invest to support growth in indoor coverage solutions, OpEx in Q2 2023 was seasonally high by providing an easier comparison base. As a result, EBITDA margin went up to 91.6%. EBITDA after lease improved by 11% with margins up by nearly 2 percentage points to 72.4%, one of the highest in the sector. This was supported by efficiency actions on this cost with 400 real estate transactions in the quarter, the majority of which were land acquisitions.



We're adding new sites and indoor locations to the cost base allowed with inflation. However, real estate efficiency actions are effectively mitigating most of these cost effects. D&A, interest, and assets were fairly stable quarter-on-quarter, leading to a 10.5% growth in net income.



Moving to the cash flow on Page 10. Regarding the cash flow was EUR 159 million in the second quarter for a 68% cash conversion and in line with the full-year guidance. This is a 6% improvement quarter-on-quarter, mostly days on better list cost, net working capital, and financial charges more than offsetting cash taxes, which was not present in Q1. The current free cash flow is down year-on-year, only because 2023 seasonality in net working capital, which was particularly positive in Q2 last year. Below the recurring line, we recorded EUR 67 million of CapEx on other items, EUR 251 million of dividend payments, and the continuation of the share buyback. Reported leverage stood at 4.9x, slightly down year-on-year, well excluding the additional dividends paid in 2024 of EUR 100 million. And the share buyback program, we reduced leverage by [indiscernible] year-on-year [indiscernible].



With this, I hand it back to Diego. Thank you.

[Diego Galli, executive]

Thank you, Emilia. A few more words on my side, starting from a comment on the current evolution in the Italian telco market. Discretionary investments in mobile infrastructure have been limited to the minimum over the past few years. This is due not to the lack of demand but rather to the absence of accepted returns for the operators in the last few years. This is due not to the lack of demand but rather to the absence of accepted returns for the operators in a very competitive market. The structural investments, however, cannot be postponed forever. As we can see here, Italy lags materially behind European peers.



In 2024, we have seen transformational transactions being announced and executed in the Italian telco industry with the potential to unleash higher investments. These transactions and may be others to come are expected to have a neutral to positive effect on INWIT, both directly and indirectly. This is because the MSA is strong and protective with all or not in closed and allows for extra fees in case of use of additional frequencies as it is often the case when 2 MLOs combined.



In summary, INWIT delivered a resilient Q2 and can count on the best infrastructure assets and unique industrial capabilities. Features that allow us to be well-positioned to capture the structural growth trends in the digital infrastructure in Italy.



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

[Operator]

Thank you. This is the Chorus Call conference operator. We will now begin the question-and-answer session. [Operator Instructions]. The first question is from Roshan Ranjit with Deutsche Bank.

[Roshan Ranjit, analyst]

My question is on the OLO progression. And I think as you alluded to last quarter, we did see a pickup in the net adds. I guess my question is, that doesn't necessarily translate to a big boost in the revenue number in the quarter. I guess that's down to the IoT mix. So how should we think about that mix going into H2? Should we expect a further pickup in the net adds? Will that be driven by IoT? Anything you could say around the pricing differential between an FWA PoP and an IoT PoP, that will be very helpful.

[Diego Galli, executive]

Yes. Thank you, Roshan. And yes, I think that the quarter shows an encouraging sign with the 500 [indiscernible]. This as we shared, reflects the component of IoT and overall, does not reflect yet the acceleration in FWA access tenants. So overall, in terms of mix, we need to discount the fact that the IoT revenue per unit is at a lower price. Also interesting to mention that the other MNOs, mobile, the MNOs are overall progressing, and we continue to do a decent good level of tenants also with those. So in short, good progress acceleration in FWA access.

[Roshan Ranjit, analyst]

And if I could just follow up, what would -- do you still expect that FWA access WA acceleration to come in the second half of the year? Or is that now kind of pushed out to '25?

[Diego Galli, executive]

Yes, I think it's rational to expect a trend which is likely both to the current level.

[Operator]

The next question is from Andrew Lee with Goldman Sachs.

[Andrew Lee, analyst]

I had a question just on shareholder returns. So obviously, you haven't quite completed your buyback yet, but your net debt to EBITDA is running quite low and obviously goes well below the low end of your targeted range by the end of this year. I wonder if you could just comment on how you're thinking about capital allocation. My understanding is the kind of inorganic or M&A investment opportunities are scarce. And if shareholder returns are the obvious way to allocate capital, how quickly will we make a decision on this, given that it looks like the balance sheet is a bit underutilized as things stand?

[Diego Galli, executive]

Thank you, Andrew. Yes, let me take the opportunity to recap our approach and framework, we think starting from the leverage, we think that we may support the structural leverage up to 6x considering the business profile. In the current context and given also the cost of funding, we have been having a more prudent approach, defining the corridor between 5x and 5.5x. And overall, we believe that leverage below 5x will mean to have an inefficient capital structure. This means that by 2026, considering our leverage trajectory, we have financial flexibility, which is about EUR 1.5 billion.



Then in terms of allocation, I think our priorities are clear. We clearly -- we are focused on growth as well as shareholder remuneration. In terms of growth, the opportunities are related to large special coverage projects and it serves active equipment as well as small regional edge data centers. These are the additional businesses where we may see opportunities clearly on top to more sites, more land, more datas part of the organic investments. The market is fluid clearly. It's in a transformation period. So opportunities may arise. Let me also say that at this stage, we don't have in the pipeline projects or opportunities which have a particular material level.



So having said that, and consistent with the past, we will continue to assess the opportunities in the market as well as assessing the opportunity to increase shareholder remuneration in the framework of, as I said, the market dynamics in the framework core, the cost of funding and consistent also with the finalization and execution of the current net debt. So I think that within the next couple of quarters, we will continue to monitor the situation and by no later than early next year, early 2025, we will have another round of capital allocation.

[Operator]

The next question is from Stefano Gamberini with Equita.

[Stefano Gamberini, analyst]

As regards the full-year guidance, could we expect that the revenues could be in the low part of the range of EUR 1.316 billion considering this trend of all that remains, if I understood correctly, at lo- mid single digits in coming quarters? And if you can elaborate a little bit also on 2025 expectations, considering that the CPI probably will be close to 1%. And what is, we can say, the upside for ancotenant contract commitment versus the CPI level? Could you elaborate a little bit about this?

[Diego Galli, executive]

So far, we have been growing revenues high single digits with Q1 stronger than Q2. Overall, in the half 1 growth has been 8.6%. And we expect a similar trend for half 2, which is consistent with the guidance range. Then clearly, there are opportunities to work on the discretionary spend and to expect a little bit of further acceleration. With regards to the inflation, our base assumption is 2% per year up to 2026. Current here in Italy it's slightly below. It's about -- I think the consensus is higher than 1%, it's between 1% and 1.5%. We may remember that the impact of inflation is 1 percentage point of inflation means EUR 5 million EBITDA . So in the framework of, let me say, 2026 targets. I think this is an element that clearly is well within our guidance range. Again, the consensus for 2025 expects at best an increase of inflation at about 2% and plus 2%. So let me say, let's see how things will evolve. The impact is relatively small. And again, probably this range of 2024 inflation in Italy is lower than the general in the medium-term trend. Let me also say that clearly, CPI is also [indiscernible]generally a lower cost of capital.

[Operator]

The next question is from Usman Ghazi with Berenberg.

[Usman Ghazi, analyst]

I just wanted to touch base on the anchor PoPs, which as you mentioned in the presentation, was a little bit below the €600 million per quarter run rate, it was about €200 million, I think, in Q2. You mentioned there are some phasing elements there. So I just wanted to confirm that you would expect this to get back up to kind of the 600 range through the second half.



And then just related to this, so you've mentioned that you would expect an H1 growth, 8.6%, that's a better proxy for how you expect to be doing in the second half than the Q2 run rate, which is in the low 8s. Could you perhaps bridge the main kind of moving parts as to how you go from the Q2 kind of low 8s to H2, which you're implying is going to be closer to the 9% in terms of revenue growth?

[Diego Galli, executive]

Thanks, Usman. With regards to the anchor tenant PoPs, Q2 is lower and on the back of a very strong Q1. Overall, the half-year is well on track. It's 1,000 anchor PoPs, and this is fully consistent with the full-year target of 2,000, which is confirmed and well within sites considering the pipeline and the work in progress. So 1,000 of Q1, 1000 in up Q2 and 2,000 in the full year, consistent with the target.



With regards to the [indiscernible] revenue growth, yes, there are clearly levers, commercial levers we work on. Clearly, we have the big bulk, which is moving on track, and it's the committed growth underpinned by new sites and new tenants. We have new businesses, which have been growing quite well and is confirming the opportunity in the market and the ability to capture this opportunity. And this is where we may see some further acceleration in the second half of the year.



All is well as we said, FWA access has not yet shown the acceleration effect that can go a little bit better in the second half of the year. So it's about the discretionary investments from anchor to a little bit of OLOsmay support the second half of the year. So steady, resilient, and strong trend is already embedded in H1 with a little bit of potential acceleration in H2.

[Operator]

Next question is from Fabio Pavan with Mediobanca.

[Fabio Pavan, analyst]

I found the slide on the Italian digital infra market, quite interesting your view on the need for Italy to invest more on 5G infrastructure. My question is in your conversation with TLC player, do you have the sense that this point is well taken, and we may have an acceleration eventually, if not in the second half of this year, in the first part of next year?

[Diego Galli, executive]

I think that the market and as well as reflected in the different comparison statistics show the need for better infrastructure and better connectivity and more investment to support the digitalization of the country. The demand is clear and there. The opportunity is to have a market structure, which is more sustainable, and therefore, more able to support what has been postponed so far. So an acceleration of investments to catch up and to bring the digitalization in the economics of life at least closer to European and international levels.



So if we talk about -- and there are some programs which have been now supported by the states, such as the 5G in rural areas, which are progressing. I think that this will be also the trigger to accelerate in other areas and market areas where again, talking about the opportunities in the economy, in the economic life in the businesses to leverage more on digitalization to save money as well as to provide a better service to customers as well as in the social life when whatever we do now, a good smartphone connection is needed, both indoor and outdoor or in the underground or any train. I think that the structural secular trends if there is no need to discuss about that. And I think that it's very clear that Italy is lagging behind. And yes, I'm convinced that this gap will be closed in the next year and a stronger market structure will support this trend

[Operator]

The next question is from Giorgio Tavolini with Intermonte.

[Giorgio Tavolini, analyst]

The first one is on the exercising of the 51% option in the molding network. I understand this is a very, let's say, not a material project but could be very significant in for future cooperation with bolting for other opportunities. And I was wondering if you had any further comment on this. The second question is on the [indiscernible] remedies if you have any update on the current situation? And the third one, very quickly is on the electromotive limits. I was wondering if you see any change so far from your ancotenant in the redesignation or optimization of their network architectures.

[Diego Galli, executive]

Thank you, Giorgio. On the first one, yes, it's an interesting project, not particularly material, but it's interesting and fully consistent with our strategy on investing in key verticals such as transportation. And so yes, it's an interesting and interesting opportunity to -- we are building the 5G metro in Milan. We will build the one in Rome. So it's, again, a net -- a further development on the microgrid of the indoor on top of to the towers with an integrated approach, supporting our customers.



On the second point, [indiscernible], now good to see that we continue to do a decent level of business, no significant change compared to the past, but good progress also extended to DAS into indoor coverage solutions. On the EMF, no significant change yet. We are on the operators and regulators and in the -- let me say, still in the assessment study and approach, no impact, no change yet visible in the market.

[Operator]

Mr. Rufini and gentlemen, there are no more questions registered at this time.

[Fabio Ruffini, executive]

Thank you, everyone, for connecting. Have a great day.

[Diego Galli, executive]

Thank you.

[Operator]

Ladies and gentlemen, thank you for joining. The conference is now over.